Oil and Gas in the Capitals

The Saudis and their neighbors in the Gulf have caught the “green” bug. They have embarked on multi-billion-dollar solar power projects, to reduce the amount of oil burned in power plants, and divert these amounts from domestic consumption to exports. If these renewable projects do not deliver, Gulf nations may not export the oil needed to meet growing global oil demand. The whole world will pay the cost for this in higher oil prices. Failure of green projects is not new. They failed in Europe and the U.S.; they also failed in some Gulf countries in the early 1980s.

Origins. The story in the oil-producing countries goes like this—economic boom, fueled by high oil prices, population boom, fueled by high birth rates, and urbanization, fueled by massive migration to major cities, have all increased energy consumption significantly. This increase has reduced, and will continue to reduce, net oil exports. Since oil remains the main source of income and governmental revenues, a decrease in net exports means lower governmental receipts. Lower revenues translate into economic and political problems on the ground. People in the rentier states¹ do not pay taxes, but expect the government to subsidize them as a form of wealth distribution. If governments are not able to subsidize, their legitimacy is questioned. From the governments’ points of view, scrambling for nuclear and solar power plants is not a matter of providing electricity, it is a matter of survival. This explains the extravagant spending on nuclear and solar energy in the last two years by countries like the UAE and Saudi Arabia.

Plans. Saudi Arabia will spend tens of billions of dollars to supply 30% of its electricty from solar power by 2030. Abu Dhabi plans to have 7% of its total consumption from renewable energy. Neighboring Dubai has already started a 1-gigawatt solar complex. Kuwait plans to have 30% of its electricity demand met by renewable energy by 2030. Qatar will supply 80% of the power needed for desalinization plants from solar, with renewables reaching 10% of total electricity supply by 2020.

Regional supporters of solar projects claim that these countries can supply electricity from solar power at a leveled cost of energy (LCOE) that is less than 10 cents/kWh, which is lower than the LCOEs of all projects around the world, including 12 cents/kwh in the Arizona desert. However, these costs and the projects’ viability are questionable. The assumed cleaning and replacement costs are clearly very low. They assume a very low rate of return. They assume that oil prices will increase indefinitely. In making the case for large-scale deployment of PV in the Middle Eastern region, one company involved in Gulf solar projects stated that they can generate a rate of return of 9.4%, assuming oil prices rise in real terms to $163/bbl by 2030!

According to U.S. DOE numbers, the LCOE in Arizona’s desert is 12 cents. Is there a difference in sunshine between Arizona and the Arabian desert that makes solar electricity cheaper in Arabia? Probably not. However, sandstorms in the Arabian desert are larger, more powerful, and more frequent than those in Arizona. This makes cleaning and replacement costs higher than any other place on earth with solar panels, especially given that solar power in the Gulf assumes cheap, heavily subsidized, and abundant water! Given the region’s massive solar projects, one would wonder where all the water needed to cool and clean these panels will come from.

The situation is worse in coastal areas. In cases of extreme heat, when electricity is needed the most, panels have to shut down to be preserved. Even if they keep operating, their efficiency declines because of almost 100% humidity and excruciating heat. Humidity and heat reduce solar panel efficiency, which changes project economics. The fact that all projects are government-owned and supported shows that these projects’ economic viability is questionable. In addition, the comparison with Europe, the U.S. and China is biased. These advanced countries manufacture and export solar technology and benefit from research, development, and job creation. Gulf nations are mere importers.

Why the hurry? If these projects are not economic, then why are these countries rushing to spend billions of dollars on them? The rush of some Gulf oil producers to tap the sunny deserts of Arabia and build nuclear power plants to produce electricity is not only motivated by the need to reduce oil consumption and prevent a decline in oil exports. It is also motivated by the need of these governments to stay in power and maintain peace on one hand, and reduce international pressures, regarding carbon emissions and climate change on the other.

The problem is that solar power may not deliver as planned, and nuclear projects will be delayed, probably for several years. As a result, oil and gas consumption in these countries will continue to rise, and exports have to decrease. One could argue that if these projects fail, Saudi Arabia can increase its oil production capacity. This chapter came to a close, when the IEA, for the first time, acknowledged in its recent outlook what Saudis have been saying in recent years: Saudi production is capped at current capacity, not the 15 MMbpd that IEA mentioned in its previous outlooks.

Regardless of the economics of solar and nuclear projects, political and strategic considerations justify the spending of billions of dollars on them. Solar and nuclear energy will contribute to the energy mix of Gulf nations, but solar will not deliver as planned, and nuclear will be delayed for several reasons. 

¹ A “rentier” state is a term in political science and international relations theory used to classify those states that derive all, or a substantial portion, of their national revenues from the rent of indigenous resources to external clients.