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The energy transition brings a ‘very real risk’ of conflict in petrostates, a new report warns. What can be done about it?

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The United Arab Emirates is one of dozens of petrostates at risk of losing more than half of its expected income from fossil fuels as the world moves toward clean energy, a new report finds.

Global demand for fossil fuels may increase braid before the end of 2030, the International Energy Agency (IEA) forecast in October. But what does this mean for oil and gas-dependent countries like the UAE hosting COP28?

If this is messed up, it could have a serious impact on government finances and increase social unrest, according to an analysis by financial think tank Carbon Tracker released today.

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

“This is a deep threat to oil and gas exporting countries, as falling demand for oil and gas is likely to lead to significant declines in future revenues.”

As demand declines – due to falling prices due to excess supply – a situation of up to 40 petrostats could be seen. oil and gas Revenues fall from an estimated $17 trillion (€15.6 trillion) to just $9 trillion (€8.3 trillion) in the years to 2040.

For 28 high-cost producers such as the UAE and Saudi Arabia, more than half of their expected revenues could be lost even in a moderate infection scenario. So what can they and the rest of the world do about it?

Demand for oil and gas is declining due to world action on climate crisis

Governments around the world are adopting strict climate policies in response to unprecedented wildfires, heat wavesFloods and drought as climate crisis.

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 declining.

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

And if the current government’s policy pledges are met, the IEA estimates that oil demand – which peaked by 100 million barrels per day in 2019 – will decline to 92.5 mb/day in 2050 and 54.8 mb/day by 2050.

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

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

How connected are the world’s largest petrostates to oil and gas?

Carbon Tracker’s new ‘Petrostates of Decline’ report Analyzes 40 countries with high economic dependence on oil and gas revenues. It calculates how much their governments rely on the revenue and how much it is likely to decline in a ‘moderate transition’ over the period 2023-2040 – consistent with limiting global warming to 1.8°C.

It found that 28 petrostates would lose more than half of their expected revenues in this scenario. especially:

  • The UAE relies on oil and gas for 40 percent of government income, but production revenues may be 60 percent lower than expected. Saudi ArabThe world’s largest oil exporter is also facing a similar situation.
  • Six African States are highly vulnerable, with more than 60 percent of their total budget at risk. These are: Nigeria, home to 215 million people, Angola, Chad, Congo, Equatorial Guinea and Gabon. In all countries except Gabon, oil and gas revenues may be 70 percent less than expected.
  • Venezuela is one of the countries most at risk from the necessary energy transition. Carbon Tracker says government finances are entirely dependent on fossil fuel revenues, and may be 80 percent lower than expected.

Governments generate revenue through state-owned national oil companies (NOCs) and taxes on oil and gas production. When demand falls, overproduction will no longer be economical and lower prices will yield less revenue from remaining productive projects.

This raises serious questions about how countries will continue to meet the development needs and expectations of their populations, especially those populations population increases,

Guy Prince of Carbon Tracker says, “In many petrostates, a political settlement has established where citizens expect a generous welfare state as well as high public sector wages and low or zero-income taxes.”

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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 said.

“Clearly, such rapidly growing populations in states dependent on oil and gas revenues, which are relatively less developed, is a dangerous combination for future declines in oil and gas demand,” says Prince.

What can petrostats do about falling demand for oil and gas?

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

The main way for petrostates to avoid a decline in oil and gas demand is to diversify their economies and invest in new sectors. The report also calls for ending subsidies for fossil fuel consumption, which would reduce pressure on government finances. And for a broader tax base that will bring more income to the state treasury.

United Arab Emirates Offers a mixed bag of examples. According to Carbon Tracker, Dubai has achieved successful diversification. Oil once accounted for more than 50 percent of its GDP, but today it is less than 1 percent as the emirate has built a dynamic economy, including import and export logistics, finance, property and tourism. .

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However, Abu Dhabi – one of the seven emirates that make up the United Arab Emirates – is heavily dependent on oil.

The report said that many petrostates are likely to require international financial and technical assistance to carry out the necessary reforms.

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

It seems like Just Energy Transition Partnerships – which have so far focused on coal phase-out – as a potential model for cooperation between countries.

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