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The Gulf's sunshine states

The countries of the Arab Gulf aren't just blessed with oil and gas. Sunshine and wind are abundant too. A shift to capture their energy is underway

Oil has been the most important fuel of economic development within the Gulf Cooperation Council (GCC) region, the vast, deserty piece of land that stretches across the Arabian Peninsula towards the Arabian Gulf. When it was first struck in Bahrain in 1931, few could have imagined the enormous change of fortune oil would bring to the region. It has made countries like Saudi Arabia, Kuwait, the UAE and Qatar rich; and their governments derive between 65% and 85% of their budgets from the export of fossil fuels. Qatar, Kuwait, the UAE and Bahrain are today among the world's wealthiest nations on a per capita basis.

As important as oil has been, the region's energy market is now looking beyond it, to other sources of energy. Natural gas already plays a pivotal role in the GCC's energy mix—and provides Qatar with a substantial portion of its hydrocarbon-export revenue. And as regional demand for energy continues to rise, the future fuels that will power the GCC's economies will look surprisingly green.

Reducing the GCC economies' reliance on oil for domestic energy supply is not such a new policy at all. Increasingly since the 1990s and 2000s, oil's sister hydrocarbon has been the region's preferred fuel to power the utilities sector and its economically important, energy-intensive industries. Because of this move towards gas in the power sector, the GCC's demand for the fuel more than doubled from about 120bn cubic metres a year in 2000 to over 265bn cm by end-2014, according to US Energy Information Administration data. In more recent years, some GCC countries have begun to introduce small numbers of natural gas liquids-fuelled vehicles, primarily for use by taxis.

Originally flared, or burned off as an unwanted byproduct in crude oil production, natural gas may have taken a later start in the GCC than elsewhere in the world, but its value for domestic energy use in the GCC today is high. With the ability to relatively easily replace oil in power generation, and as feedstock in industries from fertilisers to petrochemicals production, natural gas is a versatile fuel for use in the GCC economies' evolving strategies to diversify their economies away from oil, and to save crude for more value-generating exports.

$24.7/MWh - Record-low electricity price from solar-PV plant in Abu Dhabi

Surging domestic energy consumption within the GCC increasingly justified the search for alternative fuels to oil and its products—whose value was, and still is, highest on international export markets. Countries with domestic gas production exceeding their own market needs, in particular Qatar, turned towards natural gas exports in parallel to the export of oil. Oman and the UAE have similarly been exporting smaller volumes of natural gas, although the fuel's success as a domestic alternative to oil, and limits to national natural gas production, meant both countries have since seen their gas exports curtailed by the competing needs of local consumers. Oman, for example, exported around 10.6bn cm in 2005 and consumed about 9bn cm domestically; by 2016, the country's consumption reached 23bn cm and net exports had fallen to around 8bn cm—the outcome of big domestic gas production increases and summer-time gas imports from Qatar via neighbouring UAE of up to 2bn cm. The UAE's domestic demand for natural gas surged from around 40bn cm in 2005 to almost 80bn cm in 2016, turning the country into a net importer of it in 2007. Last year, the UAE imported about 16bn cm, most of it through the Dolphin pipeline from Qatar.

But natural gas in the GCC is different to oil in a number of ways This is one reason why, despite its popularity, the region may yet look to other energy technologies to complement the past decades' rapid gasification of its energy sectors. Most important, is that many of the region's gas resources are costlier and harder to develop than they were in the past. While much of the gas produced in the GCC was associated gas, a byproduct of oil output—and hence, a gift of nature—future gas production will increasingly rely on new reservoirs distinct from existing oil fields. Much of this gas is what engineers call sour gas too, so its chemical composition needs further purification, making it expensive to develop. Other gas resources, for instance in Oman and Saudi Arabia, include tight, deep-water and unconventional resources, again raising the cost of a product that used to be considered almost free in the past. This includes greenfield development costs, the building of new infrastructure (including offshore), and generally higher technology costs to drill for gas resources at the border between conventional and unconventional finds.

Gas strategy

Producing gas still has solid economic rationale, especially if it frees up more oil to be exported to international markets. But the development costs have complicated and delayed bringing online sufficient new gas supplies in countries such as Kuwait, the UAE and Saudi Arabia, where domestic consumers pay a fraction of the expected development cost of the resource. Investment in new production capacity has therefore lagged, in turn widening the gap between the domestic market's needs and the output of state-owned producers. Kuwait has been facing long delays in developing its northern gasfields since the early 2000s, over a combination of economic and political disagreement over contract awards and design. In the UAE, projects such as the Shah gasfield experienced multi-year development delays during the early 2010s. Plans such as Saudi Arabia's ambitious target of raising domestic gas production by 48% (or around 60bn cm) by 2020 under its new National Transformation Plan have been met with scepticism. The International Energy Agency, for example, forecasts a rise of just 8%.

This has led to the irony of some GCC countries—at the heart of the world's petroleum industry—importing gas from the US. The UAE, holder of the world's seventh-largest gas reserves, Kuwait, which itself holds around 1.8 trillion cm, and even net gas-exporter Oman have all imported gas from outside the region in recent years. Bahrain has mulled gas imports in the coming years. Saudi Arabia, with the world's sixth-largest gas reserves, has so far denied intentions to import gas too, and continues to fill domestic shortfalls in the power sector by burning either oil products or, during the peak summer months, crude oil itself. The economic opportunity cost of this stubborn strategy is high. The kingdom burnt 1.39m barrels per day of oil in July 2017, a record high. Around 0.657m b/d of the total were crude oil that, even at today's prices, would have fetched higher prices internationally.

27% - UAE target share of renewables in energy mix by 2022

One particular problem has been the price domestic users in the GCC pay for their gas—just a fraction of its marginal cost of production. Fuel prices in the region, having long been regulated by the state, reflect—at best—historical running-even costs that no longer constitute adequate market signals to investors. Oman, which charges some of the region's highest prices for gas, raised the level in early 2015 (for industrial users) to $3.01 per million British thermal units. For Omani industry buyers, this was a shock: a doubling of the price a year earlier. Nonetheless, the new price was still about a third of that paid elsewhere in the world. Saudi Arabia, at the lower end, used to charge domestic customers a flat price of $0.75/m Btu up until end-2015. No wonder its efforts to bring international companies in to develop the gas upstream fizzled out. The IEA estimates the cost of natural gas subsidies in Saudi Arabia in 2014 alone totaled around $11.8bn. That's a fiscal cost that the austerity-ridden state couldn't ignore once the fall in oil prices started to hit government finances. Like some of its GCC neighbours, Saudi Arabia began reforming its natural gas prices for some customer segments in early 2016, raising prices for methane and ethane to $1.25 and $1.75/m Btu—still far below the cost of gas almost anywhere else in the world.

These basic numbers highlight the parallel dilemmas faced by policymakers in a region whose energy demand is growing rapidly, both a product of and support for economic growth, but where final consumers and industries have been accustomed to many decades of state-led energy-sector development and subsidised supply. Energy remains a political topic, and reforming the GCC's domestic energy markets and prices for energy in the past has required an almost epic effort by policymakers to make even small price changes digestible for consumers, who in this region see low-cost energy supplies as a basic birthright, and the basis for the region's continued industrial growth.

Qatar has a special status among the GCC's gas producers in being the only one with sufficiently large production to serve both domestic and international markets, with no apparent shortfalls on either side. Rising domestic energy consumption—demand has more than doubled from around 18.5bn cm during the mid-2000s to 40bn cm a decade later—has been met by the development of new fields, while at the same time Qatar has become the world's largest liquefied natural gas exporter. But its case is special: the North Field, which Qatar shares with Iran (where it is called South Pars) is the world's biggest natural gas deposit. Qatar recently decided to lift a moratorium on its development, meaning it may expand its LNG output beyond the 77m tonnes-a-year capacity it reached in 2011.

Domestic boost

For Qatar, natural gas has been a lifeline for revenue given its more modest oil reserves compared to some of its neighbouring countries, and fulfills the dual purpose of generating income and fueling the domestic energy sector. LNG exports account for around 40% of the government's total hydrocarbon-related revenues, a whopping QAR42.6 bn ($11.6bn) in 2015 according to the International Monetary Fund, although this number has been shrinking in line with falling oil and LNG prices. And it also exports gas to the UAE and Oman through the Dolphin pipeline, a late-2000s project that constitutes the only direct gas trade between GCC countries. Dolphin was once considered a symbol of new intra-regional energy cooperation. These days, it seems more a symbol of a bygone era—a region that holds some of the world's biggest deposits has been unable, in the years since Dolphin was developed, to find other areas of gas collaboration. Distant, costly LNG supplies sail into GCC markets, while Qatar's gas sails in the other direction.

Beyond fossil fuels

Aside from oil, gas and sand, the GCC also has an endless supply of sun and wind. The value of the GCC economies' fossil fuels on international markets, coupled with the region's own rising energy needs, has, on top of this natural endowment, been driving the business case for alternatives to oil and gas in the domestic market. It's been a boon for renewable energy, both in policymaking circles and among businesses. For the latter, new renewables-based projects offer an opportunity to enter into partnerships with the public sector in utility markets—a relatively new development in the Gulf region, where every aspect of utility value-chain used to be entirely held in public hands.

From a strategic perspective, the rise of renewables in the GCC is remarkable, even if deployment remains in its infancy and currently limited to a small but growing number of utility-size projects. For decades, renewable energy lacked any formal appeal in the region, and today renewables account for less than 1% of GCC final energy production, a pattern similar to that across the entire Middle East. Assumptions about cheap and abundant oil and gas have been difficult to overcome.

Still, policy is changing markedly, led by Dubai and Abu Dhabi, where economic strategy has tended to be more forward-looking and tied to economic diversification. Dubai, which holds significantly less of its own oil and gas reserves than neighbouring emirate Abu Dhabi, has historically had an economic incentive to develop energy alternatives that price competitively against fossil fuels. As solar-power costs fell in recent years, the emirate jumped on the trend.

When Dubai launched its 5 gigawatt Mohammed bin Rashid Al Maktoum Solar Park in 2012, it subsequently managed to push down costs for solar photovoltaics to what was, at the time, a record low of $58.50 per megawatt-hour for a 200MW follow-up phase. In May 2016, the bids for another 800MW of capacity pushed the cost down to another record low of $29.9/MWh. Months later, the bids for a 1.17GW solar plant in Abu Dhabi brought the price down still further, to $24.7/MWh. In Dubai, this now makes solar PV the lowest-cost source of energy—cheaper than fossil fuels and nuclear power too.

Prices seem likely to fall further. In September, Dubai announced the winning bid for a 700MW concentrated-solar power plant at the Mohammed bin Rashid al-Maktoum Solar Park. The contract came with an all-time price-tag low of ¢7.3 per kilowatt-hour—and holds huge potential to turn around the state of play for solar technologies in the region. CSP is more expensive to install than PV, but it comes with the option to store electricity, and hence turn solar power from a variable source of electricity to a constant one.

The UAE now has a target of producing 27% of its energy from clean sources by 2021, and has more recently announced another target of generating half its power needs by 2050 from clean energy—44% from renewable energy and 6% from nuclear power. So far, these are the most ambitious alternative energy targets in the GCC.

Cost arguments are recent developments, but they come at a time when changes to the Gulf economies' historical domestic energy mix are increasingly welcome, even in more conservative political circles. Where in the past political and industrial discourse centred around the fundamental role of fossil fuels, the past few years have brought a notable change: alternative energy is now seen as a benefit, rather than a threat, to the region's long-term economic outlook. Falling oil and gas revenues due to dwindling international prices and rising domestic needs, the high burden of fossil-fuel subsidies, and the experience of shortfalls in domestic natural gas production are all weighing on the minds of policymakers. Renewable energy is their solution. Ali al-Naimi, the former Saudi oil minister, has said that he thinks solar energy "will be even more economic than fossil fuels". The UAE's crown prince, Mohammed bin Zayed, went even further. "In 50 years, when we might have the last barrel of oil, the question is when it is shipped abroad, will we be sad? If we are investing today in the right sectors, I can tell you we will celebrate at that moment."

New green economy

Job creation outside the oil and gas sector and the potential positive impact on research and development are also now factors favouring renewable deployment in the region—especially given the other pressing need, to find employment for an ever-younger and well-educated populace.

The UAE has been riding on this advantage, integrating its clean-energy targets closely with a wider economic strategy that sees the country as a green regional hub, with green-knowledge clusters and centres of research and innovation, supported by new "green" legislation, such as the region's most-advanced building codes. In early 2013, Abu Dhabi launched Shams 1, at the time the world's largest CSP plant, and the emirate also hosts Masdar city, a building complex in the suburbs of Abu Dhabi designed to show the feasibility of low-carbon cityscape development. The aim here is not only to build physical infrastructure, and to eventually bring down technology costs, but also to develop skills and human capacity.

The strategy has a political dimension too. The UAE has been active in international climate negotiations and was unusually outspoken, for a GCC state, in its support for global climate-change efforts. The image of a country, or region, emerging from its historical role as the world's fossil-fuel supplier to one of regional innovation and even green leadership is part of the UAE's soft power efforts—part of a more proactive and self-confident foreign policy.

Saudi Arabia, besides the UAE the GCC's most dynamic market for renewable energy, has made some efforts to keep up with its neighbour. After much talk and little progress in promoting renewable energy in the kingdom up until the mid-2010s, the reorientation of the domestic energy sector under King Abdullah's successor Salman, his son, crown prince Mohammed bin Salman, and energy minister Khalid al-Falih has in the past 18 months raised hopes for a more dynamic approach to renewable energy in the country.

Under the National Renewable Energy Programme (NREP), launched in July 2016, Saudi Arabia announced a target of 3.45GW of renewable power capacity by 2020 and 9.5GW by 2023-70% of which will come from solar power, the remainder from wind. The NREP links alternative energy deployment and an overall more sustainable energy agenda to the kingdom's National Transformation Program, part of the crown prince's Vision 2030—a plan to develop a non-oil economy and create jobs for young Saudis. Pledging to end his country's "addiction to oil", Mohammed's vision will face many hurdles. But it represents a fundamental shift that few would have thought possible a few years ago.

So far, renewables account for less than 1% of the Saudi power mix, reflecting the Kingdom's past scepticism toward alternative sources of energy. Still, recent months have brought some progress. The first phase of the NTP's renewable-energy programme targets a total of 700MW from renewable facilities. Saudi Arabia's first bidding round for a utility-scale solar-PV project, in Sakaka, in the north of the country, opened in October, and received bids as low as ¢1.79/kWh for a 300MW photovoltaic plant. This would be cheaper even than the contracts secured by the UAE. A second bidding round for a 400MW wind power in Al Jouf (originally Midyan) is in the pipeline for early 2018, with 24 companies shortlisted. Other project tenders are expected for the end of this year.

Over the next 10 years, the Saudi government aims to develop 30 solar and wind projects across the country, involving up to $50bn worth of investments. For 2018, the government has mulled a financial-incentive scheme for domestic consumers to promote installation of small-scale PV rooftop panels, initially as an offset scheme against future consumption of electricity, and later through a feed-in tariff or premium. All of these steps are also part of Riyadh's strategy to boost the share of private-sector output in the Saudi electricity mix to 100% by 2030 from 27% now, and increase fuel efficiency by 7% over the same period.

Winds of change

While the economic rationale for solar PV in the region is sound—and proven in the UAE—and can be supported by governments freeing land for development and offering soft credit, wind power may also soon have its moment. Saudi Arabia and parts of Oman are thought to have good potential for this technology, owing to their mountainous territories and exposure to good coastal wind sites, in particular the Red Sea and upper Gulf coast, in Saudi Arabia, and the Arabian Sea, in Oman. Oman's most promising wind sites are those located in the southern and eastern regions of Oman, down to its Yemeni border. These locations have wind speeds comparable to European sites where commercial wind power successfully operates. The UAE have explored wind projects with suitable sites identified near Sir Bani Yas Island, where a 30MW wind project has been proposed. In the smaller GCC states, the scale of future wind projects is primarily limited by the available land size for suitable sites, as well as the cost of erecting turbines and their gigantic blades where existing infrastructure is missing, for instance in remote mountainous territory.

9.5GW - Saudi target for renewable energy capacity by 2023

Yet for all its renewable promise, GCC countries have often failed to hit their targets. Qatar a few years back had bold plans to expand its green energy and create a green-knowledge cluster as part of its economic-diversification strategy. So far, progress has lagged, owing to the lack of political focus and falling oil revenue and therefore government funds for prestige and demonstration projects. So, while Doha once planned to use solar power for cooling its 2022 World Cup stadia, evidence of this is scant and plans for a 3.5GW solar-power complex project, announced by Kahramaa, have been put on hold. More recent announcements have been modest, including a 200MW solar-PV project. The country's target for renewable energy's share of the energy mix is just 2% by 2022.

Even less progress has come in other GCC countries—although this could be changing too. Bahrain and Kuwait have so far offered little incentive to investors to consider renewable energy. But Kuwait this past summer issued plans for a tender in the first quarter of 2018 for the $1.2bn Dibdibah solar-PV plant. The emirate's ambitions are bolder than its progress so far: it plans to produce 15% of power from renewable energy by 2030.

Oman, with an estimated 30 years left of its oil and gas reserves at current production rates, has good reason to get busy with alternatives. But it too has been lagging behind some of its neighbours. It is constrained by finances more than other richer GCC states. Still, in August, the country issued an engineering, procurement and construction contract for a large-scale wind farm, the first in Oman and the GCC. The 50MW Dhofar project is funded by the Abu Dhabi Fund for Development, and will supply 16,000 homes in the southern governorate at Oman's border with Yemen. Otherwise, concentrated solar power in Oman has so far been used in enhanced oil recovery (EOR), a niche application of solar power in which Oman has gained much experience. The country's main oil and gas producer, Petroleum Development Oman, began investigating solar-steam generation in EOR back in 2005, recognising that the technology held potential to save valuable natural gas that would have otherwise been injected directly, and hence been lost for other uses on domestic markets or for export.

Nuclear option

Nuclear power is the other main alternative for the region. It is now an integral part of the UAE's energy strategy and construction of the first of four 1.4GW reactors at Barakah began in 2011. It should come online in 2018. The four plants will eventually meet a quarter of the country's electricity, and are planned to come online successively by 2020.

Saudi Arabia has flirted with the idea of nuclear power for many years, and initially announced plans in 2011 for 16 nuclear reactors to be built over 20 years, at a cost of more than $80bn. They would generate about 20% of the country's electricity. The target date was later moved from 2030 to 2040, while the subsequent launch of Vision 2030, along with revised targets for renewable energy, left some uncertainty over the fusion plan. A firm decision was only approved in July under the directive of crown prince Mohammed bin Salman. The Kingdom's nuclear and renewable energy agency, Kacare, will map out possible sides for two nuclear reactors, each with 1.2-1.6 GW capacity. Construction contracts are to be signed next year.

Source: Petroleum Economist
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