Originally published on Energy Post.
By Karel Beckman
At the Atlantic Council’s Global Energy Forum in Abu Dhabi on 12-13 January, oil executives, Middle Eastern energy ministers and experts in the geopolitics of energy came together to discuss the geopolitical implications of “the energy transformation”. Yet no one presented a vision of what a new global order, based on renewable energy, would look like, writes Karel Beckman, Energy Post’s editor-in-chief. The oil players all embrace renewable energy, but they do not regard it as something that will upset their business models.
Chalk up some more victories for renewable energy. The day before the Atlantic Council event, on 11 January, the United Arab Emirates (UAE) – the third largest oil exporter in the world after Saudi Arabia and Russia – announced that it intends to invest $163bn in clean energy projects up to 2050. A week earlier China had announced it will be investing $361 billion into renewables up to 2020. And on 16 January, right after the forum in Abu Dhabi, Saudi Arabia’s energy minister Khalid al-Falih announced a renewable energy programme worth between $30 and $50 billion by 2023. Riyadh plans to tender 10 GW of solar and wind power.
These announcements confirm a trend that has by now firmly taken hold. Investment in renewables is outpacing investments in other forms of electricity generation. As Fatih Birol, Executive Director of the International Energy Agency (IEA) reminded the audience in Abu Dhabi, in 2015 additions of renewable capacity in the power sector were higher than those in coal-, gas-, oil- and nuclear-fired power combined.
Another trend that has taken hold is of ever-lower costs for solar and wind power, which almost all experts expect to continue. Solar and certainly onshore wind are already cost-competitive with gas-fired and nuclear power, and in some cases even outcompete coal-fired power. Since renewables also score high when it comes to reducing air pollution and ensuring security of energy supply, they will almost certainly continue to grow. “A new economic model is emerging”, said Suhail Al Mazrouei, Minister of Energy of the UAE, who spoke about his country’s new energy strategy at the event.
The question is, how will this new economic model affect the global world order – which is after all built on oil and gas to a large extent? No better institution, it seems, to answer this question than the Atlantic Council, a prominent US-based bipartisan international affairs think tank, which has a special division, the Global Energy Center, devoted to energy issues.
Yet the high-level policymakers, business executives and energy experts gathered in Abu Dhabi did not really come up with a coherent answer. No one presented a picture of what our world will look like when the energy transition is over and oil has become just a niche industrial product. This kind of future still seems unimaginable for most people in the oil business.
If the worlds of oil, gas, geopolitics and renewables met in Abu Dhabi, but did not mix, an important reason for that may be that renewables have as yet only become a significant factor in the power sector, not in heating and industry, and certainly not in the transport sector, which is crucial to the future of oil.
“How many solar panels do you see when you drive around in Abu Dhabi?”
Minister Al Mazrouei of the UAE announced that his country would seek a “balance” in its energy mix – a 50/50 strategy, he called it, with 50% zero-carbon energy (44% renewables, 6% nuclear) and 50% fossil-fueled (38% gas, 12% coal) by 2050. But although he spoke about “energy mix”, it is clear he was talking about the electricity sector only, since he didn’t mention oil at all.
A press release from the UAE”s Ministry of Energy displayed the same confusion. It said: “The new strategy takes into consideration an expected annual growth of 6 percent, and will work on increasing the contribution of clean energy in the energy mix from 25 percent to 50 percent by 2050 while slashing carbon footprint during power generation by 70 percent over the next three decades.” (Italics added.)
Fatih Birol did put his finger on it when he called transport and heating “the new frontiers” for renewable energy. But for now they are frontiers only. And although the IEA chief called last year a “turning point” for renewables, which represented more than half the new power capacity around the world, he also said that he saw no “peak oil demand” in sight.
“”Everyone – ministers, oil executives – is much concerned about peak oil demand”, he said. “Many international oil companies and even OPEC are seeing peak oil demand on the horizon.” But Birol said that oil demand would continue to grow out to 2040, thanks to increased demand from the maritime, freight, aviation and petrochemicals sectors. In the transport sector, only passenger cars would see a small decline in demand.
Second gas revolution
As long as renewables are largely confined to the electricity sector, oil companies – and oil countries – have little to worry about. Oil plays a negligible role in the electricity sector after all. More than half of oil’s output goes to transport, the rest to industry.
What is more, in electricity generation the oil players have another ace in the hole, called natural gas, which is their plan B, as I have pointed out elsewhere. And the future of natural gas, they all agree, looks rosy. David Koranyi, Director of the Energy Diplomacy Initiative of the Global Energy Center of the Atlantic Council, spoke for many when he said that gas has “the brightest prospects” of all the fossil fuels.
“The gas sector is awaiting a second revolution”, said Birol. “After the shale gas revolution, we will now see an LNG revolution. This will be driven by a wave of new LNG projects, first from the US and Australia, later from other countries such as Tanzania, Mozambique and Canada.”
Surely it was no coincidence that French oil company Total, a world leader in solar energy through its subsidiary SunPower, was carrying out a billboard campaign in Abu Dhabi at the time of the Atlantic Council Forum, which launched Abu Dhabi’s annual Sustainability Week, proclaiming it is “Committed to natural gas” and “investing in natural gas to reduce the carbon footprint of the global energy mix”.
The only voice to put a question mark behind the prospect of a Golden Age of Gas was that of Anne-Sophie Corbeau, Research Fellow at the King Abdullah Petroleum Studies and Research Center (KAPSARC) in Riyadh, who said that the future of gas “does not look so golden”. Burning gas emits CO2 after all, she said, and the methane emissions of the gas industry may even make it worse than coal from a climate perspective. In addition, gas is not cost-competitive in many regions, such as South East Asia, Corbeau pointed out.
But Corbeau was an exception. Christof Rühl, Global Head of Research at Abu Dhabi Investment Authority (ADIA), one of the largest sovereign wealth funds in the world, and former Chief Economist at BP, expressed outright scepticism at the idea that renewables are close to playing a significant role in the global energy economy. The contribution of shale oil and gas to global energy demand is already higher than that of all renewables combined, he said, although they have only been around for a few years. “How many solar panels do you see when you drive around in Abu Dhabi?” he asked.
So unconcerned seem Middle Eastern oil producers to be about the prospects of fossil fuels that energy intensity in these countries is going up rather than down, Rühl pointed out. The Middle East is the only region in the world where this is the case, he said. “They are going completely in the wrong direction.”
Addiction to oil
Jean-François Seznec, senior fellow at the Atlantic Council’s Global Energy Center, argued that Saudi Arabia, the world’s largest oil producer, has been diversifying its economy away from oil for some time. Earlier this month he published a paper about this called The End of Saudi Arabia’s addiction to oil. But all of the “post-oil” activities he mentioned which the Saudi’s are pursuing – petrochemicals, refining, aluminum, fertilizers – are derivatives from oil and gas. This kind of “diversification” has little to do with renewable energy.
So what about Saudi Arabia’s new $30-$50 billion renewable energy programme? Energy minister Al-Falih put this in perspective. He was quoted as saying that by 2030 the country aims to produce 70 percent of its power (not its energy) from natural gas and 30 percent from renewables “and other sources”. These “other sources” include nuclear energy. Riyadh is considering building 2.8 GW of nuclear capacity. In this field the Saudi’s are behind Abu Dhabi: that country is planning to start up the first of four new nuclear reactors this year (5.6 GW in total). Mohamed Al Hammadi, CEO of Emirates Nuclear Energy Corporation, said in Abu Dhabi that the reactor is now 92% complete.
“A breakthrough in storage would change the picture”
Mattia Romani, Managing Director Economics, Policy and Governance at the EBRD (European Bank for Reconstruction and Development), said in Abu Dhabi that he believes in a bright future for renewables. “The IEA said in 2010 that solar power would become competitive in the 2030s. That’s laughable. Today both solar and wind are cost-competitive.”
Romani said he saw “enormous pick-up [of renewable energy] from the private sector”. And “all of this happened against the background of low oil prices. That’s astonishing.” He did add that the most successful investment category for the EBRD was not renewables, but energy efficiency.
Yet Patrick Pouyanné, the CEO of Total, threw cold water on the belief that the current low prices for solar energy are sustainable. “As the owners of SunPower, we know that the prices currently quoted in the market are not profitable”, he said. He added that Total was aiming for 20% renewables in its portfolio. Adnan Amin, Director-General of the International Renewable Energy Agency (IRENA) said he found that “disappointing”.
Formula One racing
Many of the discussions at the Atlantic Council summit did not mention the energy transition at all, but reverted to the familiar theme of “what will the oil market do”. Birol of the IEA said “we are entering a period of greater oil price volatility”. He warned that investment in new oil projects was at its lowest level since the 1950s and new discoveries at their lowest since the 1960s. “If this does not change in 2017, we are headed for a supply-demand gap that cannot be filled with US tight oil”.
Pouyanné of Total said the oil market is still “fragile”. He believed it would take two years to reduce the still large oil inventories in the world. If we want oil prices to stabilize, OPEC needs to renew its commitment to limit oil production later this year, he added.
Al Mazrouei, the UAE’s energy minister, countered that “it is not only up to OPEC to limit production. Non-OPEC countries must also do their part.” If, as a result of higher oil prices, shale oil production in the US strongly rebounds, that “won’t help”, he said.
Al-Falih, the Saudi energy minister, said he was confident Saudi Arabia and Russia would “continue to work together” to stabilize oil markets “for the benefit of all”.
The oil price, then, still seems uppermost in the minds of oil producers. The big oil and gas players do embrace renewable energy but they view it as something that is complementary to their business, not as a possible substitution for oil and gas. For this reason, they do not see that the energy transition could have serious geopolitical implications.
This will only change if electricity starts making serious inroads into the transportation sector. “A breakthrough in storage would change the picture”, said Pouyanné.
The participants at the Atlantic Council conference did get a small taste of what an electrified transport system could look like: they were taken out to the Abu Dhabi Formula 1 racing circuit, where they were able to race on the track – with electric cars. Fun, to be sure – but no one believed Tesla will soon beat Mercedes.
Reprinted with permission.
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