Europe rankles Gulf countries with energy transition push, while seeking oil, gas supplies

Europe is counting on the Middle East as a critical supplier of LNG to replace Russia, but the EU's pressure on Gulf states to more rapidly embrace the energy transition is already driving a wedge between them.

In a report outlining the European Commission's priorities on engagement with the Gulf, EU leaders said May 18 they aimed to step up cooperation with the region on climate action and clean energy but challenged Middle East fossil fuel producers to take "bold steps to shift away" from their oil-and-gas driven economies.

At the same time, they said Gulf countries "can contribute to limiting the volatility of markets impacted by the energy transition not least through increase exports of Liquified Natural Gas as an alternative to pipeline gas."

And they added they would continue to stress "measures to stabilize oil markets, cooperation on hydrogen, energy efficiency and faster deployment of renewable energy."

Gulf officials have taken exception to what they see as the cognitive dissonance of western finger-wagging on climate change while asking for more oil and gas supplies to tamp down surging prices and alleviate a supply squeeze exacerbated by US and EU sanctions on key producers, including Russia for its invasion of Ukraine.

Dated Brent has been on a two-year bull run since the worst of the pandemic, with S&P Global Commodity Insights assessing the benchmark at $116.51/b on May 17, down from a 14-year high of nearly $140/b in March, as volatility has spiked since the start of the war.

Gas prices have lurched even more erratically, as the Platts JKM LNG marker hit an all-time high of $84.75/MMBtu in early March but has settled in the low $20s/MMBtu in recent days.

Consuming countries, such as the US, India and Japan, have said Middle East oil producers in OPEC are keeping the crude market artificially tight by not tapping their spare capacity, but OPEC ministers have countered that the market instability is largely caused by a lack of upstream and downstream investment.

The pandemic has played a role in delaying and canceling oil and gas projects, but western financing has also dried up as investors and policymakers urge divestments from fossil fuels to speed the energy transition.

Reality check

Saudi energy minister Prince Abdulaziz bin Salman said at a recent industry conference that the current crisis should be "a reality check" for countries that have not paid enough attention to energy security.

"If the signals of the market are not conducive, people would refrain from investing," he said. "If people refrain from investing, there is a consequence to that, and that consequence will emerge in the form of available supply."

OPEC Secretary General Mohammed Barkindo has said that the push for renewables at the expense of fossil fuels has created a "transition premium" on oil and gas prices.

The battle lines figure to remain entrenched, even as the Middle East prepares to host the next two UN climate summits: COP27 in Egypt in 2022 and COP28 in the UAE in 2023.

Gulf producers, who earn the vast majority of their GDP from oil and gas revenues, have been spending heavily to expand their lifeblood industries, banking on hydrocarbons remaining the dominant fuel source for decades to come.

But they say they are also playing their part in the energy transition, rapidly building hydrogen facilities and utility-scale solar power projects, including the world's largest photovoltaic plant in Abu Dhabi.

OPEC heavyweights Saudi Arabia and the UAE are aiming to be able to pump some 2 million b/d more crude oil combined within the next decade, while committing to net zero carbon emissions targets of 2060 and 2050, respectively.

Meanwhile, gas giant Qatar plans to boost its LNG capacity by almost two-thirds to 126 million mt/year by 2027, promoting it as a cleaner alternative to coal and more reliable than renewables.

All three countries have been lobbied heavily by consuming nations desperate for more supplies.

Harmony in partnerships

"We are all trying to congregate around the idea of reducing emissions of all greenhouse gases," Prince Abdulaziz said in January. "We have to be honest about, are we really trying to achieve that goal or are we trying to take that hope as a pretext to ... get rid of hydrocarbons? I really would like to see the true colors of everybody."

While it needs the hydrocarbon supplies now, in the long term, the EU wants to replace gas-fired power generation with renewable energy, including hydrogen, and reduce the share of oil in transportation fuels.

EU leaders said in their report that Gulf countries can not rest on just exporting hydrocarbons, but much also become major investors in renewable energy and energy efficiency projects globally.

"Given the magnitude of climate change challenges and the opportunities that the green transition can offer, joining forces is paramount for the EU and the Gulf region," the report stated.

Europe will explore green hydrogen partnerships and promote closer cooperation on electric grid connectivity and sustainable transport, it said.

But for now, the current energy crunch remains a fissure between European consumers and the Middle East producers they rely on.