ME energy transition: Where next?

The energy transition has already begun. With environmental concerns escalating to a climate emergency, it is no longer a choice to play in the cleaner energy race.

However, the transition is complex, and a one-size-fits-all approach does not exist. In the Middle East, the challenge is acute and all sectors of the economy, from energy to chemicals and finance must prepare for change.

Across the Middle East, traditionally associated with oil as a primary fuel of choice in its power and industrial sectors, the transition to a cleaner energy mix presents a unique challenge.

While the mix is already changing, the region has lagged behind others in terms of the move to cleaner, renewable fuels.

Over the past few decades, Middle Eastern countries have transitioned from burning oil to gas, mainly driven by the financial incentive of selling higher-priced oil abroad and instead burning the cheaper gas domestically. Qatar, as a world leader in LNG exports, is an exception. Countries such as Bahrain, the UAE, Israel and Jordan are currently using gas as the dominant fuel of choice to generate electricity, with little to no oil in the power generation mix.

Kuwait has made strong progress in replacing oil generation with gas, while Saudi Arabia is taking more time.

Still, the move away from fossil fuels as a whole and towards cleaner fuel sources and renewables has been somewhat slow.

Renewable power generation represents an extremely small portion of the overall generation mix and outright renewables generation is around 2 per cent of what is generated in Europe.

However, there has been a shift towards greater investment in renewables projects in 2021 relative to oil- and gas- fired power generation.

Almost all the countries in the Middle East have their own state-sanctioned energy transition plans, which include ambitious steps to increase renewables and to reduce fossil fuel dependence.

Jordan, the UAE and Oman have also increased the share of renewables in power generation over the past years, with Saudi Arabia and Kuwait trying to catch up. Away from power generation, Kuwait has been increasing its industrial gas use by an average of 9 per cent year on year over the past five years. Gas consumption from the UAE’s industrial sector is around 35 per cent of total gas demand, similar to its power sector.

Looking ahead, the return of Brent crude oil prices in 2021 to a more stable $65 — 75/bbl range is a positive move for Middle East oil producers.

Saudi Arabia and the UAE will be prominent voices at the 26th UN Climate Change Conference of the Parties (COP26) in Scotland in November, where discussions will focus on the next version of the International Climate Change Agreement.

These countries are positioning themselves at the centre of the energy transition, including the development of green hydrogen, but will need to maintain their positions in fossil fuels to fund cleaner fuel projects.

Iran and Iraq are less prominent in the energy transition space and will continue to focus on maximising revenue from oil production.

Qatar leads the region’s energy consumption per capita, followed by the UAE and Kuwait. In terms of carbon emissions, the role of oil in Saudi Arabia and Iran put them at the top of the Middle East list.

While Iran is the leading gas producer in the Middle East, Qatar is by far the leading gas exporter and is in close competition with Australia as the largest LNG producer in the world. Investment in Qatar’s domestic gas production and LNG export infrastructure will continue through the 2020s and will shape the global market.

Qatar will expand its current 77.4mtpa of LNG capacity to almost 126mtpa by the late 2020s in two phases. The expansion is underpinned by new investment in Qatar’s vast North Field. The first expansion phase will consist of four 8mtpa LNG trains which will start up from 2025.

Qatar will continue to work closely with a range of major global LNG and gas companies in a similar manner to its existing LNG trains. Qatar’s primary LNG sales market is Asia, while Europe also plays an important role. In this respect, Qatar will need to pay close attention to European regulation on the emissions and shipping which will step in in the coming years.

Producers in the Middle East are also taking steps to explore the new but growing trend for carbon-neutral LNG cargoes. A carbon-neutral LNG cargo is a normal cargo of LNG supplied with the matching number of emissions reduction credits to offset its environmental impact. For example, a producer could sell a cargo of LNG alongside a number of credits earned by investing in forestry projects.

Oman LNG in June 2021 agreed to deliver a carbon-neutral cargo from its plant at Qalhat to Shell at a Middle Eastern country, in what would have been the first such deal in the region.

The world’s largest LNG supplier, Qatar, has not yet been heard to sell any carbon-neutral cargoes directly. However, new Qatari trading unit QP Trading in November 2020 signed a 10-year deal with Singapore’s Pavilion Energy, under which it would supply up to 1.8mtpa of LNG from 2023 along with a report on the emissions impact of the cargoes from their production, measured from well to discharge port.