By: Cristiano Rizzi, Managing Director & Partner at Boston Consulting Group (BCG), Bjorn Ewers, Managing Director & Partner at Boston Consulting Group (BCG), and Szabolcs Mihalik, Associate Director at Boston Consulting Group (BCG)
The energy sector is very important to the UAE – do you seeing this continuing?
The energy sector has been pivotal in shaping the UAE’s economy and we completely see that the energy sector will continue to be a key economic pillar for the UAE going forward. Since the discovery of oil and gas, the UAE has been a central player in the global energy market and has continued to mark its place ever since, blessed with its cost-competitive hydrocarbon resource base. Even the most aggressive diversification scenarios expect oil demand at ~66 mb/d by 2040 1, and the UAE is expected to stay among the front runners of the cost curve.
Moreover, the UAE has invested heavily to proactively diversify its energy mix for economic and environmental sustainability purposes. This is also setting the course for keeping the energy sector’s pivotal role in the UAE’s economy in the long-term. Beyond the sector’s economic contribution, energy has and will continue to play a key role in local talent development and driving innovation for the country.
How will the COVID-19 pandemic change the UAE’s energy sector?
The pandemic’s impact has been far and wide, and the energy sector was one of the industries that have been severely affected globally. However, the pandemic has further accelerated certain trends that we also see for the energy sector in the UAE, including:
- Accelerating the UAE’s digital ecosystem supporting the energy sector:
A digital transformation is an inevitable step and will be an important principle to adopt, to drive value creation across the energy value chain (e.g. remote operations, logistics management, digital consumer platforms), together with the radical change of internal service delivery models ranging from the use of robotics and AI at internal support services to redefining supplier models to amplify productivity.
- Increasing localization of supply chains for local UAE energy players:
Localisation, especially in the UAE, had already been a hot topic, even before the pandemic. Now, the supply chain disruptions brought on by the pandemic are providing a new impetus to secure the supply of critical goods. Major energy companies are already playing an important role in the localisation of manufacturing and industries in their respective countries, also based on their broader social mandate that some of them carry. Going forward, based on a recent BCG global survey with energy players, more than 75 per cent of respondents are interested in discussing localisation/regionalisation strategies for critical items while 35 per cent have already initiated steps to further localise their supply chains. This trend we also see further enforced in the UAE, accelerated by the pandemic.
- Strengthening local-content creation across energy segments:
As part of the strategy to navigate potential future crises and related to the previous point of localising supply chains, we can expect to see efforts to strengthen local content creation, and one key focus will be on strengthening stakeholder value propositions. We already see impactful initiatives across the UAE and expect this trend to continue.
How is the UAE looking to increase its renewable energy mix? What type of renewable is the UAE focusing on?
The UAE is one of the front-runners when it comes to renewable ambitions, which we can also see in the UAE Energy Strategy 2050 that was published in 2017. The UAE is focusing a concerted effort towards a more diversified energy mix, with aims to increase the contribution of clean energy in the total energy mix from 25 percent to 50 percent by 2050.
We can expect that the target investment of AED 600 billion by 2050 will see exponential growth in renewable energy such as solar, given that the UAE also has high solar irradiation levels to support this technology. Moreover, as indicated in the UAE’s Energy Strategy 2050, nuclear energy is already emerging as another form of energy to complement the further diversified energy mix.
The UAE’s current renewables generation capacity of ~1.7GW is expected to grow to ~2.5GW by year-end. Renewables also enjoy a cost-competitive position, which is demonstrated by the lowest ever bid globally for the construction of Al Dhafra Solar IPP 2 plant. Cost competitiveness will be a clear enabler for the growth of renewables in the UAE.
What are the main opportunities for companies looking to get into the energy sector in the UAE?
The current market conditions are filled with uncertainties, however, there are a few areas that will continue to remain as growth opportunities for companies wanting to enter the UAE’s energy sector:
- Specialised technology players
The energy sector heavily invests in technologies and digital innovations to uplift the sector’s performance. This is the case for power & water, for oil & gas but also alternative and renewable energy. These include automation, Digital Twin technology, real-time optimization, and robotics/AI solutions, for example. In addition to the large scale digitization, opportunities are also present for new entrants in areas of specialized and niche technologies (e.g., special purpose drones).
- Local suppliers for the Energy Sector
As requirements for local-content are increasing, local suppliers (e.g., oilfield services and equipment providers) will find themselves in a better position to compete versus players serving the local market from abroad. However, global experiences and references will still be important factors in corporate vendor decisions for industry-specific tasks, so companies will need to attract the right local and international talent to win in the UAE energy sector.
How important will new technology be in the advancing the UAE’s energy sector?
New technologies are more important than ever in the post-COVID world. More and more companies, not only in the UAE but worldwide, are positioning themselves for the new digital wave. It is crucial to put a laser-focus on value generation and being able to generate ideas and execute minimal viable products quickly. Companies will need to develop their digitally enabled operating model and scaling capabilities to effectively and efficiently spread the benefits of digital technologies across their operations.
Digital technology can increase efficiency across the value chain. At BCG, we have worked with companies who have, through leveraging digital technologies, achieved double-digit growth in energy production as well as cost reductions by as much as 15 percent covering ongoing operating costs as well as capital efficiency. Additionally, HSSE practices are also improved largely by new digital technologies that reduce risks and increase safety.
What are the big challenges facing the UAE’s energy sector?
The country is on a strong track and becoming more resilient by further improving its cost-competitiveness especially in the oil and gas sector while also diversifying and further developing the performance of other energy segments including renewables or nuclear. Diversification to other energy sectors is a clear priority for the UAE Energy Strategy 2050 and the UAE is on a successful path to deliver on its ambitious targets. Considering the high investments planned, it is fundamental that new technology and facilities will be built in a cost-competitive manner with excellence in project execution which is another lever the energy sector in the UAE is pushing.
What is the UAE doing in terms of transiting to clean power?
The UAE has already taken significant steps towards transitioning to clean power. Currently, the Noor Solar PV (1.2GW) plant in Abu Dhabi is commercially operating, with the world’s largest single-site solar power plant being currently under construction in Abu Dhabi. In Dubai, the Mohammad Bin Rashid Al Maktoum Solar Park’s 4th phase with 950 MW combined concentrated solar power (CSP) and photovoltaic solar panel (PV) capacity is under construction and is expected to be operational by 2022. The UAE is also set to build the GCC’s first hydroelectric power plant in Hatta. Finally, UAE’s Barakah-1 plant has made recent headlines, as the first peaceful use of nuclear power that has been connected to the grid.
All of these examples demonstrate the progress of the UAE’s commitment towards clean energy. With the availability of cleaner and cheaper energy sources, it can also lead to other emerging energy sources, such as hydrogen. The current target for the UAE is to increase usage of power generation from clean energy to 30 percent by 2030, and 25 – 30 per cent of its electricity requirement from both nuclear and solar energy. The country is on a strong path and is expected to remain at the forefront when it comes to transitioning to cleaner energy.
1: IEA World Energy Outlook 2019, Sustainable Development scenario