In a fairy-tale turnaround that few could have foretold, oil prices have soared to multi-year highs, largely aided by strong post-Covid demand, surprise OPEC+ cuts and the disruption caused by Russia’s war in Ukraine.
The petrodollar windfall has really given a boost to previously battered Gulf economies, allowing some Gulf Arab states to pay down debt and others to diversify their oil-reliant economies in very big ways. All the six Gulf Arab states--Saudi Arabia, the United Arab Emirates, Kuwait, Qatar, Bahrain and Oman--are on track to post budget surpluses, many for the first time in a decade thanks to buoyant oil prices and years of fiscal reforms.
But it’s not just the Arabian oil giants that will be enjoying the good times. In its latest forecast, the World Bank has predicted that in 2023, the entire Middle East and North Africa (MENA) region will grow 3.5%, more than twice the global average growth rate of 1.7% thanks mainly to high energy prices and increased oil production. GCC growth is expected to stabilize at 3.7% this year after expanding at a blistering 6.9% clip in 2022.
Diversification and Sustainability Remain Key
Although hydrocarbons remain the backbone of MENA’s economy, the realities of climate change as well as wild oil price swings have been forcing Gulf nations to restrategize and diversify their economies away from oil--and Saudi Arabia is leading the way, again.
Although Saudi Energy Minister Prince Abdulaziz bin Salman recently made waves in the oil community after telling Bloomberg News that Saudi Arabia intends to pump every last drop of oil and is going to be the last man standing, Saudi Arabia has crafted one of the most ambitious clean energy blueprints: Crown Prince Mohammed bin Salman’s Vision 2030 economic plan.
In the economic plan, Saudi Arabia has set a target to develop ~60 GW of renewable energy capacity by the end of the decade, which compares with an installed capacity of roughly 80 GW of power plants burning gas or oil.
So far, Saudi Arabia has only made limited progress deploying renewables with just 520 MW of utility-scale solar in operation while 400 MW of wind power is under construction.
With its sun-scorched expanses and steady Red Sea breezes, Saudi Arabia is prime real estate for renewable energy generation. Last year, Saudi Arabia’s national oil company Saudi Aramco sent shockwaves through the natural gas markets after it announced that it was kicking off the biggest shale gas development outside of the United States. Saudi Aramco said it plans to spend $110 billion over the next couple of years to develop the Jafurah gas field, which is estimated to hold 200 trillion cubic feet of gas. The state-owned company hopes to start natural gas production from Jafurah in 2024 and reach 2.2 Bcf/d of sales gas by 2036 with an associated 425 million cubic feet per day of ethane.
Two years ago, Aramco announced that instead of chilling all that gas and exporting it as LNG, it will convert it into a much cleaner fuel: Blue hydrogen.
Saudi Aramco has told investors that Aramco has abandoned immediate plans to develop its LNG sector in favor of hydrogen. Nasser said that the kingdom’s immediate plan is to produce enough natural gas for domestic use to stop burning oil in its power plants and convert the remainder into hydrogen. Blue hydrogen is made from natural gas either by Steam Methane Reforming (SMR) or Auto Thermal Reforming (ATR) with the CO2 generated captured and then stored. As the greenhouse gasses are captured, this mitigates the environmental impacts on the planet.
Last year, Aramco made the world’s first blue ammonia shipment--from Saudi Arabia to Japan. Japan--a country whose mountainous terrain and extreme seismic activity render it unsuitable for the development of sustainable renewable energy--is looking for dependable suppliers of hydrogen fuel with Saudi Arabia and Australia on its shortlist.
The Saudi government is also building a $5 billion green hydrogen plant that will power the planned megacity of Neom when it opens in 2025. Dubbed Helios Green Fuels, the hydrogen plant will use solar and wind energy to generate 4GW of clean energy that will be used to produce green hydrogen.
But here’s the main kicker: Helios could soon produce green hydrogen that’s cheaper than oil.
Bloomberg New Energy Finance (BNEF) estimates that Helios’ costs could reach $1.50 per kilogram by 2030, way cheaper than the average cost of green hydrogen at $5 per kilogram and even cheaper than gray hydrogen made from cracking natural gas. Saudi Arabia enjoys serious competitive advantage in the green hydrogen business thanks to its perpetual sunshine, wind, and vast tracts of unused land.
Germany has said it needs “enormous” volumes of green hydrogen, and hopes Saudi Arabia will become a key supplier. Two years ago, Germany’s cabinet committed to invest €9B (about $10.2B) in hydrogen technology in a bid to decarbonize the economy and cut CO2 emissions. The government has proposed to build an electrolysis capacity of 5,000 MW by 2030 and another 5,000 MW by 2040 over the next decade to produce fuel hydrogen.
The European economic powerhouse has realized it cannot do this alone, and will require low-cost suppliers like Saudi Arabia especially as it doubles down on its green energy commitments following a series of devastating floods in the country.
UAE: Nuclear, Wind and Waste-to-Energy
Back in 2021, the Emirates Nuclear Energy Corporation (ENEC) announced the commissioning of the country’s first-ever nuclear power plant--the Barakah unit 1.
The 1,400-megawatt nuclear plant has become the single largest electricity generator in the UAE since reaching 100% power in early December, and is now providing "constant, reliable and sustainable electricity around the clock."ENEC says Barakah unit 1 is "now leading the largest decarbonization effort of any industry in the UAE to date."
Following in the footsteps of Saudi Arabia, the UAE is also laying a strong foundation for the energy transition.
Masdar, the clean energy arm of Abu Dhabi sovereign wealth fund Mubadala, is building renewable capacity in central Asia after signing a deal in April 2021 to develop a solar project in Azerbaijan.
Since its inception in 2006, Masdar has built a portfolio of renewable energy assets in 30 different countries, having invested about $20bn to develop 11GW of solar, wind and waste-to-energy power generation capacity.
And now Masdar says it intends to apply the lessons gleaned abroad to develop clean energy capacity back at home.
“Solutions we have developed in our international operations will definitely have applications here in the UAE”, says Masdar’s El-Ramahi.
For instance, Masdar plans to bolster the UAE’s comparatively weak wind resources by developing domestic wind farms using the latest class three turbines that are able to harness electricity even from low wind speeds.
Further, the company is also constructing a $1.1bn facility that will burn garbage to generate power in one of the world’s largest waste-to-energy plants. Once complete, the plants will incinerate almost two-thirds of the household wastes the country generates every year.
Though not typically considered a clean energy source, modern waste-to-energy plants are much cleaner as per the United Nations Environmental Program (UNEP). By using advanced technologies, these plants are able burn waste at extremely high temperatures thus ensuring complete combustion while missions are specially treated, leaving minimal amounts of toxic byproducts like flue ash. In fact, tests have shown that the air emitted by certain waste-to-energy chimneys can be cleaner than the air flowing in.
By Alex Kimani for Oilprice.com
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1- Soaring oil and gas prices give them the incentive to accelerate the diversification of their economies by replacing oil and gas with solar and nuclear energy and also hydrogen in electricity generation, desalination plants and manufacturing industries. This means that they will earn extra revenues from the saved oil and gas.
2- The Gulf region will be one of three regions in the world that are destined to produce the very last three barrels of oil. The other two regions are Venezuela’s Orinoco Belt and Russia’s Arctic. And while Saudi Energy Minister Prince Abdulaziz bin Salman likes to boast that Saudi Arabia intends to be the last man standing, this honour will actually go to Iraq based on its proven and semi-proved oil reserves exceeding 400 billion barrels, the cheapest production costs in the world and its prolific wells.
3- Over the next couple of years, Saudi Arabia is planning to develop the Jafurah gas field, which is estimated to hold 200 trillion cubic feet of gas. Production will start in 2024 and reach 2.2 Bcf/d of gas. The bulk of it will be used to satisfy domestic demand and some will be converted into a much cleaner fuel: Blue hydrogen.
4- The Saudi petrochemical industry will receive a share of the produced gas to enable it to expand and possibly become the world’s largest petrochemical industry.
5- Following in the footsteps of Saudi Arabia, the UAE is also laying a strong foundation for the energy transition. Its first-ever nuclear power plant – the Barakah unit 1 has become the single largest electricity generator in the UAE and is now leading the largest de-carbonization drive in the country.
6- Masdar, the world’s largest designated research centre of renewable energy has since 2006 built a portfolio of renewable energy assets in 30 different countries. It now intends to use its extensive expertise in solar, wind and waste-to-energy power generation to develop clean energy capacity back at home.
Dr Mamdouh G Salameh
International Oil Economist
Global Energy Expert