Should Big Oil have a say in the Energy Transition?
A fleeting look at the UAE’s recent sustainability record reveals a slew of obscenely large numbers: $40 billion invested in clean energy over the past 15 years, with a goal of reaching $160 billion by 2050; an announcement at the World Future Energy Summit that renewable energy will make up 44% of the energy mix by 2050; construction of some of the world’s largest solar projects, including one that met 15% of Dubai’s energy needs in 2022; a $3.1 billion investment into carbon capture technology by the Abu Dhabi National Oil Corporation (ADNOC), seeking to capture 5 million tonnes of carbon dioxide by 2030. Compared to its Gulf counterparts, the UAE has demonstrated a strong attempt to diversify away from oil, with a quantifiably higher transition readiness than any other GCC oil-producing nation.
But environmentalists and general purists have been reticent to laud the nation’s climate efforts, pointing to the booming fossil fuel production that supplements the outward push toward a green economy. ADNOC, while investing in carbon capture technology, also aims to increase its oil production capacity from 4 to 5 million barrels/day by 2027, receiving approval earlier this year from OPEC to amp up drilling. This internal production is increasingly aided by investments in offshore fossil fuel infrastructure in developing economies like Uzbekistan and Azerbaijan. ADNOC’s growth project could lead to over 2.7 gigatons of carbon dioxide emissions, the second highest in the world. The World Economic Forum’s Energy Transition Index, benchmarking countries on their readiness for transition toward sustainable energy systems, ranks the UAE 63rd out of 120 countries globally.
But when it was revealed that the UAE would be hosting COP28 in November this year, and that it would be helmed by Sultan al-Jaber, ADNOC’s chief executive officer, the international backlash became even more pointed. There are concerns that having the CEO of a major oil corporation lead a conference dedicated to fighting climate change will give Big Oil the ability to influence the renewable energy agenda, slowing down any tangible progress toward a fossil fuel ‘phase-out’. These concerns stem from the oil lobby’s emphasis on reducing emissions from fossil fuels, instead of stopping their use altogether. The position of emission reduction without ending the oil regime is one that has been strongly supported by al-Jaber, who foresees fossil fuels playing a crucial role in the immediate future and who believes an energy transition must be realistic and economically viable.
While critics are irked by what they see as Big Oil’s veiled power play to extend their longevity, they are doubly skeptical of the emission reduction methods that are currently employed to limit global warming; carbon capture and carbon offsetting. ADNOC’s carbon capture efforts aim to scale from 800,000 to 5 million tons by 2030, but studies have shown that existing carbon removal methods only account for 0.1% of the 2 billion tons of carbon dioxide removed from the atmosphere by other means, and that carbon removal must increase 30-fold by 2030 to meet the emissions reduction targets of the Paris Agreement. Carbon offsetting relies on excessive reforestation, which is already an uphill task for the arid Middle Eastern desert, and even when constructed, forests are vulnerable to destruction for future infrastructural expansion.
So the UAE finds itself accused of halting a fossil fuel phaseout, while diverting away from clean energy in favor of emissions reductions. But hosting the world’s biggest renewables conference is not simply a PR move to hypnotize environmental lobbies; the UAE has legitimate interests in protecting itself from climate change, and economic interests in a move toward renewable energy.
Foremost on this list is the imminent survival need to prevent desertification and drought as a result of global warming. The World Bank estimates that climate-based water scarcity will cost the Middle East between 6–14% of its GDP by 2050, and arid desert regions with high temperatures are the most vulnerable to the subtle effects of climate change on rainfall and water availability. The UAE primarily secures its water through large scale desalination plants, but these plants are themselves highly energy intensive and contribute significantly to greenhouse gas emissions, thus needing to be offset by additional clean energy investment. This does not even include the significant emissions caused by excessive public air conditioning to protect people during the UAE’s frequent heatwaves, with temperatures between 35–45 degrees Celsius for 4–5 months in an average year. The cycle is vicious; either the UAE invests in clean energy to prevent the emissions caused by desalination and CFCs, or it outsources water from foreign nations. Such bilateral agreements will likely be contingent on whether the UAE has done enough to secure its own water supply, or whether it can provide other renewable energy infrastructure in exchange for water.
While the country lacks water, it is otherwise well-endowed, receiving over 350 days of sunlight in a year and situated in an arid desert, giving it enormous solar and wind capabilities. The Mohammed bin Rashid Al Maktoum Solar Park in Dubai, the largest single-site solar plant in the world, will power 800,000 homes by 2030. Abu Dhabi has also set up the Shams Solar Park, the first utility-scale solar plant in the Middle East. The endless supply of solar energy makes it incredibly alluring to the UAE from a business perspective.The UAE has some of the lowest power purchase agreement prices in the world, with the capacity to offer solar photovoltaic projects for as less as 3 cents per kWh. Investment in solar energy has been accompanied by a strong interest in green hydrogen technology, which if done right, could generate close to $200 billion in annual revenue for Gulf countries by 2022, which is a third of the annual revenue generated by Saudi Arabia’s Aramco in 2022.
That is no small number in light of a global economy moving away from fossil fuels, and strengthening ties with foreign countries for these ends has already been a significant part of the UAE’s renewables strategy. Masdar, the renewable energy wing of ADNOC, has been contracted to build wind farms and solar power plants in the United Kingdom, Spain, and the Pacific Islands. The energy interests have even taken precedence to diplomatic relations, with a recent diplomatic thaw with Israel, partly to strengthen bilateral commercial solar energy ties. Masdar has famously attracted significant foreign private investment over 500 global energy providers, often giving them tax exemptions to perform business with the UAE. Masdar has itself invested in ventures for green hydrogen technology in India, the United States, and Egypt. It is on track to become the world’s second biggest developer of clean energy by 2030, and this exemplifies the UAE’s strategy: it wants to be the first-mover in a future market for clean energy, when fossil fuels inevitably disrupt. Integrating Masdar within ADNOC doubly ensures that ADNOC can potentially serve as one of the ‘last men standing’ when global oil producers eventually start to close up shop.
But apart from concerns of desertification and opportunities for cost-effective first-mover advantage, there is a significant fiscal interest in the UAE presenting itself as a crucial market for green finance. It is important for the government to expand revenue from non-hydrocarbon sources and to promote private investments in renewables, in order to reduce the funding of fiscal offsets by solely hydrocarbon revenues. Public investment has been the main policy of the UAE Green Strategy thus far, but it remains to be seen if a private green finance market (including FDI for sustainable finance) will develop organically in a low-population country like the UAE, where a significant portion of the employment system surrounds the hydrocarbon sector. Hosting COP28 and ushering in more foreign investment for sustainability projects allows the government to offset its significant planned spending of $160 billion on renewable investment by 2050, by allowing the government to preserve more revenue through an organic expansion of the private market. The private market can only expand if the rest of the world sees the UAE as a major player, and this is their attempt to prove it.
We see that the UAE’s hosting of COP28 is driven by their own personal incentives to profit from sustainable investment and trade, manage government spending, and protect their people from climate change. There is nothing perverse about this; governments do not need to be motivated by deep cosmopolitanism or an unselfish altruism in order to work toward climate change, as long as their actions contribute to furthering a renewable energy transition, which they evidently have. If anything, proof that the UAE has personal stakes in the energy transition gives their commitment a far greater integrity.
The looming variable that remains to be resolved is the ongoing large-scale production of oil and natural gas in the Middle East and in the UAE, which is not slowing down any time soon. But this is more a question of immediate survival and practical policy considerations than any long-term masterplan. Direct hydrocarbon revenues comprise over 60 percent of the UAE’s total fiscal revenue, and the percentage was significantly larger a decade ago. Al-Jaber holds the view that the collapse in global oil demand during the COVID-19 pandemic which sent economies into significant risk and high inflation of energy prices was in part caused by significant investment cuts in fossil fuels, before global economies were truly ready to transition.
While oil market shocks are viewed as an omen for a shift toward renewable energy, they also signal how reliant the global economy is on fossil fuels. Notably, if the UAE were to significantly accelerate their decarbonisation efforts from their existing attempts, fiscal revenues would be strained, debt would rise, oil prices would decrease, external balances would subsequently weaken, and the quality of hydrocarbon-based assets (like those invested in by Abu Dhabi Investment Authority (ADIA), the UAE’s prime sovereign wealth fund) would deteriorate, weakening the overall health of the economy. So it is important for decarbonisation to occur at a reasonable pace without threatening the nation’s economic growth. Additionally the pace of global decarbonisation results in a discount to future resource revenues, but since actual decarbonisation may follow a different trajectory, fiscal management must be prudent and the UAE must not go all in on decarbonisation.
But decarbonisation is ongoing, albeit slow, and the UAE has adapted to the challenge. The renewables transition in global sovereign wealth funds, who have previously turned a blind eye to alternative energy, is telling. As recently as 2019, sovereign wealth funds had the lowest proportion of financial institutions that included ESG metrics or climate risk in their investment approach. But in 2021, ADIA acquired a 10% interest in Sempra Infrastructure, one of the largest energy networks in North America. The same year, Mubadala, another UAE sovereign wealth fund, invested in Culligan International, a leader in North American sustainable water solutions. Globally, renewable energy is now the second most popular sector for sovereign wealth funds in the area of development. For the UAE, returns from these funds are expected to substitute hydrocarbon revenues in the long run, when fossil fuels are exhausted. If such investment is being increasingly directed toward renewable energy, then returns from alternative energy sources will eventually comprise a significant majority of the UAE’s annual revenues.
In the months leading up to COP28, al-Jaber is formulating a Global Decarbonisation Alliance, and has stopped all routine gas flaring and significant methane emissions at ADNOC plants. More ambitiously, ADNOC has pledged to remove all operational net carbon emissions by 2045. Giving Big Oil a seat at the climate conversation does not imply that they control the conversation; if anything it is an opportunity to make oil producers listen to what the developing world has to say. Neither al-Jaber, nor the UAE, nor any oil company, has final say on the conference’s outcome. It is unclear if the conference even has a tangible final outcome. And if this is the case, their presence at the conference does not indicate a usurping of climate interests, but the ability to hold less sustainable oil producers accountable to their more sustainable counterparts. Al-Jaber and the UAE have attempted to pave a path toward renewable energy while still thriving economically, and can guide the Middle East’s remaining oil powers to do the same.
There is a cognitive dissonance that arises when an environmentalist sees ADNOC helming COP28. Much of this is linked to political narratives of fossil fuel divestation that have become ideologically pervasive today. But while demanding divestiture from fossil fuels is a legitimate cause, physically divesting fossil fuel producers from conversing with global governments may not achieve the same effect. Villainizing the people who hold the world’s fate in their hands is cathartic, but impractical.
