How Gulf states deal with the energy transition challenge
Reading 7 minutes l by Barbara Riccardi, Regional Head Middle East Caucasus Central Asia at Natixis Corporate & Investment Banking.
Barbara Riccardi shares her insights on how the Persian Gulf Region (PGR) is helping to facilitate the energy transition through a combination of government commitments, sovereign wealth funds support and state oil champions cooperation.
What are the key global strategy challenges that Persian Gulf region is facing?
One of the most pressing challenges facing the Gulf states is how to transition from a petroleum-based economy to a carbon-neutral economy. The serious macroeconomic consequences of the upheavals in the oil markets over the past 10 years and the growing awareness of the threat of climate change on society and the economy have pushed the Gulf countries to rapidly reduce their dependence on oil and prepare for a post-oil era notably through sector diversification. The United Arab Emirates (UAE) and Saudi Arabia, for example, are key promoters of the energy transition and are positioning state-owned companies to become the global champions in the energy transition away from hydrocarbons.
The UAE - which will be hosting the COP 28 conference in November 2023 - has adopted a goal to reach net zero by 2050 and pledges to invest over $160 billion in clean and renewable energy until 2050. That works out at around $6 billion of investments a year. These investments will notably lead to 25% renewable and low-carbon energy generation by 2030, and 75% by 2050 at Dubai through the on-going construction of the world's largest single-site solar power plant at Al Dhafra using approximately 3.5 million solar panels once operational, the supply of up to 25% of the UAE’s electricity needs once fully operational, and the production and export of hydrogen as a clean form of energy.
As far as Saudi Arabia is concerned, they have implemented Vision 2030 that is a unique transformative economic and social reform blueprint and launched the Saudi Green Initiatives (SGI) supported by an investment plan of $190 billion. Some of the key targets are to generate 50% of electricity from renewable energy sources by 2030 and reach net-zero emissions by 2060.
The sovereign wealth fund of Saudi Arabia, PIF is leading this transformation and directly or indirectly investing in flagship mega-projects that are aimed at delivering the ambitious commitments of the Saudi government. Some of these projects are currently under way such as: Helios (one of the world’s largest green hydrogen production facilities), AlUla (a mega-city powered by 100% renewables energy) or SIRC (a waste management champion relying on state-of-the-art technologies).
In addition to these commitments and investments, the UAE and the Kingdom of Saudi Arabia have established government export credit agencies to support the development of these non-oil export and trade countries, the Etihad Credit Insurance (ECI) and Saudi EXIM.
What is the purpose of sovereign wealth funds?
Middle Eastern SWFs are designed as government investment vehicles to engage primarily in foreign investments. They have proved their influence on the international monetary and financial system and are the most active proponents of the energy transition as they increasingly invest in renewable energy projects through direct or indirect stakes.
Last year, SWFs and pension funds from only three jurisdictions (Singapore, Middle East, and Canada) contributed to 90% of global investments in renewable energy and the Emirati state-owned holding company, Mubadala was the second largest single funder.
Middle Eastern SWF’s investment mandate is not limited to their home markets but extends to international markets as a mean to accelerate the pace of the necessary economic diversification and transformation. An example worthy of mention is PIF and Mubadala have invested in German Skyborne Renewables, the world’s largest private offshore wind energy developer.
Furthermore, renewable energy infrastructure not only offers governments the opportunity to achieve their net-zero targets but also provides protection against inflation. It must also be highlighted that SWFs cooperate significantly and increasingly with the main actors in the sector from which governments want to diversify from: the national oil companies.
How do oil companies are helping to secure the energy transition?
The oil industry plays a significant role today in the decarbonization and energy transition through innovation and investment in hydrogen. I have several examples here: in January 2023, the leading fuel distributor in the UAE, ADNOC, announced plans to decrease its greenhouse gas (GHG) emissions intensity by 25 percent by 2030. Two years earlier Mubadala, ADNOC, and ADQ - another Abu Dhabi SWF - signed an alliance to establish Abu Dhabi as a trusted leader of low-carbon green and blue hydrogen in emerging international markets and build a substantial green hydrogen economy in the UAE. Last October, Aramco (The Saudi Arabian Oil Company) announced the creation of $1.5 billion sustainability fund to support an inclusive global energy transition with particular focus to green hydrogen, sustainable technologies, and digitization as solutions to climate change, and to reach net-zero emissions by 2050. Moreover, in place for 17 years with three UAE energy leaders as shareholders - ADNOC, Mubadala and TAQA - Masdar has become one of the world’s largest clean energy companies with more than $40 billion of projects in over 40 countries across six continents, and the growth plans targeting at least 100 gigawatts of renewable generation capacity and up to one million tons of green hydrogen production by 2030.
In brief: In the Middle East, the switch to less-polluting energy sources has been a stated priorities for some years now. Implementation is under way, as demonstrated by the acceleration of large and global investments in renewable sectors including solar, wind and hydrogen all leading to the decarbonization goals. Sovereign wealth funds and state oil companies are actively contributing to sectoral diversification strategies of governments to reduce dependence on oil market dynamics. The ultimate target is the development of a sustainable economy.
ACRONYMS & GLOSSARY
ADNOC: The Abu Dhabi National Oil Company State-owned oil company of the United Arab Emirates
ADQ: The Abu Dhabi Developmental Holding Company PJSC (sovereign wealth fund)
Aramco (or “the Company”): The Saudi Arabian Oil Company
COP 28: The 28th session of the Conference of Parties
ECI: The Etihad Credit Insurance
GHG: Greenhouse gas
Mubadala: The sovereign investor managing a diverse portfolio of assets in the UAE and abroad
PGR: Persian Gulf Region
PIF: The Public Investment Fund, the sovereign wealth fund of Saudi Arabia (6th sovereign wealth funds in the world)
SGI: The Saudi Green Initiative
SIRC: The Saudi Investment Recycling Company, wholly owned subsidiary of PIF
SWF: Sovereign wealth fund
TAQA: Abu Dhabi National Energy Company PJSC
UAE: United Arab Emirates