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UAE focus: Perfecting the energy mix on the road to net zero

Angitha Pradeep analyses the UAE’s role as a global player in the hydrocarbon, renewable, and nuclear sectors as the current economic and geopolitical setting impacts its diversification strategies

While the UAE has long been considered a primary focus for leading international onshore engineering, procurement, and construction (EPC) contractors, stakeholders from around the world have now begun to turn their eyes more fervently to the oil-producing nation.
Following Russia’s war in Ukraine, key players, such as Paris-headquartered Technip Energies and Sydney-based Worley, have declared that they will no longer be pursuing further opportunities in Russia, echoing the strong sentiments shared by the US and UK governments.

However, as these firms look to the UAE, leading to greater competition for key tenders – the prevailing risk-averse attitude will also see these firms being more selective in their bidding strategies going forward, industry experts said.

Additionally, experts also predict that oil prices will likely remain high for most of 2022, due to some form of an embargo on Russian oil, and gas at a later stage, creating disruptions and a deficit in supply.

James Willn, partner for Energy and Natural Resources at Reed Smith, noted that in this scenario, the immediate mindset of the oil and gas majors in the Middle East would be to maximise revenues by increasing production.

“This requires investment, therefore, we expect to see – and are seeing – more oil and gas infrastructure projects designed at increasing production capacities,” he said.

This, in turn, will increase demand for high-skilled engineering services, especially due to upcoming, large projects such as Abu Dhabi National Oil Company (ADNOC’s) Hail and Ghasha development.

Bolstering investments as oil production rises

In December 2021, the UAE’s largest oil company ADNOC, announced plans to invest $127bn up to 2026. This is part of its strategy to increase its oil-producing capacity from 4mn barrels per day (BPD) to 5mn BPD by 2030, as well as scale up its gas-producing capacity to achieve self-sufficiency.

ADNOC’s strategy to increase oil production was also enhanced in February 2022, when it awarded framework agreements to several companies to drill thousands of new wells.

“These framework agreements are a continuation of ADNOC’s unprecedented investment in services to enable the expansion of drilling activity required to responsibly unlock the UAE’s leading low-cost and low-carbon intensity oil as well as the nation’s gas resources,” Dr Sultan Ahmed Al Jaber, Minister of Industry and Advanced Technology and ADNOC MD and group CEO, said in a statement at the time.

Contracts worth $1.94bn – finalised within the agreements – were mainly related to wireline logging and perforation services and have been awarded to a range of companies, including subsidiary ADNOC Drilling as well as leading international drilling services companies such as Haliburton, Schlumberger, and Weatherford.

Dr Al Jaber added: “Not only do these contract awards support our 2030 strategy, but they are also expected to deliver over 80% of in-country value to the UAE and align with the UAE’s ‘Principles of the 50’ economic blueprint for sustainable growth.”

Furthermore, ADNOC awarded an EPC contract to local contractor NPCC for the long-term development of its Umm Shaif offshore oilfield, which is considered a significant development as part of its strategy to achieve self-sufficiency, according to Vinod Raghothamarao, director for Energy Consulting at S&P Global Commodity Insight.

The contract, valued at $967mn, was awarded in January 2022, and is expected to be completed by 2025. Other contracts as part of this plan include offshore developments at key fields such as Belbazem, Upper Zakum, Lower Zakum, and Umm Shaif, Raghothamarao told Oil & Gas Middle East.

Elaborating on other long-term contracts in the country, he added: “In December 2021, TechnipFMC was awarded a 10-year framework agreement contract by ADNOC to provide wellheads, trees and associated services to the operator, valued at around $1bn. ADNOC has also awarded a $227mn contract to UAE-based RobtStone for work on a key enhanced oil recovery project at its Bab onshore oilfield.”

Pointing to a promising outlook for 2022, HE Saif Humaid Al Falasi, the group CEO at ENOC, told Oil & Gas Middle East that the UAE’s oil and gas sector will continue to focus on returning to growth this year, in the current post-pandemic environment.

“This is evident from the increase in global demand as major economies are recording high vaccination rates and enabling other sectors to resume activity. The recovery in tourism and the services sector also contributes to the country’s growth in the oil and gas sector.

“Fuelled by strong prospects for innovation and digital transformation, the UAE government is also using fiscal policy to promote the private sector,” Al Falasi added.

In a similar vein, Raghothamarao pointed out that the UAE economy can look forward to two years of robust growth for its oil sector.

“In 2022, the oil sector will be the primary driver of 4.4% GDP growth, while the non-oil sector—services in particular—will also contribute to the growth by 6.2% in 2023.

Additional oil sector revenue from higher oil prices will most likely result in a substantial surplus in the country’s 2022 current account; higher growth in 2022 reflects the much-increased oil price profile.

“Moreover, the UAE will use spare oil production capacity and lift output by around 100,000 BPD. Recycling petrodollars also supports consumption which helps in offsetting the negative impact of higher prices on demand,” Raghothamarao said.

He added: “Most national oil companies in the region were already prepared to increase their CapEx investments in 2022 before the Russian invasion of Ukraine. However, restrained activity in 2020 and much of 2021 means that operators need to catch up on lost brownfield field development plans just to maintain production levels on maturing fields.

“With most operators also engaged in long-term plans to increase oil and gas production levels, a high number of final investment decisions on greenfield projects are expected over the next one to two years. In addition, the UAE and its neighbours such as Saudi Arabia, Iraq and non-OPEC member Oman are working on getting the most out of their reserves before the global demand for oil and gas wanes over the coming decades.”

Furthermore, Abu Dhabi’s National Oil Company (TAQA) delivered “a very strong performance in 2021”, with revenues rising 11% year-on-year to almost $12bn within its oil and gas business, the company said.

TAQA noted that its oil & gas average production volumes increased to 122.4 thousand barrels of oil equivalent per day, an increase of 4%, driven by higher production in Europe, mainly the UK.

Jasim Husain Thabet, TAQA’s group CEO and MD, said in a statement at the time that while 2021 showcased the financial and operational strength of TAQA Group, it also progressed in new areas such as green hydrogen.

He added: “We achieved key milestones, including the first water being produced from the Taweelah Reverse Osmosis plant – that, once fully operational, will be the largest of its kind in the world. Internationally we also moved forward on our growth plans by signing the Tanajib cogeneration and desalination project in Saudi Arabia with Saudi Aramco.

“We also announced the successful completion of the region’s largest green bond in January, which was 1.8 times oversubscribed by international investors. As we look ahead, I am confident that we will continue to add value and support the energy transition as we focus on growth, optimisation and building capabilities in Abu Dhabi and beyond.”

In December 2021, ADNOC and TAQA announced a $3.6bn strategic project to significantly decarbonise ADNOC’s offshore production operations and lower the carbon footprint of ADNOC’s offshore operations by more than 30%. ADNOC would own a 30% stake in the project.

In the same month, the firms also revealed that they would join Mubadala Investment Company (Mubadala) to become shareholders in Masdar – a subsidiary of Mubadala – to support the UAE’s role in its energy transition, which combines the companies’ renewable energy and green hydrogen portfolios into Masdar.

Commenting on the strategic partnership, Rawan Oueidat, analyst – Corporate Ratings at S&P Global Ratings, told Oil & Gas Middle East: “This translates into a combined current, committed, and exclusive capacity of 23GW of renewable energy (with plans to reach at least 50 GW by 2030).”

TAQA will own a 43% shareholding in Masdar’s renewable energy business, while Mubadala retains a 33% share, and ADNOC holds a 24% stake upon completion of the transaction.

At the same time, ADNOC will take a 43% stake in Masdar’s green hydrogen business, with Mubadala and TAQA retaining 33% and 24%, respectively.

Furthermore, in January 2022, Masdar announced investments in various programmes to determine the commercial viability of hydrogen.

Renewables: An era of unlimited clean energy?

The UAE has been investing in renewable energy for about 15 years, but has recently accelerated these investments in line with the UAE Energy Strategy 2050 and the Dubai Clean Energy 2050 initiatives. Experts emphasised that green practices will play a key role in contributing to the sustainable energy mix.

Showcasing ENOC’s role, Al Falasi said: “We are committed to supporting the country’s energy transition and have made strong efforts to put sustainability at the heart of our operations. One example is the Service Station of the Future in District 2020, which is powered by solar photovoltaic (PV) panels and a 25m wind turbine. The station can recycle water and produce drinking water by converting humidity in the air into water molecules”
With the UAE firmly focused on the next 50 years, advances in technology and innovation will remain crucial to reimagining the future of energy.

Al Falasi said: “Public and private sector partnerships and investment will also be vital in order to realise long-term goals in the energy sector, which will support the UAE’s ongoing diversification efforts whilst extracting maximum value-chain synergies.”

The UAE is the first country in the region to pledge its commitment to achieving net-zero targets by 2050 – and won the bid to host COP 28 – as the world looks to improve the focus on renewable energy.

“This demonstrates the country’s commitment to a more sustainable future, which can be achieved with an energy mix to balance economic requirements and environmental goals,” he added.

Similarly, Oueidat said: “GCC energy players’ spending on sustainability is picking up, but will not contribute materially to cash flow over the next five years, in our view, despite a greater focus on environmental targets in the region.”

She explained: “We believe the slower spending pace stems largely from regional energy companies being significantly more shielded than global peers’ from energy transition risks, as well as the currently lower returns on green and renewable projects. Many are aware of the risks and opportunities ahead, and some are making real commitments to environmental targets. However, timelines to achieve these are longer than global peers’, and we don’t expect to see shifts in asset profiles in the short-to-medium term. The sector’s sustainable debt issuance is also unlikely to see a strong uptick, in our view, due in part to fewer suitable projects being undertaken by the sector.”

From a regulatory point of view, Willn noted that the hurdle for renewables is that they are either incredibly immature or not in place, but the evolution of regulation is not so much an issue, and no doubt, best practices from other jurisdictions will be adopted.

“For instance, in terms of finance, certainly from a solar perspective, we are already seeing lenders providing for large scale solar projects, and likewise, for other renewables, this is simply a case of lenders getting comfortable with the assets they are lending on.”

In fact, according to a report by GlobalData’s MEED, there were no contract awards for oil-powered or gas-fuelled power stations in the MENA region in the first half of 2021. In addition to that, the same period saw several contracts, worth roughly $2.8bn, being awarded for renewable energy projects in the region.

In August 2021, DEWA announced its first wind farm project in Hatta, Dubai – the first of its kind in the Gulf region with investments of around $390mn. DEWA noted that the plant’s production capacity is set to reach 250MW with a storage capacity of 1,500MWh, and a lifespan of up to 80 years. In December 2021, the plant had completed 35% of the work.

Other emirates in the UAE are also focusing on their renewable strategies; for instance, under the RAK’s solar programmes, it aims to develop 9MW of solar PV in 2022, and is setting a base for larger capacity in the coming years, Andrea Di Gregorio, executive director, Energy Efficiency & Renewables Office, RAK Municipality – Government of RAK, said in a statement in March 2022.

Meanwhile, Abu Dhabi is focusing on a 2MW Al Dhofra solar project, which will be the world’s largest single-site solar power plant once operational. Owned in partnership by TAQA and Masdar (60%) and Jinko Power and EDF Renewables (40%), it can generate enough electricity to power approximately 160,000 houses and mitigate 2.4mn tonnes of CO2. The plant is expected to become operational this year.

Gas to remain a central part of UAE’s decarbonisation strategy

The UAE is viewing natural gas as a key resource to address its current “energy trilemma,” an industry expert said.

The trilemma involves ensuring a more reliable, affordable, and sustainable source of power, while also helping to produce low carbon fuels in the form of blue hydrogen or ammonia in the future.

Abdurrahman Khalidi, chief technology officer at GE Gas Power for EMEA, explained: “Investments in renewable energy are critical but not occurring fast enough, with renewables expected to account for less than 50% of the total global electricity supply in 2040.

“Supplies of renewable energy are typically intermittent in nature as sunshine, rain, and wind speeds vary over the course of a day and across seasons, and battery storage solutions remain expensive, often making them economically unfeasible.”

He added: “To meet these potential gaps in energy supply from various renewable energy sources, gas-powered technologies offer the flexibility to ramp power production up or down rapidly.”

In terms of sustainability, gas-powered technology provides the lowest carbon emission per MWh, if power generated, among all fossil fuels, reaching as low as 310g of CO2 per kWh, versus about 547-935gCO2/kWh or more for liquid fuel plants and 750-1,000gCO2/kWh for coal-fired plants.

ADNOC awarded two EPC contracts worth $1.46bn to NPCC and a joint venture between Técnicas Reunidas and Target Engineering, with the company also noting that 70% of the award value would flow back into the UAE’s economy under its in-country value programme.

Both engineering contracts are expected to be completed in 2025 and will enable the Dalma field to produce around 340mn standard cu. ft per day of natural gas. The offshore Dalma field is located 190 km northwest of the Emirate of Abu Dhabi.

Khalidi added that gas also presents pathways to net-zero carbon emissions in the long run through hydrogen-based power generation and CCUS solutions.

In addition to ADNOC, most other national oil companies in the GCC region are also investing in renewables, introducing blue and green hydrogen, as well as selling blue ammonia to increase the push for clean energy, but are doing so largely through partnerships with power and utilities players or international entities.

Khalidi explained: “The region is well-positioned globally to play a leading role in the supply of blue and green hydrogen and to remain at the heart of the world’s future energy ecosystem as an exporter of this valuable, clean fuel.

“It has many of the ingredients needed to produce hydrogen cost-effectively in the long run: enormous renewable energy potential; large amounts of land for renewable energy projects; access to seawater; depleted oil and gas reservoirs to safely store carbon dioxide; and tremendous reserves of natural gas.”

Elaborating on other projects in the country, Raghothamarao said: “The UAE’s Masdar sealed a collaboration agreement with ENGIE to study a 200MW green hydrogen facility, which could come on stream in 2025 to supply Fertiglobe’s ammonia facilities at Al Ruwais, Abu Dhabi.

In addition, in Dec 2021, “Masdar and Engie pledged to invest $5bn in green hydrogen production from at least 2GW electrolysis capacity by 2030. Masdar also teamed up with TotalEnergies and Siemens Energy to co-develop a demonstration plant at Masdar City, Abu Dhabi that aims to turn green hydrogen into sustainable aviation fuel.

“The UAE has formed partnerships to develop a hydrogen economy with significant energy consumers like Japan and Germany on the demand side. Aside from DEWA, which operates the pilot project, Mubadala, ADNOC, sovereign fund ADQ, and TAQA are also developing clean hydrogen production facilities.”

The UAE is aiming for renewables and nuclear facilities to account for half of its installed power capacity by 2050, an objective which will be key in the country’s plans to decarbonise its grid and boost green hydrogen production. Simultaneously, the country will adopt carbon capture and storage (CCS) technology en-masse to mitigate emissions from continued fossil-fuel production and support blue hydrogen production.

Furthermore, Khalidi pointed out that the significant presence of energy-intensive industries such as oil and gas, smelters, petrochemicals, and others, also provides an opportunity to deploy carbon capture, utilisation and storage (CCUS) solutions at scale in the region.
Agreeing with Khalidi, Willn also commented that ADNOC has been very vocal about CCUS solutions, with the oil producer saying that “there is no credible way of reaching global climate goals without the widespread adoption of CCUS”.

He added: “Having already established the Al Reyadah facility, ADNOC have indicated that they are expanding their CCUS ability to five million tonnes per year by 2030 by accelerating investment in CCUS technology.”

Nuclear energy: Older players re-emerging

Nuclear energy will also play a vital role in the UAE’s energy mix and diversification strategies. For instance, once fully online, UAE’s Barakah nuclear facility can potentially reduce gas consumption in 2030 by 900mn to 1200mn cubic feet per day, according to a report by IHS Markit (a part of S&P Global).

The UAE is the only Arab country currently producing nuclear energy for power generation, having started commercial operations in April 2021 at its Barakah-1 plant. Emirates Nuclear Energy Corp, in March 2022, noted that its second plant, Barakah-2, has also commenced commercial operations, marking the plant’s halfway point towards full operational capacity.
This raises the plant’s online capacity to 2.8GW and meets expectations that all four of its reactors is expected to be operational by 2024; with Unit-3 having completed construction and Unit-4 under construction.

UAE is poised to achieve 23.5% emissions reduction target by 2030 and is expected to achieve 44% in renewables and 6% in nuclear target in the energy generation mix by 2050.
Explaining how this will benefit the UAE, Willn said: “The end goal for Barakah is that the four units (when completed) will produce enough electricity to cover 25% of the country’s energy needs,” adding that, the Barakah nuclear plant makes it more than possible for nuclear energy to be a mainstay of energy supply in the UAE.

However, he noted that principal challenges within any nuclear plant are time and cost and that nuclear projects historically take longer than planned.

“In addition to the expense of building a power plant, nuclear plants must also allocate funds to protect the waste they produce and keep it in cooled structures with security procedures in place. However, once the initial cost has been incurred, nuclear energy is one of the most cost-effective energy solutions available, and unlike renewables, nuclear energy is a very reliable source of energy,” Willn said.

He concluded that within the Middle East, the UAE is leading the way in terms of transitioning towards green energy.

“Last October, the UAE announced its net-zero by 2050 strategic initiative, encouraging other nations such as Saudi Arabia and Bahrain to follow suit and commit to achieving net-zero emissions by 2060, signalling increased momentum towards decarbonisation in the region. Furthermore, the UAE has substantial groundwork for green energy, and is already home to three of the largest and lowest-cost solar plants globally and is a pioneer in new zero-carbon fuels such as green hydrogen,” he said.