For decades, evidence has been piling up which proves mankind's influence on climate change. Although the global economy remains largely driven by fossil fuels, the energy transition has gained traction in recent years. The changing tide can also be seen in countries that are heavily invested and dependent on the fossil fuel industry. This includes the hydrocarbon-rich Arab states of the Middle East that are gradually taking into account a carbon-free future. These states seem to realize that they won't be able to depend on their oil and natural gas industry indefinitely. Therefore, they're preparing to make maximum use of their energy assets. The question is, is it too little too late or just in time?
A changing tide
Although it has always been a certainty that at some point the world would need to wean itself of its fossil fuel addiction, the timescale was always a point of discussion. But in 2021, the energy transition is happening, and it is progressing quicker than most people could have predicted.
It is precisely this transformation that is rapidly becoming a reality-check for wealthy Arab countries in the Gulf region that have created rentier states where their citizens live easy and comfortable lives. Despite decades of talk, the Arab states of the Gulf are still heavily dependent on income from the export of fossil fuels.
The UAE is one of the few countries that has steadily pursued policies to create an innovative and modern society while diversifying the economy. Saudi Arabia has its own agenda which has become known as Vision 2030; a strategic policy framework that intends to prepare the country for a future where oil and gas play a marginal role.
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The Covid-19 pandemic accelerated trends as industrialized countries made advanced plans to tackle the coming economic crisis by investing heavily in green technologies. This trend has become somewhat of a threat to the Arab Gulf states.
Focusing on the future
Ever since the discovery of the massive oil and gas wealth of the Middle East and the nationalization of the 60s, the prized energy assets have remained firmly under the states' control. That seems to be changing, and it is changing fast. In 2019 Saudi Aramco's partial IPO brought an additional $25 billion to the state's coffers. On top of that, the crown prince recently announced that the company is in talks with a consortium of Chinese companies and funds to sell shares worth another $20 billion.
In addition to Saudi Aramco, the UAE also intends to offer shares to international investors through a partial IPO of the drilling and fertilizer units of ADNOC. While the Emirates would maintain the vast majority of the shares, the sale would provide extra liquidity just as energy prices are rising again.
The remaining Gulf countries have other plans to bolster their finances. Oman has taken steps to enter the bond market backed by the profitability of the national oil companies. Qatar Petroleum is not far behind with its plans.
According to Ben Cahill, a senior fellow at the Center for Strategic and International Studies in Washington, "the national oil companies are watching each other and picking up some new tricks."
Too little too late?
The value of fossil fuel assets depends on energy prices and the prospective growth of demand. As countries are announcing ambitious targets for scaling up clean energy investment, the future of the oil and gas industry has changed from positive into bleak.
Although OPEC remains optimistic about the demand for oil in the short term, other organizations are less positive. Bernstein Energy, Rystad, and the IEA predict peak oil to occur in 2025-2030, 2028, and 2020-2030, respectively.
The question is then whether it is too little too late for the Arab states to diversify and modernize the economy on the back of their existing energy assets? In the case of Saudi Arabia, the partial IPO in 2019 was met with lukewarm enthusiasm by international investors. Therefore, eventually, the offering was performed locally at the Riyadh Stock Exchange instead of New York, London, or Shanghai.
These plans should be met with a healthy dose of skepticism as energy markets are transforming rapidly. If announced a decade ago, they could have reaped higher rewards. But then again, no one could have predicted that the energy transition would progress at its current speed.
By Vanand Meliksetian for Oilprice.com
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Vanand Meliksetian has extended experience working in the energy sector. His involvement with the fossil fuel industry as well as renewables makes him an allrounder… More
Comments
Saudi Arabia’s international IPO was withdrawn from the market because of persistent question marks about the actual size of its proven reserves and risk of US litigation with regard to the destruction of the World Trade Building in New York. So it opted for a small domestic IPO just as a way of raising badly needed funds.
Even Aramco’ negotiations with a Chinese major oil company to sell 1% share of the company for a reported $19 bn will not take off. The Chinese company like other companies in the world won’t pay $19 bn for 1% share and without a fully independent auditing of Saudi proven reserves. Furthermore, it won’t buy if the deal doesn’t include oil-producing assets. It isn’t going to pay such an excessive sum for refineries and petrochemical plants.
More to the point, there is no evidence whatsoever of peak oil demand. Any talk about an impending peak is premature and is based on wishful thinking and self-delusion.
There will neither be a post-oil era nor an alternative as versatile as oil throughout the 21st century and probably far beyond. And with growing world population and rising global GDP the demand for oil will continue to rise well into the future.
Furthermore, when oil majors like BP and Shell talk about an approaching peak oil demand, they mean their peak not the world’s. Supermajors have oil reserves projected to last only 8-10.5 years and they are finding it extremely difficult to replace their fast-declining reserves because of a resurgent resource nationalism.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London