Issue: 4/2023
New Priorities, New Partners?
With its massive impact on global energy supplies, the Russian war against Ukraine has drastically changed the strategic priorities of EU energy policy. In an attempt to replace a large share of European energy imports within a very short space of time – around 30 per cent of oil and 45 per cent of gas imports previously came from Russia – the EU struck out on a new path. The idea was to achieve a quantum leap in its energy policy so as to accelerate the transition to alternative energy sources and make Europe less dependent on fossil fuels. At the same time, new energy partnerships were to bring about a diversification push, thereby freeing the EU from its one-sided dependence on Russia. In connection with this dual strategy to enhance energy security while also promoting the energy transition, Brussels suddenly found a new (old) partner in the oil- and gas-rich states of the Arabian Peninsula.
The energy producers in the Gulf ceased to be important suppliers for Europe some time ago. For a long time now, the oil and gas exporters Bahrain, Qatar, Kuwait, Oman, Saudi Arabia and the United Arab Emirates (UAE) have been exporting the majority of their mineral products not to the West but to Asia – above all to China and India, but also Japan and South Korea, as well as the countries of South-East Asia. Just before the outbreak of the war in Ukraine, for example, EU member states accounted for barely a tenth of Qatar’s and Saudi Arabia’s oil and gas exports, while the EU’s share of UAE exports was less than three per cent.
In view of the worsening energy crisis, however, the EU adopted a whole canon of strategy documents in May 2022, identifying the Gulf states as an important pillar of Brussels’ energy policy once again. The short-term aim was for Qatar and other Gulf states in particular to step in to satisfy the EU’s unmet energy needs by supplying liquefied natural gas (LNG). In addition, the EU focused on the Gulf’s energy transition plans, particularly hydrogen production, with the Gulf states seen as key future exporters of renewable energy sources to support the European energy transition.
One and a half years later, however, there is a significant gap between the aspirations and the reality of a possible EU energy partnership with the Gulf. With their excellent natural conditions – for the production of both fossil fuels and renewable energy – and their longstanding experience as energy exporters, the Gulf states could become important partners within the EU’s import diversification programme. Overlapping energy interests on both sides also offer a welcome opportunity to deepen relations in the current context. Nevertheless, this potential can only be realised if a better mutual understanding of each other’s strategic priorities is achieved, and if the approaches to cooperation – particularly on the part of the EU – are not ground down by contradictions between aspiration and reality.
New Strategic Direction
In view of the turmoil on the international energy markets, the EU established an ambitious strategic framework in its REPowerEU plan in May 2022, drawn up swiftly after the outbreak of the war in Ukraine with the aim of becoming independent of Russian energy imports by 2027. In order to achieve this, the EU plans to reduce its energy consumption through savings and efficiency improvements, accelerate the transition to a climate-neutral energy supply from domestic sources, and diversify its energy imports through new energy partnerships so as to minimise dependencies. The aspect of international energy partnerships plays a key role, both in the strategy document and in the EU’s public communication.
Neither the EU nor the Gulf Cooperation Council are blocs with homogeneous interests.
So it is certainly no coincidence that on the same day as it announced the REPowerEU plan, the EU also published two other strategy documents relating to external partnerships, particularly in the area of energy policy: the updated version of the EU External Energy Engagement Strategy (EEES), and the joint communication on “A Strategic Partnership with the Gulf”.
The EEES aims to promote new energy partnerships that cover both the short- to medium-term demand for natural gas and the medium- to long-term demand for renewable energy sources for the energy transition, while at the same time reducing dependence on individual energy suppliers. In the short term, the purchase of gas is to be facilitated in particular through rapid operationalisation of the EU Energy Platform, whose function is to pool demand and negotiate with international partners so as to facilitate the joint purchase of gas and hydrogen. In terms of the medium-term energy transition, the EEES particularly emphasises the need to expand international hydrogen trade in order to cover half of the planned annual demand of 20 million tonnes of hydrogen by 2030 through imports.
The communication on a strategic partnership with the Gulf region also clearly reflects the EU’s desire to expand cooperation with the countries of the Gulf Cooperation Council (GCC) in the face of increased challenges with the aim of securing energy policy interests. To date, relations between Europe and the Gulf region have primarily taken the form of bilateral partnerships at member state level – clearly demonstrating that neither the EU nor the GCC are blocs with homogeneous interests. The new strategy now seeks to foster the interregional dimension of the partnership and provide a roadmap for deeper relations in key areas. Alongside other issues, “green transition and sustainable energy security” is a key area of cooperation mentioned in the strategy paper. It emphasises that the Gulf states are reliable suppliers of LNG but also potential new partners for the import of green hydrogen.
With the triad of REPowerEU, the EEES and strategic partnership with the Gulf, the EU has set itself an ambitious package of energy policy goals in order to expand cooperation with the Gulf states as a result of the upheavals in European energy policy. In doing so, the EU has certainly demonstrated that – contrary to widespread reservations – it is indeed capable of responding to new geopolitical realities by making far-reaching political adjustments within a very short space of time. The success of the new EU external energy strategy will not be measured on paper, however, but in terms of results, and with regard to the Gulf states, there is a clear need for improvement.
The Potential and Reality of EU-GCC Energy Cooperation
The EU considers LNG and green hydrogen in particular to be key areas for deeper and more strategic energy cooperation with the GCC states. While the idea is for natural gas to act as a transitional energy source, the EU sees hydrogen as the core element of long-term energy cooperation with GCC members to support the European transition to renewable energies. Yet the timeline alone reveals initial differences between Europe and the Gulf: out of economic self-interest, the latter is seeking to conclude supply contracts for gas and other fossil fuels with as long a duration as possible. In addition, the EU is falling considerably short of its claim to act as a central hub for future energy partnerships. On the contrary: in contrast to the noble intentions of the aforementioned EU strategy documents, it was once again the European nation states that single-handedly established bilateral energy partnerships with Gulf states during the 2022/2023 energy crisis – with the EU merely taking on a subordinate role.
The Race for Gas: Structural Upheavals and Uncoordinated National Initiatives
As a direct consequence of the war in Ukraine, the EU’s import structure has changed considerably. Russia traditionally supplied a large proportion of European gas imports (45 per cent or 115 billion cubic metres in 2021), but the sale of Russian pipeline gas to Europe in winter 2022/2023 – the first heating period after the outbreak of war – fell by around 80 per cent compared to the preceding year. All in all, Russian gas now only covers 10 per cent of total EU demand – a considerable reduction.
The loss of Russian gas imports was partially offset by purchases of LNG, which increased by 60 per cent compared to 2022, to reach 130 billion cubic metres. This made the EU the largest LNG importer in the world in 2022. The lion’s share of this is covered by LNG imports from the United States, which currently meet around 15 per cent of total European gas demand. The remaining supply gap in LNG imports is being filled at present by the major GCC gas exporters, primarily Qatar, but also Oman and the UAE. Qatar alone increased its gas deliveries to the EU by around 15 per cent in the last heating period, mainly supplying Belgium, France, Italy and Poland.
Only 11 out of 122 energy agreements signed by EU states were concluded at EU level.
Nevertheless, availability on the international LNG market remains tight. Since a large share of the Gulf states’ LNG capacity is tied up in long-term contracts – primarily with East Asian importers – they were unable to expand their supply to Europe in sufficient volumes to meet the increased demand for gas in the EU. Qatar has only supplied a total of five billion cubic metres of additional LNG to Europe since the outbreak of the war, for example. In view of this increased demand, Doha announced that it would increase its production by 44 billion cubic metres per year by 2027 to create additional export capacity, some of which could be allocated to the European market. Abu Dhabi had already previously planned to increase its gas production capacity to 13 billion cubic metres per year by 2030. Nevertheless, the international supply of LNG is set to remain scarce according to forecasts.
In order to secure a share of this additional future export capacity, the EU should – according to its strategy papers – act as a unified negotiating bloc and jointly establish new energy partnerships. The reality is in stark contrast to this, however: only 11 out of 122 energy agreements signed by EU states between January 2022 and August 2023 with a total of 32 countries worldwide – including 13 natural gas contracts with Bahrain, Qatar, Oman and the UAE – were concluded at EU level; the rest are purely bilateral agreements. These include Germany’s notable LNG agreements: a 15-year contract with the Qatari state energy company Qatar Energy for 2.8 billion cubic metres of LNG per year, which is expected to cover 3.7 per cent of Germany’s anticipated total gas demand from 2025, and a smaller German supply contract with the Emirati state-owned company Abu Dhabi National Oil Company (ADNOC), which already started in 2023.
This shows that, despite declarations of intent to the contrary, most European states reverted to solo efforts to secure their natural gas supplies after the outbreak of war. The declared aim of coordinating efforts in the face of a global undersupply in order to strengthen the states’ own negotiating position contrasts starkly with the actual situation in which EU states have competed with each other to conclude bilateral deals with the Gulf states and others. This gap between rhetoric and reality has not gone unnoticed in the EU’s partner countries – and does not exactly boost the image of the EU as a coherent and assertive player. The fact that pooling EU demand hardly works in practice is mainly due to a lack of political will on the part of the member states. For large EU members with good market access, there is little incentive to strengthen the EU’s joint external representation if this means giving up national sovereignty and accepting a longer and more complex procurement process – especially as this seems difficult to justify to domestic voters in times of high energy prices.
The EU energy platform created in connection with the REPowerEU plan could help in this regard by pooling demand, coordinating the use of infrastructure and enabling joint negotiations with international partners so as to facilitate the joint purchase of gas. The coordination mechanism is a voluntary instrument, however – which has inhibited its use to date. At the moment, EU member states only have to tender 15 per cent of their gas storage capacity via the energy platform, though certain European states have gone beyond this – such as Bulgaria, which handles 100 per cent of its gas requirements via the platform. After a long start-up period, the EU energy platform finally started launching tenders for joint gas purchases from May 2023 onwards, brokering deals for some two billion cubic metres of LNG in a first round. For the mechanism to develop real market power, however, it would have to be used to handle a significantly larger proportion of EU gas purchases.
Prospects for Gas Imports: Diverging Time Horizons
In addition to weaknesses in terms of European coordination vis-à-vis international energy partners, there are also structural obstacles to an LNG partnership between the Gulf region and Europe due to the conflicting planning horizons of the EU and the Gulf states.
European decision-makers regard natural gas as merely a bridge solution, so from the EU perspective, LNG imports from the Gulf are no more than a temporary prop that is to be gradually replaced. The EU is looking to achieve its “net zero target” by the middle of the century, having set itself an accelerated emissions reduction target of 55 per cent by 2030. Forecasts therefore assume that in a scenario in which the EU meets its CO2 neutrality targets, gas demand would already be 50 per cent below the 2019 level by 2030. Even if the EU fails to fully meet its targets, an accelerated push towards decarbonisation could still reduce gas demand by 30 per cent below the 2019 level. Therefore, Europe sees a truly strategic energy partnership between the EU and the GCC more in the field of renewable energies.
The Gulf states see the situation the other way round: for the decision-makers in the Gulf, a reliable, long-term partnership, including one in the area of gas exports, is to provide a foundation on which future energy cooperation with Europe can be built – both in economic terms and from the point of view of trust. Despite the ongoing energy transition and the medium-term decline in demand for gas, the Gulf does not believe that gas will be phased out quickly. In addition, GCC members are very much counting on technical solutions such as CO2 capture and storage leading to the climate-neutral production of oil and gas in the future.
Beyond LNG, the EU is looking to make hydrogen the focus of its future energy cooperation with the Gulf states.
This view is not entirely unfounded: as the loss of imports from Russia partially offsets the overall decline in demand in Europe, the foundations for the expansion of LNG partnerships between the EU and the GCC will remain fundamentally attractive in the coming years. In particular in a scenario in which the EU accelerates its decarbonisation but, by 2030, is not yet on course to its net zero target, an additional 40 billion cubic metres of LNG imports would still be required to replace lost Russian gas supplies as compared to 2019.
This is certainly one of the factors gas producers in the Gulf have in mind when they see LNG not just as an interim solution but as a component of a longer-term energy partnership between the EU and the Gulf region; this is why they are looking to conclude supply contracts with the EU with as long a duration as possible. The EU would do well to show more flexibility here if it wishes to build energy partnerships with the Gulf – not only in the area of LNG but also hydrogen.
Green Hydrogen: A Future Pillar of EU-GCC Energy Cooperation?
In addition to LNG, the EU is looking to make hydrogen the focus of its future energy cooperation with the Gulf states. Having identified green hydrogen – i. e. hydrogen produced by electrolysing water using electricity from renewable sources – as a key component of its energy transition, the EU increased its forecast for future hydrogen demand in the REPowerEU plan almost fourfold, to 20 million tonnes per year by 2030. Due to the natural conditions that prevail in European countries, however, they will not be able to produce sufficient quantities of green hydrogen to meet their own needs. For this reason, the EU intends to import ten million tonnes of green hydrogen per year by 2030, covering half of its planned hydrogen demand – currently the largest import requirement for green hydrogen to have been announced worldwide.
In order to meet the timetable for its energy transition, the EU must focus on countries that are able to supply relevant quantities of green hydrogen at competitive prices relatively quickly. In addition to three hydrogen corridors – in the North Sea region (Norway and the United Kingdom), with Ukraine and in the southern Mediterranean – partnerships are also to be concluded with other countries. Within the Gulf region, analyses point to Saudi Arabia, the UAE and Oman as particularly promising candidates for hydrogen exports in the coming years, and the EEES also identifies the Gulf as a promising region in this respect.
The appeal of the Gulf states as hydrogen partners for the EU results from a combination of factors, including excellent natural conditions for the production of renewable energies, especially solar energy, a well-trained labour force in the energy sector, significant financial capacity and, last but not least, ambitious projects already under way to develop hydrogen production. The Gulf is able to draw on existing expertise and infrastructure, particularly with regard to the production of ammonia – a hydrogen derivative – and blue hydrogen, both of which are produced from natural gas using technologies to capture the resulting emissions. The GCC states also already have export infrastructure in place, such as LNG terminals. These factors mean that it is possible to scale up the hydrogen economy in the Gulf with comparatively short lead times and low investments. Another positive aspect for export prospects according to forecasts is that the production potential for low-carbon hydrogen is likely to far exceed domestic demand in the Gulf states, meaning that there is less likely to be competition between hydrogen for domestic supply and for export than in other producing countries.
There are hurdles to hydrogen trade between Europe and the Gulf region, too. One of these challenges concerns the significant loss of energy when transporting hydrogen derivatives by ship: since there are currently no existing pipeline connections from the Gulf to Europe, this is a potential competitive disadvantage compared to imports from geographically closer regions, such as North Africa, which have existing pipelines that can be converted.
Compared to other promising hydrogen producers that have expressed export intentions, such as Australia and Chile, however, the geographical proximity to the European market would be a competitive advantage for the GCC countries in view of the high cost and technical complexity of hydrogen transport. The G20’s announcement in September 2023 that it is looking to create an economic corridor linking India, the Middle East and Europe – which includes plans to build a green hydrogen pipeline – further improves the long-term prospects for exporting green hydrogen from the Gulf to Europe.
Saudi Arabia plans to become the world’s largest hydrogen producer.
The Gulf states are also an attractive partner due to the advanced state of planning and concrete projects already in existence for hydrogen production: Saudi Arabia and the UAE are pioneers here, having already announced and launched major projects for the production of green and blue hydrogen and hydrogen derivatives. In connection with the Saudi megaproject NEOM, for example, a production plant for green ammonia is being built that is set to produce 1.2 million tonnes per year of the hydrogen derivative for export by 2026. Saudi Arabia plans to become the world’s largest hydrogen producer, while the UAE aims to achieve a 25 per cent share of the global low-carbon hydrogen market by 2030. The comparatively small Sultanate of Oman is also pressing ahead with the development of the relevant production capacity so as to achieve its ambitious hydrogen targets. With only small hydrocarbon reserves compared to its neighbours, the country is focusing specifically on the production of green hydrogen.
In this area too, however, there are gaps between potential and actual implementation of EU plans to establish energy partnerships with the Gulf. Despite the complementarities and the communicated interest in energy partnerships with the Gulf, not a single EU hydrogen partnership has been concluded with a GCC state to date. Instead, EU agreements have already been signed with Egypt, Kazakhstan and Namibia – even though some of these countries have less advanced hydrogen production projects and imports are subject to less favourable framework conditions, such as geographical distance.
This gives rise to the impression that some political forces in Europe have a fundamental fear of coming into contact with the Gulf states, while several of Europe’s value-based partners, such as Japan and South Korea, are expanding their own energy cooperation with the Gulf states at high speed. The EU should recognise that an energy partnership with the Gulf is not a stopgap solution and should not construct a false dichotomy between values and interests that would ultimately leave the potential for hydrogen partnerships with the Gulf unrealised.
Definitions as the Crux of Energy Cooperation
In addition, the definition of renewable hydrogen as adopted for the EU’s planned hydrogen demand is a potential sticking point in energy relations with the GCC countries. While the EU currently uses a strict definition that only allows green hydrogen, i. e. hydrogen produced from renewable sources, most of the GCC countries’ hydrogen plans refer to low-carbon hydrogen – in other words: both green and blue hydrogen. For example, the Abu Dhabi National Oil Company (ADNOC) has announced its intention to produce one million tonnes of blue hydrogen per year by 2030, while Qatar, in line with its clear orientation towards natural gas, has so far focused entirely on blue hydrogen, also by exporting its LNG reserves for the production of blue hydrogen in other countries. This is because the development of the hydrogen economy is clearly part of overarching economic visions in the GCC states: renewable energies and energy sources are seen as a means of diversifying energy sectors and economies that have so far been dominated by fossil fuels, and as an additional source of income – not as a substitute for the use of fossil energy resources.
With its stated import requirements for green hydrogen, the EU currently occupies the leading position worldwide and is therefore an influential sales market. Nevertheless, it is important not to overestimate the regulatory power of the EU to determine definitions and the corresponding orientation of production in partner countries.
This applies in particular to GCC members with their own considerable financial capacity, their strong economic interest in the production of blue hydrogen based on fossil reserves, and not least their growing political self-confidence: the Gulf states are no longer willing to merely take orders from the West, but instead see themselves as independent proactive players. Existing economic relations with Asian energy importers and the expected increase in demand in Asia for green and blue hydrogen offer the GCC states numerous alternative export opportunities. This does not rule out the possibility of an economic interest in aligning with the EU definition of green hydrogen in order to obtain a relevant share of the fastest maturing sales market for green hydrogen. In the case of Oman, for example, which is focusing its ambitions on green hydrogen, this approach seems likely.
European energy policy in the Gulf is far too often determined by solo efforts at national level.
In order to realise these “first mover” opportunities for the European green hydrogen sales market, however, the Gulf states – as potential exporters of green hydrogen – must receive clear signals from the European side that it is worthwhile to make investments in the development of production facilities along with the relevant value chains and transport routes. At present, the willingness of the GCC states to mobilise further investment in the development of green hydrogen production appears limited due to the lack of concrete offtake agreements on the European side. In this scenario, the GCC states are more likely to focus increasingly on expanding production capacity for blue hydrogen and supplying this to Asia. This cannot be in the interests of the EU, whether in terms of security of supply or when it comes to the rapid development of the European hydrogen economy.
The EU should enter into hydrogen partnerships with potential exporters in the Gulf region as soon as possible.
Quite the opposite: in view of the long-time ho-rizons for the development and export of relevant quantities of green hydrogen, there are increasing calls for a more pragmatic view of blue hydrogen as a transitional energy carrier. Signals to this effect are also to be seen at EU level, above all in the discussions surrounding the hydrogen and decarbonised gas market package: this would regulate the use of low-carbon hydrogen, thereby marking a move towards its more widespread possible use. This would be a promising starting point for potential hydrogen partnerships with the Gulf states.
From Potential to Concrete Cooperation
Despite the potential synergies identified, there are still clear gaps between the EU’s ambitions to set up energy partnerships with the Gulf and the reality of the past year and a half. There is room for improvement in terms of the EU’s capacity to act in a concerted manner, and European energy policy in the Gulf is still far too often determined by solo efforts at national level. Contradictory perspectives on the part of the EU and the GCC regarding the time horizon of gas supplies and the definitions of renewable hydrogen also stand in the way of realising the potential for closer energy cooperation. Moreover, the EU is no longer the only possible economic partner for the Gulf: if the contradictions between the respective priorities are not resolved, the Gulf states will look to other partners to expand their energy cooperation. Europe certainly has alternative energy partners, too – in North Africa, for example. Yet if the EU wants to draw the right conclusions from the energy crisis of 2022/2023, it must diversify energy import structures as broadly as possible in the future. For this reason, the Gulf states should become an important pillar alongside other energy partners.
The following steps will be crucial in order to overcome the obstacles and realise the potential for a closer partnership between the EU and the Gulf states:
Conclude Hydrogen Partnerships with Specific Framework Conditions
The EU should enter into hydrogen partnerships with potential exporters in the Gulf region as soon as possible. Saudi Arabia, the UAE and Oman are particularly promising candidates here. When establishing hydrogen partnerships, concrete framework conditions for cooperation should be set and, as far as possible, purchase quantities defined so as to create the necessary incentives for Gulf states to invest in the expansion of green hydrogen production and increase planning security for European customer companies. Moves to adopt a more pragmatic view of blue hydrogen as a transitional energy carrier are also a step in the right direction and should be accelerated in order to enable rapid upscaling, thereby paving the way for the use of green hydrogen in the long term.
Increase the Coherence of EU Energy Partnerships
In order to be able to act as a united and more powerful negotiating actor with the outside world, measures to increase coherence in relations with energy partners must be resolutely pursued, particularly the EU Energy Platform. The further development of this platform depends on the political will and the openness of the member states to pooling a larger share of EU gas demand in order to guarantee the effectiveness of the mechanism. The same applies to the newly created European Hydrogen Bank, which aims to support the development of a European hydrogen market through joint auctions.
Strengthen the Coordination Bodies between the EU and the GCC
It is also important to improve coordination between the EU and the GCC with regard to energy. Proposed dialogue formats such as the EU-GCC ministerial meeting on green transition, a private sector business forum on the energy transition, and the EU-GCC energy and climate expert group need to be operationalised and used to improve ongoing coordination so as to support energy partnerships at the political, economic and technical levels.
– translated from German –
Philipp Dienstbier is Head of the Konrad-Adenauer-Stiftung’s Regional Programme Gulf States, based in Jordan.
Veronika Ertl is Head of the Konrad-Adenauer-Stiftung’s Regional Programme Energy Security and Climate Change Middle East and North Africa, based in Morocco.
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