UAE among petrostates that risk losing half their income as fossil fuel demand drops

UAE among petrostates that risk losing half their income as fossil fuel demand drops

The United Arab Emirates is one of dozens of petrostates that risk losing more than half their expected income from fossil fuels as the world shifts to clean energy, a new report finds.

Global demand for fossil fuels could peak before the end of 2030, the International Energy Agency (IEA) forecast in October. But what does that mean for oil and gas dependent countries like COP28 host the UAE?

If fumbled, it could cause a serious dent in government finances and spiralling social unrest, according to analysis from the Carbon Tracker financial think tank released today.

Electricity is expanding to become the basis of our entire energy system, driven by falling costs of wind, solar and batteries,” says Guy Prince, senior oil and gas analyst and author of the report.

“This is a profound threat to oil and gas exporting nations, because falling demand for oil and gas is likely to lead to a significant fall in future revenues.”

As demand declines - with falling prices exacerbated by oversupply - up to 40 petrostates could see oil and gas revenues plummet from an expected $17 trillion (€15.6 trillion) to just $9 trillion (€8.3 trillion) in the years to 2040.

For 28 high-cost producers like the UAE and Saudi Arabia, more than half their expected revenue could be wiped out in even a moderate transition scenario. So what can they and the rest of the world do about it?

Oil and gas demand is dropping as world acts on climate crisis

Governments across the world are adopting tougher climate policies in response to unprecedented wildfires, heatwaves, floods and droughts as the climate crisis bites.

The remaining ‘carbon budget’ - the amount of CO2 that can be emitted while keeping the world within the ‘safe’ limit of 1.5°C global warming - is rapidly depleting.

At COP28 this month, the EU is pushing for a world-first deal to phase out the ‘unabated’ global use of fossil fuels.

And if current government policy pledges are met, the IEA estimates that demand for oil - which pushed 100 million barrels a day in 2019 - will drop to 92.5m b/d in 2050, and 54.8 m b/d by 2050.

Despite the writing on the wall, a number of petrostates have plans to increase oil and gas production and exploration.

The UAE’s state-owned oil company ADNOC, for example, is the world’s tenth largest producer of oil and gas, and it plans a huge increase in production according to recent data from the Global Oil and Gas Exit List (Gogel).

How wedded are the world’s biggest petrostates to oil and gas?

Carbon Tracker’s new ‘PetroStates of Decline’ report analyses 40 countries with high economic dependence on oil and gas revenue. It calculates how much their governments rely on revenues and how far these are likely to fall over the period 2023-2040 in a ‘moderately paced transition’ - consistent with limiting global heating to 1.8°C.

It finds that 28 petrostates would lose more than half of their expected revenue under this scenario. In particular:

  • The UAE relies on oil and gas for 40 per cent of government income, but production revenue could be 60 per cent lower than expected. Saudi Arabia, the world’s biggest oil exporter, faces a similar situation.

  • Six African states are highly vulnerable, with more than 60 per cent of their total budget at risk. These are: Nigeria, home to 215 million people, Angola, Chad, Congo, Equatorial Guinea and Gabon. In all countries but Gabon, oil and gas revenues could be over 70 per cent lower than expected.

  • Venezuela is one of the countries at greatest risk from the necessary energy transition. Government finances are entirely dependent on fossil fuel revenues, Carbon Tracker says, and these could be over 80 per cent below what is expected.

Governments earn revenues through state-owned national oil companies (NOCs) and through taxing oil and gas production. When demand falls, much production will no longer be economic and lower prices will bring less revenue from the remaining producing projects.

This raises serious questions about how countries will continue to meet the development needs and expectations of their populations, especially as these populations grow.

“In many petrostates, a political settlement has become established where citizens expect high public sector salaries and low or zero-income taxes along with a generous welfare state,” says Carbon Tracker’s Guy Prince.

Africa’s population is expected to double to 2.5 billion by 2050 when it will be home to one in four of the world’s people, the report notes.

“Clearly, such rapidly growing populations in oil and gas revenue dependent states, that are relatively less developed, is a dangerous combination in a future of declining oil and gas demand,” Prince says.

What can petrostates do about falling oil and gas demand?

“Governments should waste no time in reducing their dependence on fossil fuel revenues and take steps to make their economies more resilient and better equipped for a low-carbon future,” urges Prince.

The main way for petrostates to avoid being dragged down by dropping oil and gas demand is to diversify their economies, and invest in new sectors. The report also calls for an end to subsidies for fossil fuel consumption, which will reduce pressure on government finances. And for a broader tax base that will bring in more income to state coffers.

The United Arab Emirates offers a mixed bag of examples. Dubai has achieved successful diversification, according to Carbon Tracker. Oil once accounted for more than 50 per cent of its GDP, but today it is less than 1 per cent because the emirate has built a dynamic economy, also including import and exports logistics, finance, property and tourism.

Abu Dhabi, however - another of the seven emirates that make up the UAE - remains heavily dependent on oil.

Many petrostates are likely to need international financial and technical support to make the necessary reforms, the report says.

“The international community more broadly has a clear stake in supporting petrostates through this process, both for development reasons and to mitigate the very real risk of conflict and instability if these countries are hit hard by the energy transition.”

It looks to Just Energy Transition Partnerships - which have so far focused on coal phaseout - as a possible model for collaboration between countries.