Fuel for Thought: COP26 climate push puts Middle East oil and gas heavyweights on edge

In the run-up to the UN's COP26 climate summit, Middle East oil and gas producers are going on the offensive.

They have denounced keep-it-in-the-ground activists for pressuring investors to shun fossil fuel projects. Backed by many mainstream forecasters, they have insisted that oil and gas will have vital roles in the global fuel mix for decades to come, not least in combating energy poverty in developing nations without easy access to renewables.

But they will need to do a lot of convincing, as the momentum behind energy transition gathers pace.

At COP26, which begins Nov. 1 in the Scottish city of Glasgow, world leaders will gather for two weeks of negotiations over commitments to combat climate change, including cutting consumption of hydrocarbons.

Recent years have seen shareholders push many companies to green their portfolios and divest from fossil fuels, while policymakers in many countries, particularly in the West, have ratcheted up their clean energy ambitions.

It is a trend watched with unease by Middle East producers, who earn the bulk of their GDP from oil and gas revenues and have been spending heavily to expand their lifeblood industries.

Saudi Arabia and the UAE are trying to rapidly build up their hydrogen industries, taking advantage of their gas resources, and have sold cargoes of ammonia to Asian customers for power generation.

OPEC kingpin Saudi Arabia, for example, is targeting a world-leading crude oil production capacity of 13 million b/d from its current 12 million b/d in the coming years, while neighboring UAE is seeking to boost its output capabilities to 5 million b/d from 4 million b/d by 2030.

Qatar hopes to regain its status as the world's largest LNG exporter by boosting its production capacity by almost two-thirds to 126 million mt/year by 2027.

The expansions fly in the face of the International Energy Agency's recent assessment that for the world to bring its energy-related carbon dioxide emissions to net-zero by 2050 to avoid the worst impacts of climate change, no new upstream projects should be developed.

Decrying what he called "the euphoria around energy transition," Qatari energy minister Saad al-Kaabi said cutting off oil and gas production would lead to damaging supply crunches, with alternatives yet to scale up.

"We should not forget, we need investment just to sustain the current projects," he said at a major gas industry conference in Dubai. "These are not just on-or-off fields. They need investments to keep going."

Saudi energy minister Prince Abdulaziz bin Salman has called the IEA report a "la la land" fantasy, while Omani oil minister Mohammed al-Rumhy, on an IEA webinar, no less, warned the agency's roadmap could destabilize the world economy with spikes in oil prices of up to $200/b.

OPEC Secretary General Mohammed Barkindo, who represents many of the region's heavyweights, even linked the recent surge in oil and gas prices to a "transition premium" caused by uncertainty over future supplies. Those hurt most by higher energy costs are the world's vulnerable poor, he added.

The JKM spot LNG price has shot up more than fivefold in the past year, with S&P Global Platts assessing the benchmark Sept. 24 at $26.80/ MMBtu, while European gas prices have likewise almost sextupled. Dated Brent was assessed at $77.34/b on Sept. 24, up almost 90% on the year.

"The prices we are seeing are not entirely being dictated by supply and demand, because a transition premium is imagined in the evaluation of hydrocarbons," Barkindo said at the Gastech 2021 conference. "The market is looking at the efforts being made to crowd out this industry from capital investment."

S&P Global Platts Analytics forecasts upstream capex spending will rise 8% year on year in 2021 to $392 billion, after a 24% plunge in 2020 due to the pandemic. That is below the 2014 peak of $764 billion.

Pivoting from oil

But producers can't address COP26 with rhetoric alone, and Middle East officials say they recognize they must play their part in combatting climate change.

Saudi Arabia and the UAE are trying to rapidly build up their hydrogen industries, taking advantage of their gas resources, and have sold cargoes of ammonia to Asian customers for power generation.

Blessed by ample sun, the region is also constructing several utility-scale solar power projects to feed rising electricity consumption, including the world's largest photovoltaic plant in Abu Dhabi.

Gulf countries, who have long dragged their feet on pivoting from hydrocarbons, have announced lofty renewables targets and say they are committed to the UN Paris climate accord.

Funding those projects will require significant sums of cash, drawn largely from their oil and gas earnings.

"The question is how do we manage to develop and invest in projects that are friendly to the environment without [needing] gas and oil," Abdullah al-Nuaimi, the UAE minister of climate change and environment, told Platts. "We really need to weigh development, as well as improvement."

On the fossil fuel front, Saudi Aramco and Abu Dhabi National Oil Co. have touted their crudes as having some of the world's lowest lifecycle carbon intensities, making them more palatable in an emissions-regulated global regime.

Like many gas producers, Qatar has promoted its LNG as a bridge fuel less polluting than oil and coal, which could help lower greenhouse gas emissions while clean technologies continue to develop, though even that argument has lost favor among environmentalists who want to stop all drilling.

Less-wealthy Middle East producers, such as Iraq, have said they will seek financing help to green their oil sectors.

"Middle East oil and gas producers have been trying to portray the image of responsible nations that recognize the challenge imposed by climate change and the need to tackle it," said Carole Nakhle, who heads the consultancy Crystol Energy. "At the same time, they want to extend the life of their most valuable asset: hydrocarbons."

Saudi Arabia's answer

To Saudi Arabia, the world's largest exporter of crude, the solution lies in what it calls the "circular carbon economy," a concept that involves capturing emissions and either using them in industrial applications or abating them in storage sites or carbon sinks.

The kingdom heavily promoted the concept in 2020, when it held the presidency of the G20, and though the group endorsed it, CCE has failed to gain much traction due to the high costs of carbon capture, utilization and storage and lack of industrial demand for CO2 at the scale needed for it to be impactful.

It may require carbon credit markets to further evolve, and Saudi Arabia has recently announced plans to launch its own trading platform to serve the Middle East region.

"As countries aim to fulfill their Paris goals and commitments, we need to take an all-options approach, an all-solutions approach, and an all-technologies approach," Khalid Abuleif, Saudi Arabia's chief negotiator for climate agreements, said at a recent webinar hosted by the kingdom's energy ministry as part of New York Climate Week.

Saudi Arabia will take that argument to COP26 and hope for a receptive audience.

For the region, the summit will be critical, as the countries navigate a rapidly changing energy landscape. Staring down an existential crisis in the coming decades, they will need to ensure the energy transition does not leave them behind.