Navigating the Energy Transition How Gulf NOCs Can Weigh in on the Climate Crisis Navigating the Energy Transition How Gulf NOCs Can Weigh in on the Climate Crisis Samer Joseph Mosis Copyright © 2020 Gulf International Forum All rights reserved. No part of this publication may be reproduced, copied or distributed in any form or by any means, or stored in any database or retriev- al system, without the express prior written permission of Gulf International Forum. No part of this publication shall be reproduced, modified, transmitted, distributed, disseminated, sold, published, sub-licensed, or have derivative work created or based upon it, without the express prior written permission of Gulf International Forum. If you wish to reproduce any part of this publica- tion, please contact Gulf International Forum, at the address below, providing full details. 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Table of Contents Abstract 1 Introduction 3 Carbon Intensity: The Core Focus 6 Gas and Power: The New Normal? 8 The Push for New Technologies 12 Steps Forward and Conclusions 14 References and Endnotes 16 Executive Summary This report explores the strategies utilized by International Oil Companies (IOCs) and Arab Gulf National Oil Companies (NOCs) to address the contemporary global energy transition. Mounting internal and external pressure to shift energy production away from hydrocar- bons has fundamentally affected the business model of IOCs and NOCs alike. However, Gulf nations face a particularly acute imperative to rethink paradigms of energy production due to the fact that regional economies and political structures are undergirded by the produc- tion of hydrocarbons. As the energy transition is already underway, evaluation of existing approaches and provision of actionable recommendations for IOCs and Gulf NOCs is vital. Through analysis of strategic best practices, three central approaches to addressing the coming energy transition are elucidated: • IOC and NOC work to significantly reduce carbon intensity. These strategies largely include net-zero carbon emissions targets, methane emissions monitoring, and the use of carbon storage technology to limit carbon emissions. Many IOCs have increased investment in lower carbon technologies and set ambitious standards for carbon emissions. Comparatively, Gulf NOCs lag behind, rhetorically recognizing the significance of carbon reduction but lacking transparent, detailed, and substantiated plans. • IOCs and NOCs are increasingly emphasizing gas and power. Many IOCs have focused heavily on developing natural gas and liquified natural gas (LNG) portfolios, aspiring to apply their well-developed vertically- integrated production models outside of oil. In the Gulf, for instance, Qatar-gas is striving to develop and market its capacity as an LNG provider, and Abu Dhabi National Oil Company (ADNOC) is integrating natural gas development into its expansion plans. Similarly, the rising importance of power is reflected by the ventures pursued by IOCs and the domestic initiatives of NOCs. Navigating the Energy Transition: How Gulf NOCs Can Weigh in on the Climate Crisis 1 • NOCs are focusing on key technological innovation in carbon capture and clean hydrogen technologies. Gulf NOCs have taken a forward-leaning approach to carbon capture, utilization, and storage (CCUS) technologies, in comparison to the tentative approach of IOCs. However, the region has largely strayed away from focusing on clean hy- drogen production, despite potentially holding a strong comparative advantage. Ample space remains for Gulf nations to build key international partnerships in clean hydrogen technology and to become foundational in its growth. The findings from this research enable a comprehensive understanding of the efficacy and implications of the strategies utilized by IOCs and NOCs to address the global shift away from hydrocarbons. Despite significant initiatives undertaken by IOCs and NOCs thus far, the continued discernment of opportunities for competitive advantage are vital. Companies must explore a combination of approaches and work to demonstrate progressive action. As the global energy transition is underway, creativity and transparency are vital, especially for the Gulf nations that fundamentally depend on hydrocarbon production. 2 Navigating the Energy Transition: How Gulf NOCs Can Weigh in on the Climate Crisis Introduction The energy transition toward a global economy diversified away from hydrocarbons rep- resents an exogenous risk to economic structures across the Arab Gulf. Energy transitions have historically unfolded over decades or even centuries due to path dependency, the cost and time associated with infrastructure development, incumbent influence, the challenges of innovation diffusion, and various other factors. Today, as low-carbon sources resiliently grow in the global energy mix, policy action, disruptive technology, and societal forces have the potential to catalyze a much more rapid transition. This transformation will create seri- ous implications for existing energy actors, with the starkest consequences potentially ma- terializing across the broader Arab Gulf. There, the transition risks making “stranded assets” out of hydrocarbon reserves, once seen as guarantors of future financial security, and in do- ing so, erodes the foundation underpinning the region’s traditional socio-political structure. The share of global primary energy produced by oil and coal is expected to gradually recede through the coming two decades, while that of natural gas will increase. Collectively, these three sources are expected to comprise 73% of total energy consumption by 2040, compared to 80% in 2015. As the share of hydrocarbons declines, the share of renewable forms of ener- gy (including wind, solar, hydro and nuclear) will increase from 20% to 27%. This shift, though small, is significant from a demand growth perspective. Though global oil demand grew by 1.5% per annum between 1995 and 2015, it is expected to grow at less than half this rate between 2025 and 2035, after which it is largely expected to plateau. This decreasing trend stands in stark contrast to energy demand from “The oil-demand growth model on which international oil renewables, which is companies (IOCs) and national oil companies (NOCs) have expected to grow at an long depended is shifting – a reality that energy industry average rate of 4.5% incumbents must face.” per annum over the coming two decades.[2] It is clear that the middle of this century will see the most diversified energy mix in history. Thus, the oil-demand growth model on which international oil compa- nies (IOCs) and national oil companies (NOCs) have long depended is shifting – a reality that energy industry incumbents must face. Navigating the Energy Transition: How Gulf NOCs Can Weigh in on the Climate Crisis 3 “Total Renewables” compromises hydro, geothermal, combustible by-products and waste, wind, solar, wave, tidal, and agricultural crop-based biofuels ( primarily ethanol). While it is clear that oil demand faces long-term structural headwinds from vehicle elec- trification, energy efficiency gains, societal pressure, and fuel switching, structurally bullish factors will counterbalance these headwinds in the medium term. Over the coming decade, the global middle class will increase by more than one billion people, economic growth will be skewed toward hydrocarbon-intensive industries across the developing world, and a lag in the rate of penetration of new technologies will exist.[3] These dynamics will tempt incum- bent oil and gas companies to maintain their current business model. To some degree, they are correct; there will be demand that needs to be met. However, the revenue volatility risk and growth associated with this holdover energy demand is dangerous for publicly traded IOCs and incompatible with the economic reality facing Gulf states. As many Gulf nations look to NOCs to generate more than 80% of their export earnings, volatility in export revenue and the threat of steep, if not terminal, decline in the value of their most important assets heightens the urgency for action. Across the Gulf, the primary strategy for reducing dependence on hydrocarbon exports has been diversification of domestic economies. Dubai, for instance, has focused on trade logis- tics and real estate. For a period of time, Bahrain focused on banking and finance, and Saudi Arabia is increasingly focused on value-added, yet environmentally challenged, downstream 4 Navigating the Energy Transition: How Gulf NOCs Can Weigh in on the Climate