Subject: The outlook for sustainable energy in the Gulf states.
Significance: GCC states are among the worst polluters in the world, and they are global leaders in per capita carbon dioxide emissions. Yet several states are trying to reposition themselves as leaders in green research and technology, with a specific focus on alternative energy. All of them have signed the Kyoto Protocol, and Abu Dhabi has recently outbid Germany to become the host of the International Renewable Energy Agency (Irena).
The Gulf has significant potential for carbon capture and storage, but its attractiveness will depend on how the international market for emissions certificates will be structured.
The economic opportunity cost of consuming a barrel domestically is the difference between the (low) domestic price and the one that it would fetch internationally.
Electricity consumption is rising rapidly - not least because of the low prices that the mostly state-owned electricity producers charge their retail and industrial consumers in the Gulf.
Analysis:
Increasing international pressures from the climate change discussion partly explain the Gulf states' new focus on sustainable energy. Their ambition is to rebrand themselves as the Arab world's new, internationally integrated patrons of culture, research and social responsibility.
Key insights. Runaway domestic energy consumption is a threat to GCC oil income and, even more to domestic heavy industrialisation strategies.
Nuclear energy is likely to be the most important substitute for electricity derived from fossil fuels.
The Gulf has significant potential for carbon capture and storage, but its attractiveness will depend on how the international market for emissions certificates will be structured.
Consumer behaviour in the GCC will be harder to change than the state-dominated supply structures.
However, the shift is not only about public relations: there is a fundamental material interest in most of the oil monarchies to engineer a new energy mix that will reduce their domestic consumption of fossil fuels for electricity generation and desalination. The oil boom has made large funds available to finance this shift.
Fossil Fuel Consumption. The Gulf Cooperation Council (GCC) states produce much more carbon dioxide (CO2) per capita than other countries with comparable per capita income. These emissions are produced by the oil and gas extraction process itself, but are also due to the high consumption levels of fossil fuels in domestic industry and transport. To some extent this high consumption of locally available resources reflects a rational economic strategy. However, to a larger extent it is the result of pricing policies that encourage waste and misallocation.
Consuming fuel oil and gas domestically at heavily reduced prices made some sense in the 1980s and 1990s, when spare capacity in the GCC oil sectors was high and the production price of the marginal barrel thus was very low. However, global spare capacity is now much smaller and the dumping of valuable fuels on domestic markets at prices which hardly cover production costs makes no economic sense:
The economic opportunity cost of consuming a barrel domestically is the difference between the (low) domestic price and the one that it would fetch internationally.
The latter tends to be high, as the international market, in contrast to the 1980s, is generally ready to consume additional barrels.
Change Drivers. The rapidly increasing domestic energy consumption in the Gulf states further increases economic pressure to change the local energy mix:
Electricity production per capita - largely fed by oil and gas - has increased 2 per cent to 6 per cent annually between 1990 and 2003, while at the same time populations have been growing at more than 2 per cent.
The recent boom has further accelerated demand growth.
In contrast to the 1980s, when spare capacity was high, satisfying this additional energy demand now requires that, all other things being equal, additional barrels have to be brought on stream. This process has become increasingly expensive as the Gulf's cheaply developed oil fields have by and large been exploited.
At the same time, refinery upgrades all over the Gulf mean that there is less fuel oil available, which has traditionally been used as cheap feedstock to fire local power plants. In recent years, Saudi Aramco had at times had to buy fuel oil for Saudi power plants on the international market.
Gas shortage. Gulf power plants also run on gas, but GCC gas is mostly 'associated' - ie produced in conjunction with oil. The amounts available hence depend on Opec production policies - and have recently been insufficient for the GCC's ambitious industrialisation strategy:
Several large gas-dependent industrial projects have been put on hold.
Qatar is the only country currently producing non-associated gas. Most of it is committed for overseas exports, and the amounts that are provided to neighbours through the Dolphin pipeline will not be sufficient if current consumption trends continue (Moreover, Qatar is unhappy about the low prices at which it committed to provide its gas through Dolphin).
Electricity demand. Electricity consumption is rising rapidly - not least because of the low prices that the mostly state-owned electricity producers charge their retail and industrial consumers in the Gulf. Past attempts to reduce subsidised utility tariffs often had to be rolled back after protests from the rentier state citizenry that is accustomed to provision of free or cheap public services. Prices of domestic transport fuels have been kept similarly low and encourage over-consumption and the purchase of large, gas-guzzling cars even among the poorer strata of Gulf societies.
Some Saudi electricity producers are now even using diesel in their plants as it is sold at a highly subsidised price of less than 7 cents a litre. By 2020 Saudi Arabia could use up to half of its oil locally instead of exporting it. It already consumes the equivalent of 2 million barrel per day of fossil fuels, almost as much as Kuwait's total exports.
To some extent local climatic and geographic conditions explain higher consumption, including the need for desalinated water and air conditioning. To a larger extent, it is explained by the government's politically motivated pricing policies.
Solutions. With escalating domestic consumption, scarcity of gas, and a much increased production price and opportunity cost of the domestically consumed marginal barrel, the GCC rationale for its domestic energy mix has changed fundamentally:
One way of tackling the new situation would be an increase in domestic energy prices, which appears unlikely for the time being.
Another would be the development of new domestic energy sources - a policy that GCC states are actively pursuing, and in the course of which they are trying to reposition themselves as leaders in alternative energy.
Nuclear. The fact that tenders for coal plants are in the making in both Ras Al Khaimah and Oman shows that the domestic energy shortfalls are serious. However, the GCC will have to import its coal from overseas, and widespread adoption of coal-derived electricity would expose it further to international criticism in the climate change debate, as CO2 emissions from coal are even larger than those from oil.
Nuclear energy can provide a reliable baseload of electricity that, if appropriate diplomatic arrangements are found, will not cause any significant feedstock problems. As the GCC countries are willing to buy international nuclear technology off the rack, and a new generation of reactors that will be built globally is under way, nuclear could turn out to be an affordable option.
GCC technocrats tend to have a long-term planning horizon, making nuclear plants with their high upfront costs more attractive to them than to Western politicians operating in a four- or five-year framework. Nuclear plants would allow GCC governments to convert some of their long-term overseas capital to long-term local physical capital. Thanks to the institutional environment in the Gulf, the planning and regulation process will be considerably easier and cheaper than in the West, with little risk of becoming the political issue that has dissuaded Western firms from investing in nuclear plants in their home markets in recent decades.
Nuclear energy could also function as a geopolitical insurance policy that would commit Western powers more deeply to the security of local regimes in order to prevent internal regime change or external challenges that could lead to an attack on facilities or to nuclear proliferation:
Abu Dhabi has been pursuing an active nuclear policy and is pushing for the construction of its first reactors by 2015, a very ambitious deadline. In what amounts to an indirect reproach to Israel and Iran, it has signed up to all safeguards and monitoring mechanisms, forgoing its option for enrichment technology and instead committing to the purchase of externally provided fuel.
Kuwait is actively considering the acquisition of nuclear technology.
Saudi technocrats are also debating the construction of reactors.
Both would probably follow a similar strategy of international integration as Abu Dhabi.
The contracts for Abu Dhabi's first reactor will be awarded before the end of September; the French bid recently seemed to be gaining the upper hand, which might be related as much to Abu Dhabi's new military partnership with France as to the superiority of French technology.
Carbon capture and storage. The Gulf states' generally impressive track record of large-scale project management augurs well for the new nuclear sector. Arguably it also makes them prime candidates for the successful management of large carbon capture and storage projects (CCS), which are currently debated in the context of the emissions trading mechanisms in the international climate regime:
The Gulf produces CO2 through highly concentrated point sources in heavy industry and upstream oil and gas, which are more plausible candidates for CCS than the often diffuse sources of CO2 in advanced economies.
CO2 could be injected into oil fields for enhanced oil recovery, substituting for natural gas which is currently used to this end and could hence be liberated for domestic consumption.
The first state-directed CCS projects are under way in Abu Dhabi under the leadership of Masdar, the new national clean energy company.
The special peridotite rock formations present in the United Arab Emirates, Oman and southern Saudi Arabia could potentially be used for chemically capturing CO2.
CCS in the Gulf could result in potentially exportable sustainable energy technology, a field in which Abu Dhabi has been particularly interested and has been investing billions of dollars. However, a number of question marks remain:
Important technological issues still need to be sorted out.
It is not clear under which conditions CCS-generated emissions credits will be admitted into the global climate regimes and, as important, at which prices emissions credits will be traded.
The latter is of pivotal importance for assessing CCS's economic viability, but if CCS is technologically and economically viable, the Gulf could be well positioned to profit from it.
Solar energy. The GCC is also well positioned to develop solar energy production, as it receives 40 per cent more sun per square metre than Spain:
Abu Dhabi's ambition of becoming a technological hub has led it to invest significantly in German and Spanish clean energy companies, and although local human resources are very thin, the emirate's readiness to finance large-scale research and development is likely to attract qualified international staff.
Saudi Arabia's King Abdul Aziz City for Science and Technology as well as Saudi Aramco are involved in solar power research, and a large solar plant has been mooted in Oman.
With recent advances in long-distance electricity transmission, solar energy could in the long run even be exported to Europe through a chain of long-distance cables and transmission stations.
In the short to medium term, solar energy production, though increasing rapidly from a small base, will remain orders of magnitude smaller than other forms of electricity generation in the GCC.
Institutional environment. or all these options, the GCC countries will be able to draw on small crack teams of technocrats and advisers. These are often organised into islands of bureaucratic efficiency that have been set up separately from the rest of the bureaucracy since the 1970s and are charged with the implementation of crucial large projects.
National oil companies such as Aramco and Adnoc or heavy industry companies such as Sabic and Qatar Industries are among the best-managed organisations in the region and could play a leading role in deploying new energy technologies. Their research capacity is limited, but the increasing availability of funds for foreign researchers could lead to a rapid build-up of local knowhow. The surpluses of the 2000s boom, though dented by the 2008 crisis, remain large enough to allow for the initiation of ambitious new projects along the lines of the heavy industrialisation drive since the 1970s.
Most regimes are highly autonomous in their decisions to allocate new surpluses. They can rapidly create new institutional enclaves and separate regulatory regimes. Nuclear technology is best administered if the nuclear sector is insulated from politics and dominated by technocrats.
Kuwait's social and distributional interests are well organised, especially through parliament, and have been preventing the creation of new state-owned enterprises and bureaucratic enclaves. Nuclear power therefore will be deployed there more slowly if at all, and despite large surpluses, no major initiatives have been taken on renewable energy.
Outlook. At the same time, all Gulf states buy political calm through providing employment and cheap public services and keeping groups in society state-dependent. Given this ruling bargain, changes to the domestic energy price regimes seem unlikely - especially after the population has suffered through a period of inflation and is well aware of how full most government coffers are.
The changes that lowering energy consumption would demand - more expensive, smaller houses, higher utility and petrol prices - are unlikely to occur soon. Attempts to regulate building standards, administer fines for wastage, and educate the public about conservation are likely to have a modest impact on a population in whose daily routines overconsumption of free or low-cost utilities is deeply engrained. This means that the GCC energy mix will probably be re-organised from the supply rather than the demand side. This is less of a problem for relatively small UAE and Qatar than it is for Saudi Arabia with its substantial local population.
Conclusion:
Non-fossil energy sources will play an increasingly important role in the Gulf. The deployment of nuclear power will probably constitute the most important development, while solar power will play a secondary role. Depending on technological developments and the fine print of the future international climate regime, the Gulf could emerge as a major hub of carbon capture and storage.
