Renewables to complement Dubai's existing hydrocarbons focus

Although Dubai’s growth and prosperity have been fuelled by its proximity to oil, its own modest hydrocarbons endowment accounted for just 1.3% of the emirate’s GDP in 2016. Energy’s contribution to national GDP in recent years has averaged around 45% for the UAE as a whole, but only about 5% in Dubai. Still, Dubai operates as a centre for oil and gas trade and is home to many firms servicing the energy industry. Despite its own modest reserves, the emirate has diversified activities to become a global financial and trading hub, and hydrocarbons continue to have a major impact on patterns of economic activity. Its public oil and gas companies have a global footprint with upstream developments at home and overseas, as well as dozens of downstream ventures. At the same time, Dubai is right at the forefront of what might be called the new emerging cleaner energy world, by developing and promoting disruptive technologies, including solar energy and electric vehicles (EVs).

History

The Dubai Petroleum Establishment (DPE) was created in 1963 when the Continental National Oil Company was granted a concession by Sheikh Rashid bin Saeed Al Maktoum to prospect offshore. Three years later its engineers struck oil in the Fateh Field. Four years after that, in 1970, the South-West Fateh Field was discovered, followed by the fields at Falah and Rashid in 1972 and 1973, respectively. Dubai’s first exports of the commodity were shipped in September 1969, beginning the inflow of additional funds to invest in the emirate’s infrastructure. According to the DPE, Dubai exported 2bn barrels of oil between 1969 and 1988. In 1991 output peaked at 410,000 barrels per day (bpd), but by 2007 production had declined to 100,000 bpd, and it was announced that the government would take control of offshore assets from Dubai Petroleum Company, a subsidiary of ConocoPhillips,returning them to the DPE as of April that year. In 2017 the US Energy Information Administration (EIA) estimated that Dubai’s remaining oil reserves amounted to some 2bn barrels.

Size & Scope

The UAE is the seventh-largest crude oil producer in the world. Hydrocarbons exports in 2017 were estimated at $65bn, accounting for 20% of all export revenue. Crude reserves have been estimated at 97.8bn barrels, according to the EIA, of which approximately 96% are located in Abu Dhabi and 2% in Dubai. Prospects for new discoveries are low, however, the lifetime of existing fields is being extended by the use of enhanced oil recovery (EOR) techniques.

Total UAE production of oil was 3.9m bpd in 2017, according to BP’s 2018 “Statistical Review of World Energy” report, comprising 4.2% of global production. While this was down from 4m bpd in 2016, 2017 marked the second-highest crude output year in the past decade. This made the UAE the fourth-largest producer in OPEC, behind Saudi Arabia (11.95m bpd), Iran (4.98m bpd) and Iraq (4.52m bpd).

The country is also an important producer and consumer of natural gas, which is used in EOR techniques to boost crude output from existing mature fields. At end-2017 total proven reserves in the UAE amounted to 5.9trn cu metres, comprising 3.1% of the global total, according to BP. That same year the country produced 60.4bn cu metres of natural gas, up 1.8% on 2016. However, the country is still a net importer of gas, with consumption reaching 72.2bn cu metres in 2017.

Adding Capacity

As a result of economic and population growth, demand for electricity has increased rapidly over the last decade, with the UAE’s demand for power growing by 9% per year to exceed 40 GW by 2020, according to the UAE Ministry of Energy. Together, the seven UAE emirates have one of the highest rates of per capita electricity use in the world. Around 90% of consumption is covered by domestic production, mainly from gas-fired generators.

The UAE plans to increase electricity generation capacity by around 21 GW by 2030. Existing expansion projects will see nuclear comprising 26.8% of the planned extra capacity, followed by coal-fired generation (24.3%), gas-fired generation (22.5%) and solar (26.1%). Some 5.6 GW of nuclear capacity is set to be added though the four-reactor Barakah Nuclear Power plant, currently being built by the Korea Electric Power Corporation. Plans also include the construction of the 2.4-GW Hassyan Clean Coal power plant, set to be built on an independent power producer (IPP) basis close to the border with Abu Dhabi.

While the UAE aims to produce at least 7% of its total power generation from renewable resources by 2020, Dubai has set a more ambitious target of at least 25% of all electricity coming from renewable sources by 2030, with plans to reach 75% by 2050.

Structure & Oversight

Each emirate is responsible for regulation and oversight within its own territory. The Dubai Supreme Council of Energy (DSCE) is tasked with regulating and coordinating the activities of the oil industry, and ensuring the security and sustainability of energy supplies to the emirate. Representatives from the Dubai Electricity and Water Authority (DEWA), the Dubai Nuclear Energy Committee, the DPE, the Dubai Supply Authority (DUSUP) and the Emirates National Oil Company (ENOC) are among those on the council.

Although Dubai’s oil and gas reserves were first discovered and controlled by international companies, the sector has been brought back under government ownership. Dubai Natural Gas Company, under the guidance of the DSCE, oversees engineering, construction and management of the emirate’s natural gas infrastructure, while DEWA owns and operates all electricity generators, water desalination plants, and transmission and distribution networks. DEWA is state-owned, but allows private sector participation by granting licences to independent water and power producers.

Long-term Energy Policy

In 2015 the Dubai Clean Energy Strategy 2050 was launched, laying out the emirate’s ambitious renewable energy targets. The strategy contains five pillars aimed at turning Dubai into a global centre for both clean energy and the so-called green economy. Targeted pillars involve infrastructure, legislation, funding, building capacities and skills, and achieving an environmentally friendly energy mix.

Building the Muhammad Bin Rashid Al Maktoum Solar Park is central to the strategy. As part of the infrastructure pillar, the aim is to invest Dh50bn ($13.6bn) in the complex to install 5 GW worth of capacity by 2030, making it the largest single site solar park in the world (see analysis). The funding pillar includes the establishment of the Dh100bn ($27.2bn) Dubai Green Fund, which offers loans with reduced interest rates to companies with clean energy projects. As part of the environmentally friendly energy mix pillar, plans are in motion to see gas comprise 61% of total electricity generation by 2030, followed by solar energy (25%), nuclear power (7%) and clean coal (7%). Meanwhile, legislation is planned to support clean energy policies.

DEWA said it aims to invest Dh30bn ($8.2bn) as part of the overall strategy. At an October 2018 event to promote Dubai in Shanghai, China, Waleed bin Salman, executive vice-president of business development at DEWA, said that the authority was interested in partnering with Chinese companies to generate more power from green energy sources.

Oil & Gas Value Chains

While occupying only a minor presence in the oil and gas upstream segment, Dubai hosts a range of value-added activities including refining, retail distribution, and petrochemicals and fertiliser production. The Jebel Ali refinery in Dubai is one of the UAE’s four main refineries, with a capacity of 140,000 bpd of condensates and light crude to produce liquefied petroleum gas, naphtha jet fuel and diesel oil. In September 2016 operator ENOC announced a $1bn three-stage plan to increase refinery capacity by 50% to 210,000 bpd, with completion expected by the end of 2019. The expansion was designed to help the UAE meet growing energy demand, facilitate self-sufficiency in the production of domestic fuels and boost exports.

In mid-2018 Dubai-based Florexx International Investments awarded contracts to Canada’s SNC-Lavalin for the construction of a 100,000-bpd advanced topping refinery, although the exact location and cost have yet to be announced. Advanced topping refineries use distillation columns to separate crude oil into various products, such as naphtha, diesel, kerosene and fuel oil. SNC-Lavalin is tasked with engineering, procurement and construction (EPC) of the refinery.

As feedstock for its refineries, Dubai traditionally taps into oil and gas produced by neighbouring emirates. In early 2018, for example, it was announced that the Abu Dhabi National Oil Company had extended a 20-year-old supply contract for another 15 years to supply gas to DUSUP, as part of plans to expand its sour gas production. The gas is pumped through the Taweelah-Jebel Ali pipeline, in operation since 2001.

Further downstream, ENOC Group has been expanding its service station network, adding eight new stations to take its total national network to 122. The company is aiming to expand its station network by 40% up to 2020, in part to anticipate increased numbers of visitors for Expo 2020. The stations are also designed to meet Dubai’s green building regulations. All stations will come equipped with charge points for EVs, and photovoltaic panels installed on the roofs of each station will cover electricity consumption and transmit any surplus power back to the national grid.

Also in 2018 ENOC Group awarded an EPC contract to local firm Albanna Engineering to deliver a 16.2-km jet fuel pipeline, linking storage terminals in the Port of Jebel Ali to the Al Maktoum International Airport (DWC) in Dubai. ENOC said the pipeline would be completed in 24 months and in time for Expo 2020. The pipeline will have the capacity to pump 2000 cu metres per hour of jet fuel. Upon completion of expansion projects, the authorities expect DWC to become the world’s busiest airport, with capacity exceeding 220m passengers and 16m tonnes of cargo per year, making reliable access to fuel a critical component to its success.

Oil Price Impacts

Despite successful economic diversification programmes and an ambitious shift to renewable sources, Dubai’s economy remains dependent on global energy prices, benefitting indirectly from periods of relatively high international oil and gas prices as so many of its immediate neighbours are hydrocarbons producers. In a report issued by Bank of America Merrill Lynch (BAML) in 2018, it was noted that a combination of sanctions on Iran, bottlenecks in shale production and political turmoil in Venezuela were creating upside risk to international oil prices. The impact on the global economy is forecast to be mixed, with growth slowing in the EU, the UK and Japan, but picking up among energy producers such as the US, Australia and Brazil. Prices could return to $100 a barrel or higher in 2019, the report suggested, but noted that might reduce global economic growth by 0.2%. BAML added that the value of the US dollar was likely to be the swing factor, with a stronger US currency polarising outcomes, hurting energy importers more and benefitting the exporters. A weaker dollar would act more as an equaliser between exporters and importers.

A preliminary IMF Article IV Consultation of prospects for the UAE in September 2018 painted a relatively moderate scenario. The IMF is more conservative on the outlook for oil prices, suggesting they will remain in the mid-$70s range in 2019. With that assumption, the IMF sees UAE GDP growth increasing from an estimated 2.9% in 2018 to 3.1% in 2019. According to the IMF, “large fiscal buffers, ample spare capacity and rising investment needs for Expo 2020” mean the national government has provided sufficient stimulus to the economy. It also noted that the aim of both the UAE and Dubai to develop a “competitive, knowledge-based economy” requires deepening and broadening structural reforms. Changes such as the liberalisation of foreign investment, longer-term visas for professionals, and the easing of licensing requirements and business fees were described as a step in the right direction.

Iran Sanctions

The re-imposition of US-led sanctions against Iran, effective from November 2018, had some knock-on effects for Dubai. According to local reports, ENOC began stockpiling jet fuel on two specially commissioned Suezmax tankers shortly before the deadline for the renewed sanctions. ENOC normally imports light condensate from Iran, which is then used as feedstock at the Jebel Ali refinery. There was speculation that ENOC may have been hoping for a sanctions waiver, but in the end, alternative, non-Iranian sources of supply had to be secured. Maintaining jet fuel availability and avoiding any disruption at DWC has been emphasised as an key priority.

Foreign Investment

Dubai has been seeking to attract foreign direct investment (FDI) on at least three levels relevant to the energy sector. The first, top-level priority is to make the emirate an attractive destination for foreign companies of all types, involved in a wide range of energy and non-energy activities. Of significance here is the value of aggregate FDI. The second is to make it attractive for companies in the energy sector, including traditional oil and gas. The third is to specifically promote the renewables and green energy sector, with an emphasis on innovative technologies.

According to the Dubai Investment Development Agency (DIDA) overall FDI increased by 26% year-onyear, to reach Dh17.8bn ($4.8bn) in the first half of 2018. The number of projects jumped by 40%, hitting 248 that same period. Full-year figures for 2017 show that FDI hit Dh23.7bn ($6.5bn), up by 7% on 2016.

The authorities see the increases as a positive response to recent steps to attract general FDI by relaxing regulations, lowering the cost of doing business, and issuing 10-year visas to attract more investors and entrepreneurs to the country. The data from DIDA shows that the biggest inward FDI flows came from companies in the US, India, Thailand and Spain.

A detailed breakdown of FDI into total, oil and gas, and renewables and green economy sectors by emirate is not available, but there is evidence that the money flowing into the renewable and green energy sector is rising substantially. Schneider Electric, a global energy management and automation group with headquarters in France, has claimed in 2018 that energy efficiency innovations are enabling a total of $72bn worth of investments across the UAE. According to the company, energy efficiency has become a major investment point in the process, including energy generation in power plants, smart cities with connected grids for energy transmission, and monitoring and repairing electrical infrastructure in individual buildings.

Hanan Darwish, the company’s president for the Gulf and Pakistan, said in a press release in October 2018 that, “As the UAE and the Arabian Gulf become more urbanised, digitised and industrialised, energy efficiency can ensure safe, reliable, and connected energy to organisations and people”.

Another indication of the regional trend came from the “MENA Power Industry Outlook” report, published in October 2018 by industry analysts Ventures Onsite. The report calculates that the GCC region will require $55bn worth of investment for an added 43 GW in power generating capacity and $34bn for power transmission over the next five years to 2022. Much of this investment will be channelled into the diversification and conservation of electricity, with an emphasis on solar power, renewable sources and smart grids.

Renewable Energy

One of the targets set by the DSCE is to reduce overall energy demand by 30% by 2030. As a contribution to this goal, DEWA has pledged to retrofit the mechanical, electric and plumbing components of up to 30,000 buildings. Typical retrofit requirements include installing LED lights to reduce running costs and investing in more modern, quiet and efficient fan coil units for air conditioning.

Other leading figures in the renewables sector have been promoting the construction of zero net energy (ZNE) buildings, which are energy self-sufficient, using no more than their own locally generated renewable energy. Saeed Al Abbar, chairman of the Emirates Green Building Council, told local media in October 2018 that ZNE buildings needed to be made available to everyone and not just to a select few.

Also part of the renewables strategy is the Shams Dubai Solar Programme that aims to encourage business and homeowners to install rooftop solar panels. The panels are linked to the electricity grid under the terms of a net metering agreement, which allows consumers to receive a reduction in energy bills based on the amount of power they have contributed back to the network. The rooftop panels programme first began in 2015 with government and quasi-government buildings leading the way, followed by commercial and industrial users and then, at a rather slower rate, private homes. In September 2018 DEWA said that the programme had connected 1145 buildings to the grid, creating an additional 50 MW of capacity.

Waste Not, Want Not

As part of the greener energy movement, Dubai has also shown strong interest in waste-to-energy (WTE) plants. In early 2018 the Dubai government announced plans to build the world’s largest WTE plant, with capacity to process around 2m tonnes of solid waste every year, equivalent to about 60% of the emirate’s annual waste production. It is estimated that the plant’s generating capacity will be 185 MW, or around 2% of Dubai’s total demand.

Capable of supplying electricity to 120,000 homes, the Dubai plant will compete with the Shenzhen East WTE Plant in China to be the world’s largest. Both are expected to be completed by 2020, but the Dubai plant’s output capacity may have the edge, as it is some 20 MW higher than the Shenzhen facility. The Dubai plant will be built on a two-ha site in the industrial neighbourhood of Warsan, with electricity fed into the local grid via high voltage 132-KV cables. The project’s total cost is expected to be around $680m. Construction contracts have been awarded to Swiss-based Hitachi Zosen Inova and BESIX Group of Belgium.

Green Challenges

While industry stakeholders are confident that Dubai is progressing in its attempt to increase the share of renewables in the total energy mix, the segment has not been without its challenges. Many homeowners, particularly short-term expatriates, have been reluctant to invest in solar panels, because it can take five to six years before a return on investment is achieved. There are also issues on the part of the banks, with most financial institutions not yet accustomed to providing homeowner loans to fund the installation of rooftop solar panel systems. Additionally with ZNE buildings, there are significant hurdles when it comes to retrofitting existing buildings to make them capable of net zero operation.

Electric Move

Ivano Iannelli, CEO of the Dubai Carbon Centre of Excellence, a think tank set up by the DSCE and the UN Development Programme, is optimistic about the move to cleaner energy in general and about the contribution being made by EVs in particular. In an interview with OBG, he said that Dubai is leading the rest of the world in the development of and investment in clean energy use. Implementing an effective policy takes significant time and coordination among the different stakeholders. As such, it took the emirate a few years to develop a coherent approach because the commercial viability of EVs was not yet there. However, as new renewable energy sources and technologies become viable – for example in solar energy – the emirate is able to offer distributed risks and rewards across the whole value chain, and compete globally for the lowest IPP tariffs worldwide. “Dubai has created a business-centric environment for a green economy,” Iannelli told OBG. “What Dubai is doing is ensuring that across the value chain of low carbon transmission, there are incentives and legislative support that extend to both the public and the private sector.”

Iannelli pointed out that the Dubai Integrated Energy Strategy 2030 consists of eight pillars, and the aim is to focus on one pillar every year. So far there has been a year-long focus on the demand side, another year on the supply side, and in 2018 a major focus on water efficiency. In 2019 authorities will focus on the contribution that can be made by EVs. Here, too, Iannelli believes the emirate is leading the sector. Government data show that in late 2018 there were around 4000 EVs in circulation in the emirate, with over 350 charging points, of which 220 were installed by DEWA.

EV Promotion

With the infrastructure in place, the time has come for manufacturers to start getting EVs on the market. At present, the top end of the market is served by luxury hybrid and EVs, such as Tesla, BMW and Lexus models, and the bottom end is served by economy vehicles such as Toyota’s Prius, however, there is a big gap in the middle. Dubai authorities have been talking with international automobile manufacturers to provide the market with mid-range hybrid and EVs. They have also been working with insurance providers and banks to make sure that early adopters of hybrid and EVs get most benefit out of the transition. At present consumers who buy such vehicles face higher frontloaded costs, running at around 10-15% of the total. However, over the lifetime of the vehicle, there is a cost saving compared to those powered by carbon-burning internal combustion energies.

Another important factor in EV uptake is the fact that vehicle range is still limited by the presence of charging points and battery durability. In Europe where cities are densely populated and commute distances relatively short, the current generation of EVs fits relatively seamlessly into existing patterns of motor vehicle use. However, in the US and the Middle East, for example, distances are longer and cities less densely populated, meaning hybrid and EVs need to be capable of travelling longer distances. While in the US and Europe there has been a reactive approach, with investment in a network of charging points likely to follow behind EV adoption, according to Iannelli, Dubai has been more proactive in investing in the charging points first, so as to encourage more rapid EV adoption.

A Dubai government drive clean campaign E-Sayyara (E-Car) was launched in October 2018 to encourage hybrid and EV use in the emirate. Saeed Mohammed Al Tayer, managing director and CEO at the DSCE, told local media that greater use of EVs was in line with the Dubai Green Mobility Strategy 2030 that seeks to accelerate the penetration of such vehicles. Government targets for electric and hybrid car penetration in the emirate have been set at 2% by 2020 and 10% by 2030.

The DSCE has also set a target for all government ministries and public sector agencies to have at least 10% of their annual purchases or leases of vehicles be composed of EVs or hybrids. For the public at large, there are a range of incentives, including free charging at “green charger” stations, free parking and an exemption from state vehicle registration fees.

Additionally, a promotional campaign seeks to encourage EV use among six consumer segments, including those described as “car enthusiasts, environmentally woke citizens, tech geeks, the cost-conscious consumer, shopping mall hoppers and mileage maniacs”.

Outlook

In conventional terms, the modest recovery in international oil and gas prices expected in 2019 is positive for the UAE energy sector and for Dubai, leading to a pick up in activity levels across the hydrocarbons energy chain. But less cyclically dependent and potentially much more important on the longer term is Dubai’s progressive journey to a cleaner energy future.