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COVID-19,

the GCC and the

Race for Renewables

by Rashed Albinali

The coronavirus pandemic, while devastating for almost all economic sectors across the board, seemed only to reinforce the simple reality that the energy sector is and will continue to be extremely volatile. Since 2000, several factors — notably the 2008 global recession, the 2015 oil glut and, more recently, the COVID-19 pandemic — have produced price distortions that sharply affected the sustainability of oil and gas producers. Oil prices, per barrel, dropped to half its value when the United States ended its export ban in 2015. In 2020, the plunge in demand as a result of wide-scale global shutdowns led to historic lows in oil prices, with some future contracts dipping into negative territory. For the Gulf Cooperation Council (GCC) this meant limited space for manoeuvre . The World Bank forecasted a steep 6.6% decline this year (2021) for Middle East and North Africa (MENA) net oil and gas exporters compared to 1% for net importers. This, coupled with a growing global consensus towards achieving carbon neutrality by shifting towards renewables, means that the GCC is at an important long-term strategic crossroads. That is, how to maximise the utilisation of natural resources in light of this push towards renewables. 

Setting the Scene

Approximately one year since the first cases of COVID-19 were reported in Wuhan, China and what seemed like a transitory shock to global markets now seems to have a lasting effect on the global economy and consumer behaviour. This is because, according to the International Energy Agency, this shock is estimated to be about seven-times larger than the 2008 shocks. Global energy producers have already reduced capital investments amounting to about 20% this year, the majority of which is concentrated in the oil and gas sector. Having utilised work-from-home policies during the pandemic, many workplaces have signalled that such policies might be streamlined into corporate strategies in the future. Additionally, international airlines have already begun adjusting to a “new normal” of lower business travel. This means that the drop in demand will likely be permanent. 
A slightly more pressing issue is the shifting consensus towards renewable energy and carbon neutrality. More than 110 countries have already pledged carbon neutrality by 2050 and China — the world’s largest importer of oil and the largest carbon emitter — has pledged carbon neutrality before 2060. This has clear implications for the energy sector, which is dominated by oil and gas. Increased pressure by policymakers has led to a push for securing sustainably derived material. For example, multinational manufacturers like Apple, Toyota and Nespresso have announced plans to reduce their carbon-footprints of aluminium supplies. Aluminium smelting and production, a large industry within the GCC, is energy intensive and traditionally dependent on coal and/or natural gas for energy. It is, then, a testament to the changing global dynamics that recent shifts towards hydro-powered aluminium industries (despite carrying higher associated costs) have gotten greater traction from these multinationals. 

Unique Challenges

 

It should come as no surprise that the GCC lags behind in the race for renewables. Oil and gas has been integral towards regional development and despite decades of diversification remains the single largest contributor to export receipts and government revenues across the  respective countries. Energy needs, which are among the highest in the world, in no small part due to population growth and rising living standards, are expected to triple by 2050 especially as cooling needs increase to combat climate change in the region. The issue here is that energy needs are met by burning fossil fuels. Producers and consumers alike lack the incentive to switch from traditional oil and gas towards renewables like solar because the energy markets are heavily subsidised. This hampers the widespread adoption of renewables as a source of energy, especially since it has been demonstrated that advanced photovoltaic technology is a more efficient source of energy even if global oil maintains a price of $100 per barrel. 

Then there is an opportunity cost: mounting demand means more oil is diverted towards local consumption instead of exports. This is especially important at present as oil and gas are still considered the primary energy source. As renewable energy sources become the new norm, oil and gas will develop into more of a niche energy source and downstream products like petrochemicals will prove to be far more profitable. Simply, the GCC is not yet maximising the utility it derives from its natural resources. The first step towards remedying this would be shifting domestic consumption. Fortunately, the GCC states already begun implementing national strategies towards achieving that goal. The UAE’s nuclear energy programme saw its first (of four) power plants built in 2012 and connected to the grid in mid-2020. And, for instance, Bahrain articulated a national energy efficiency target of 6% by 2025, and a national renewable energy target of 5% by 2025 and 10% by 2035. Shifting towards renewable energy is important for achieving sustainable economic growth. The World Bank, for instance, expects that water-scarcity alone could account for economic losses that reach up to 14% of GDP in the MENA region by 2050, a figure that does not include other climate related spillover effects.


Promising Opportunities


This is not to imply a lack of opportunity. On the contrary, the GCC and wider MENA region have the potential to emerge as key exporters of renewable energy and can capture global market share before the transition is complete. Australia, another large energy exporter, has already set the path towards exporting renewable energy to its neighbours in Oceania. The Australian government fast-tracked the construction of the world’s largest solar farm and a 3,700km electricity cable that will supply approximately $1.5 billion a year of green energy to Singapore by 2027. The GCC is better positioned, both geographically and logistically, to become a major global exporter of renewable energy—especially to Europe. The International Energy Agency estimates that the potential for concentrated solar power technology alone could amount to 100 times the electricity demand of the MENA region and Europe combined. This does not include many opportunities in wind farming, hydro-electricity and biomass technologies.

A unique opportunity exists for the GCC to export green hydrogen; a clean source of energy extracted (by use of renewable energy such as solar) from water molecules using electrolysis. It can be stored and transported long distances, particularly in the form of ammonia. Costs of separating the hydrogen from ammonia are also becoming considerably cheaper. A Strategy& study projected demand for green hydrogen to displace roughly 37% of current oil production by 2050. Uses of this type of energy are becoming more commonplace for electricity and transportation fuel purposes. The GCC’s potential is derived from the competitive advantage and expertise the region possess in the oil and gas field; an advantage that can be leveraged to transform and optimise resources for new opportunities. Studies in the field show that new market entrants are currently vying for a share in the market’s over $300 billion in annual revenues.

 

***


The coronavirus pandemic crippled economies worldwide—but some more than others. The GCC, along with other net oil and gas exporters have been among the hardest hit this past year. The true test of this pandemic will be about how countries facing acute adversity can strategise and create more resilient economies. Apart from that resilience is realising new opportunities, like those found in the renewable energy industry. Globally, energy exporters are adjusting to a new norm, where carbon neutrality is a reality and not merely a pledge. The starting pistol has sounded and the race for exporting renewables has begun. However long and tenuous the transition journey may be, the GCC’s competitive advantage and abundant resource for human capital and land can prove to be vital towards making the region a front-runner in this race.
 

08 January 2021

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