The Seed and the
Harvest: a long-term vision for the role of Gulf Oil Exporters in the Global
Energy Transition
The seeming paradox of oil-exporting Gulf countries pursuing
a renewable energy diversification agenda has been discussed extensively in
this journal (cf. OEF Issue 96) and elsewhere. The ACWA Power bid in Dubai was
the first project in the world to break the six cents per kWh for a
competitive, unsubsidized tariff. As such, it brought the prospect of
solarization in the Gulf Cooperation Countries (GCC) forward at a rate that
exceeded even “optimistic” expectations[1]. Nevertheless,
the level of current and planned RE penetration is small compared to the
potential. In this paper, we look beyond the short- and medium-term horizon and
investigate the role that GCC could play in the long-term, global, sustainable
energy transition. We argue that accelerated adoption of RE in these countries is
not an existential threat but a way of securing a role as an energy exporter in
a world fueled entirely by renewable energy.
Such a world is much closer than many realize if we are to
have a reasonable chance to stay within the 2C average temperature rise
threshold. This target implies that the bulk of the fossil fuel phase-out would
need to occur by 2050-2080 depending on the assumption of the CO2 emissions
budget. IPCC gives a wide range for this budget from around 500 to 1500 GtCO2
with a 66% likelihood value of 990 [2]. At
face value this means that GCC societies would be forced to radically transform their
economies in a span of just two generations mirroring the lighting fast ascent
from poor nomadic societies into the richest countries in the world on a per
capita basis.
It is unsurprising that the prospect of such transformation
triggers discomfort and an almost instinctive reaction to fight back. So, it is
to the credit of the Gulf energy exporters that their governments, for
different reasons each, have to a large-extent, embraced the need to act
against climate change although they refrain from leading this effort. I argue
that it is in the interest of GCC energy exporters to move from the sidelines and
instead lead the charge for the following three reasons.
First, given the high quality of the fossil resource base,
their extraction rates and exports are the least affected by carbon curtailment
among all energy producers. Second, there will be a temporary but noticeable increase
in the demand for the fossil fuels that these countries produce in order to
fuel the transition from fossil to renewables. Third, from a strategic perspective
it is better to be actively involved in a change that should come anyway than
react to it as the delay entails the risk of missing out at the opportunities
created by the transition.
Growing Fossil
extraction rates for GCC under climate constraints
Looking deeper into the first statement, we note that not
all fossil fuels are equal. They differ with respect to their marginal
extraction cost in a way that generally reflects physical properties that can
be summarized in a metric like the energy return on energy invested (EROEI) [3].
The non-conventional resources like tight oil, shale gas, tar sands, and
deep-sea oil all have a higher marginal cost of extraction reflecting the fact
that they are harder to extract, transport, and/or refine into useful products.
In a recent paper, McGlade and Ekins [4]
attempted to map the geographical distribution of the resource that could be
extracted under the carbon constraints by overlaying the safely recoverable
reserves with the marginal cost of extraction of a given formation or type of
resource. They offer two estimates one with Carbon Capture and Storage (CCS)
and one without.
Since a large number of the 2C compatible scenarios rely on
CCS (even using biomass for taking carbon out of the atmosphere during the
second part of the century), it is necessary to parenthetically elaborate why
we do not consider this option viable at scale and in time. CCS in electricity
power plants, as opposed to industrial processes, imparts a significant
operational energy penalty for the capture, compression, transport and
injection of CO2 into geologic formations that is around 40% with the current
dominant technology (amine-based, post-combustion capture) [5]
and somewhat less for oxy-combustion systems. In addition, it requires heavy capital
investment further deteriorating the EROEI of the resource. Given that even
proponents suggested that “[t]ens of
large CCS demonstrators need to be built worldwide from 2009” [6]
when only one CCS power plant is operational in 2015 [7],
it is evident that the window for scaling up CCS in order to support the energy
transition is closing.
Focusing, therefore, on the analysis without CCS deployment,
they estimate that the unburnable part of the Middle East oil and gas reserves
are 38% and 61% respectively by 2050 allowing for additional extraction beyond
that date. For comparison, Canada would have to leave 75% of its oil reserves
unburned and all coal regions would need to keep more than 80% of their coal in
the ground. The practical implication of this allocation for individual ME
producers in terms of extractable reserves is that, assuming an equal
allocation across countries, shown in Figure 1, all three of the top producers
would be able to increase their annual oil extraction from 13% for KSA to 60% for
Kuwait and still stay within the extractable limits.
Figure 1 Daily
Average crude oil production in 2013 compared with the daily production level
at which the 2C-compliant extractable reserves are exhausted by 2050 (in Mbbl/day)
The Seed of the
Energy Transition
This ability to increase fossil fuel extraction may still
look counterintuitive and detrimental to the climate cause, but the realities
of the only alternative energy supply that can scale, renewable energy or RE, require
an upfront energy investment in order to be constructed. This energy investment
subtracts from what we might call society’s operational energy budget creating
an energy deficit. Fossil fuels are the sole viable option for balancing this
deficit and providing the “seed” investment in a flexible way.
Historically, energy transitions were partial affairs
lasting several decades [8].
In some respects they would be more appropriately classified as substitutions
since looking at the nominal amount of energy provided, most primary energy
sources that humanity exploited have expanded – just their utilization changed.
Coal, for example, still powers our trains and heats our homes, just more
effectively by centralizing its combustion in electricity power stations than
the less efficient distributed use in steam engines and boilers while the
global amount of energy provided from biomass and biofuels is higher than ever
before. The reality is that we don't have any historical precedent for the
massive scale transition required to move from fossil fuels to renewables,
especially when the bulk of this transition needs to take place in the next
four decades and effectively phase-out almost all fossil fuels during this
century.
Given that we are emitting around 35GtCO2 per year without a
visible slowing down yet, the phase-out of fossil fuels will need to be abrupt.
In order to prepare for this and to avoid precipitous changes in the energy
supply that would cause social dislocation, we need to phase-in the appropriate
RE capacity with advanced planning. By applying an energy balance approach to
the constraints of the energy transition [9],
we find that RE installation rates should increase by a factor of 30, from
0.2TW/year in 2013 to 6TW/year in 2040 but even higher numbers may prove
necessary. When RE installations accelerate at such rates, the investment
consumes more energy than it produces[10].
As a result, in order to compensate, the energy system will need to rely on
fossil fuels to provide what we call the seed in the sower’s strategy of the
energy transition.
In other words, the forthcoming energy transition, if it is
to be sustainable, cannot be expected to occur organically and without a
significant degree of advanced planning, for three principal reasons: (i) the
potential of depowering, i.e. decreasing economic energy intensity, is limited
if any, (ii) there are no past global or regional scale energy transitions to
act as guidance, and, critically, (iii) climate change mitigation imposes very
tight constraints on the remaining amount of fossil fuels that can be safely used.
As a result of the above, fossil fuel exporters are called
to play a vital role in fueling and shaping this global undertaking which we
call the sustainable energy transition (SET). While SET spells bad news for
marginal oil producers like tight oil, deep-sea, and tar sand plays, as
explained in the previous section, it relies on the production of oil and gas
reserves with low extraction costs to support the early years of accelerated RE
expansion in a way that does not cause severe economic dislocations.
Sustaining an Energy
Exporter Status in a Renewable Energy World
Beyond simply powering the energy transition by exporting
their fossil fuels, GCC countries have the opportunity to become a sustainable energy exporter if they choose
to leverage their capital to build out the necessary infrastructure. Even in an
RE-based world, there will be a constant need for high density energy carriers
to power processes that cannot be easily electrified (e.g. airplanes, ships and
trucks) as well as raw materials for the production of plastics and
fertilizers.
The GCC countries could act proactively to meet this demand
by building the necessary, large-scale, infrastructure. They would do so by capitalizing
on their sun-belt RE potential and convert this locally generated electricity
into a transportable, energy-dense fuel.
In order to put this in context, we provide an example on
what it would mean in the case of the UAE. In Figure 1 we assumed that
extractable reserves would be produced by 2050 at a constant rate. Given that
neither field production dynamics nor economics indicate a rectilinear
production, a logistics curve production extending further after 2050 is far
more likely. This profile, known as Hubbert curve approximation [11], can
be applied to show the unconstrained and the constrained extraction rates for
oil and gas resources of the UAE until the end of the century (Figure 2).
Figure 2 Oil and
natural production profile for the UAE following a Hubbert curve approximation
with the addition of a solar-based electricity to ammonia system in TWh
(developed in collaboration with Denes Csala)
The darker shade trapezoid that reaches to about a fifth of
the peak production, shows the amount of synthetic fuel that could be produced if
10% of the UAE’s land area is utilized for large-scale photovoltaic plants
dedicated to an electricity to liquids process. This area could accommodate
around 350GW of installed PV capacity that would drive a system of large-scale
electrolyzers for hydrogen generation, along with nitrogen from air separation
units. Their combination would produce ammonia (NH3), an energy carrier that
has higher energy density than liquid hydrogen with lower storage costs [12]. Ammonia
can be exported and used by direct combustion, through a fuel cell or as a
critical input for fertilizer production. An interesting synergistic option is
offered for the utilization of the oxygen byproduct from the air separation
units. The oxygen stream could be used for a natural gas oxycombustion carbon
capture system with the resultant CO2 being either stored or used as
feedstock for hydrocarbon synthesis in a Fischer-Tropsch system. In either case
a larger amount of natural gas could be utilized than the 39% permitted under
climate constraints. This rough concept is intended to demonstrate the
possibility of using the Gulf’s RE potential not simply to support the local
economy in the post-oil era but also to offer a significant, sustainable
resource of liquid-fuels that can allow these countries to maintain a position
as net-energy exporters. Whether it would take this form or another, it is an
option that the GCC countries need to seriously consider as the window for
building out such a system requires abundant capital and lengthy pilot testing.
Moving back from this long-term vision, like all journeys,
the energy transition in the GCC requires firm initial steps. A possible
pathway for these initial adoption phase was developed as part of global REmap,
an effort led by the International Renewable Energy Agency[13].
Institutional change along the physical infrastructure is necessary. Some key
initiatives could include:
·
revising the take-or-pay clauses with the
independent power and water producers (IWPPs) into capacity reserve agreements
that would adjust as needs change,
·
increasing the flexibility of water production
to maximize the efficiency of the legacy multi-stage flash plants by leveraging
the development of strategic water reserves and moving all new desalination
capacity towards electricity-driven reverse-osmosis systems,
·
pricing internal resources in a way that reflects
the opportunity cost for the country.
Changes along these lines supplemented by clarification of
land-use and allocation of areas for utility scale RE plant development would
nurture the RE expansion rate necessary for the countries to become truly
sustainable and energy leaders in a transitioning world without having to
provide subsidies.
Sustainable
Investments in an Volatile World
While the Gulf countries continue to maintain positive trade
balances, the 2014/15 drop in oil prices from a fairly constant $100 to less
than $38 per barrel in August 2015 has instilled concern about the long-term
finances of these countries. It is possible that this precipitous drop is a
result of a deflationary spiral dynamics as monetary expansion in the financial
system is constrained by stopping quantitative easing. This curtails debt financing
reducing the amounts available for discretionary spending worldwide, which in
turn impacts manufacturing output and their resource consumption. A byproduct
of a financialized economic system [14], such
a deflationary spiral is not caused by actual physical shortages of energy or
other resources and therefore it is possible that another cycle of economic
expansion will push prices up especially as some of the marginal producers will
have been pushed to bankruptcy.
As a result, the next cycle of expansion, if it
materializes, is perhaps the last viable chance to make a global energy
transition sustainable. The fuel exporting countries can lead the way with
proper direction of their investment not only in financial products but also in
physical assets located on their territories. Done with foresight, such
investment would allow them to secure a sustainable future as energy exporters
and create resilient local infrastructures that can thrive even after oil and
natural gas become unburnable globally. To do so, it is imperative that
development of RE projects and energy efficiency infrastructure needs to begin
in earnest. Given that RE already makes economic sense for electricity
generation, it is a matter of overcoming institutional inertia and apprehension
as well as rethinking the energy system structure in order to accommodate
higher RE penetration.
In closing, when the economic system becomes limited by
energy constraints, as those imposed by the specter of a global climate
catastrophe, the rule of limited resources and increasing complexity that has
doomed the empires of the past will become relevant again. If we want to
prevent a collapse, we will need alternative energy sources to support us as we
attempt to solve the problems inherited by building a complex civilization.
Historian Joseph Tainter eloquently describes the implications from this
tendency for complexity to beget complexity and the need for energy
availability to resolve them:
“[I]n addressing the problems of global change, our societies
are likely to become more complex and more costly. We need the wealth that can
be provided by greater availability of energy to finance greater complexity,
including more research, more education, more regulation of environmental
matters, and new technologies.” [15]
The GCC fossil exporters are therefore positioned to be a
key contributor in solving this critical future energy puzzle by providing low-impact
fossil resources for moving to a renewable energy world. Not only that, but
looking at the sustainability of their economies and with forward-looking
investments, they could maintain a global position in the energy system as
providers of a renewable stream of energy carriers taking advantage of their access
to capital and solar resource potential.
[1] S Sgouridis
et al., ‘RE-mapping the UAE’s energy transition: An economy-wide assessment of
renewable energy options and their policy implications’, in Renewable and
Sustainable Energy Reviews,, 2015, 1–15.
[3] CAS Hall,
JG Lambert & SB Balogh, ‘EROI of different fuels and the implications for
society ’, in Energy Policy, vol. 64, 2014, 141–152.
[4] C McGlade
& P Ekins, ‘The geographical distribution of fossil fuels unused when
limiting global warming to 2’, in Nature, vol. 517, 2014, 187–190.
[5] KZ House et
al., ‘The energy penalty of post-combustion CO2 capture & storage and its
implications for retrofitting the U.S. installed base’, in Energy &
Environmental Science, vol. 2, 2009, 193.
[6] RS Haszeldine,
‘Carbon Capture and Storage: How Green Can Black Be?’, in science, vol.
325, 2009, 1647–1652.
[7] GCCSI,
‘Large Scale CCS Projects’, in, Global Carbon Capture and Storage Institute,
2015, pp. 1–5,
.
[8] R Fouquet,
‘The slow search for solutions: Lessons from historical energy transitions by
sector and service’, in Energy Policy, vol. 38, 2010, 6586–6596.
[9] S Sgouridis
& D Csala, ‘A Framework for Defining Sustainable Energy Transitions:
Principles, Dynamics, and Implications’, in Sustainability, vol. 6,
2014, 2601–2622.
[10] M Dale &
SM Benson, ‘Energy Balance of the Global Photovoltaic (PV) Industry - Is the PV
Industry a Net Electricity Producer?’, in Environmental Science &
Technology,, 2013, 130312080757002.
[11] AJ Cavallo,
‘Hubbert?s petroleum production model: an evaluation and implications for World
Oil Production Forecasts’, in Natural Resources Research, vol. 13, 2004,
211–221.
[12] C
Zamfirescu & I Dincer, ‘Using ammonia as a sustainable fuel’, in Journal
of Power Sources, vol. 185, 2008, 459–465.
