Energy Transition in the Gulf: Best Practices and Limitations

The global momentum to transition away from fossil fuels presents both unique challenges and opportunities for Gulf states. Oil and gas wealth has propelled Gulf economies to become some of the wealthiest worldwide, while also enabling these highly climate-vulnerable countries to withstand severe climate impacts such as rising temperature, water scarcity and food insecurity. The transition away from fossil fuels therefore poses an existential threat for Gulf nations—potentially eroding their primary sources of income and diminishing their capacity to cope with escalating climate challenges. At the same time, however, the transition offers vast economic opportunities that align with their diversification ambitions, as well as supports global efforts to mitigate the severe climate change effects that could imperil their future economies. With this in mind, it is useful to examine Gulf countries’ various approaches to the energy transition, while highlighting key climate initiatives and limitations that may aid or hinder progress across the region.

Seeing the Energy Transition Through a Dual Lens

The final agreement of the 2023 United Nations Climate Change Conference (COP28)—which emphasized a “transition away from fossil fuels”—underscores that long-term dependence on oil and gas is unsustainable and raises concerns about the future of Gulf economies. Yet Gulf nations have long been aware of the need to diversify their economies to reduce their heavy reliance on fossil fuels. This recognition stems from historical exposure to oil price fluctuations caused by various factors, including geopolitical conflicts, market demand shifts, and shocks such as the COVID-19 pandemic.

In this context, Gulf governments are viewing the energy transition through a dual lens of challenges and opportunities. On the one hand, the transition is proving difficult because decoupling economic growth from hydrocarbon revenues threatens the countries’ core economic structure. On the other hand, the need for diversification—further reinforced by energy security concerns—is driving Gulf nations to develop strategies that enhance economic resilience and reduce hydrocarbon dependency. Decarbonization, therefore, becomes a complementary goal, as Gulf countries seek new strategies to secure a competitive edge in an evolving energy landscape. For example, both the United Arab Emirates (UAE) and Saudi Arabia have announced net-zero emissions targets and national climate strategies to support these targets, such as the UAE’s Net Zero 2050 Strategy and Saudi Arabia’s Circular Carbon Economy. Notably, however, they have also announced plans to continue production and export of oil, albeit with variant timelines.

Gulf nations face the complex task of balancing the costs of an energy transition with the need to maintain governmental revenues, economic growth, and resilience capacity against climate impacts. This task is then compounded by challenges in ensuring that the policies, regulatory frameworks, and human capacity needed to operationalize the energy transition are in place, as well as by technical hurdles associated with adopting clean energy technologies.

Balancing Transition Costs with Economic Growth Concerns 

Natural limitations, related to Gulf states’ arid and semi-arid climates, are major challenges to the region’s transition away from fossil fuels. The Gulf is one of the world’s most water-stressed regions, and oil and gas export revenues have enabled its countries to both import and operate the desalination technology needed to produce potable water. The region accounts for nearly 40 percent of the world’s desalination capacity. Additionally, the Gulf has high food insecurity, and fossil fuel revenues have enabled countries to import nearly 50–90 percent of their food: Qatar, Bahrain, and the UAE import 80–90 percent of their food; Oman approximately 50 percent; and Kuwait and Saudi Arabia sometimes up to 70 percent. Meanwhile, oil and gas revenues have helped Gulf nations to meet increasing cooling technology demands, especially during summer heatwaves. Numerous countries have experienced heat records in recent years: Kuwait (63 degrees Celsius in 2019), Saudi Arabia (55 degrees Celsius in 2019), and the UAE (50 degrees Celsius in 2023). Studies show that air conditioning makes up 70 percent of the Gulf’s peak electricity consumption, and the number of cooling units is expected to increase even further over time due to population growth and rising temperatures.

Given this reality, it is clear that rolling out clean energy policies and regulations presents major socioeconomic challenges to Gulf states. But equally apparent is the shrinking shelf life of the Gulf’s hydrocarbon dependence. As countries around the world implement their current and updated Paris Agreement action plans, fossil fuel–producing countries will be greatly affected. Measures including the scaling up of clean technologies, carbon taxes, carbon border tax adjustments, carbon standards and labelling, and cap-and-trade schemes and related offsets will all have an impact on trade and economies. As commodity-dependent economies, Gulf countries will potentially face the prospect of significant revenue losses as countries reduce their reliance on fossil fuels and impose restrictions. And these revenue losses will not only affect those working in the oil and gas industry, but also many people working in the public sector. One way Gulf governments distribute hydrocarbon revenues to their people is through large and well-paid public sectors, wherein more than half of employed citizens work in the public sector.

Socioeconomic consequences may also arise from the implementation of climate-related policies. One way to reduce dependence on fossil fuels and financially support an energy transition is to reduce or remove subsidies. Although not primarily driven by environmental concerns, Gulf governments have introduced various reforms to long-standing fossil fuel subsidies, particularly following the decline in crude oil prices in 2014. In 2015, the UAE cut back on its subsidies for fossil fuels, eventually eliminating them entirely by 2018. At that point, a 5 percent VAT was introduced on petrol and diesel. This did not apply to crude oil and natural gas. Similarly, Oman has reduced subsidies on petrol and diesel while implementing price caps to protect low-income groups. In Saudi Arabia, as part of its economic diversification strategy called Vision 2030, the government increased domestic gasoline prices in January 2018, linking domestic gasoline prices with international prices while also introducing the Citizens’ Account to protect lower-income households from such reforms. Mild protests by low-income groups took place in light of these subsidy reforms asking to cap fuel prices. Similar socioeconomic consequences may arise should Gulf governments fail to balance fiscal spending and maintain the fiscal stability necessary for ensuring affordable access to goods and services. 

Introducing higher prices or taxes on fossil fuels may result in unintended consequences as well. Carbon pricing, for instance, assigns a cost to the carbon content of fossil fuels and serves as a tool to reduce emissions. By placing a financial burden on carbon-intensive industries, carbon pricing incentivizes them to either absorb the cost of emissions or transition toward more sustainable options. None of the six Gulf states have implemented carbon prices so far. A major concern for Gulf countries about setting a price on carbon is that it would discourage foreign direct investment and suppress expansion in the oil sector.

Gulf Energy Transition Strategies

Most Gulf countries have adopted a dual energy transition approach that maximizes the value of hydrocarbons while expanding investments in clean energy resources. Such an approach allows them to maintain their competitive edge, long established through decades of expertise in the hydrocarbon sector, while simultaneously building clean energy leadership amid ongoing uncertainties associated with clean energy. But the countries are using different strategies to implement this approach. While the UAE aspires to exploit reservoirs for hydrocarbons as quickly as possible, Saudi Arabia seeks to extend the production and export of hydrocarbons as long as possible. Qatar, the only Gulf country not to commit to net-zero emissions goals, views liquefied natural gas, its major export, as a bridging fuel in the transition away phase. And while Oman—left with not sizeable oil and gas resources compared to its neighbors—is taking a leap of faith in clean energy, Kuwait continues to reaffirm its reluctance to transition away from fossil fuels and Bahrain remains on the fence.

Maximizing the Added Value of Hydrocarbons

For decades, the Gulf’s competitive advantage has revolved around hydrocarbon production and exports. The region has been central to maintaining the stability of global economies, given that it is home to about 30 percent of global oil reserves and 21 percent of natural gas reserves and it controls around 23 percent of global oil production and 28 percent of oil exports.

In having low-cost, low-carbon content fuels, Gulf nations aim to maintain their market share in climate-constrained energy markets. While they reached a deal at COP28 to transition away from fossil fuels, replacing these fuels will be a daunting task, especially since alternative energy sources such as renewables have yet to reach the needed level of maturity and reliability. In fact, energy outlooks designed to unlock climate-compatible futures show that fossil fuels will need to continue to meet future energy needs but in limited sectors compared to today’s share. For instance, even though, as the International Energy Agency suggests, oil and gas supply will decline by more than 80 percent by 2050 if the global community meets net-zero emissions targets, this means that a proportion of the world’s energy will still come from hydrocarbons even after 2050. Thus, with their long-standing comparative advantage, Gulf nations are likely to maintain a share in the future hydrocarbon market beyond 2050. Under the assumption that fossil fuels will continue to play a role in decarbonized, net-zero emission transition pathways, Gulf nations are pursuing pathways that will maximize the value of hydrocarbon resources with the lowest emissions possible.

Meanwhile, given the ongoing decarbonization trends and increasing global demand for refined and petrochemical products, Gulf countries are expanding in downstream industries both locally and globally. Gulf total refining capacity dramatically increased from more than 5.7 million barrels per day in 2019 to 6.5 million barrels per day at the beginning of 2023. Four new refining projects were completed in 2024, including three in the Gulf: Al-Zour in Kuwait, Duqm in Oman, and Jizan in Saudi Arabia. According to the International Energy Agency, petrochemicals are expected to account for over a third of the growth in oil demand to 2030 and nearly half to 2050. 

With shrinking fossil fuel markets, Gulf countries are securing long-term markets for their hydrocarbon exports. Gulf countries have bought stakes in multiple refineries overseas. Saudi Aramco has bought stakes in refineries in China, South Korea, the United States, and Malaysia, and may join a new mega refinery in India. Similarly, the Kuwait Petroleum Company has purchased a 35 percent ownership and operational stake in a refinery in Vietnam, the UAE’s Abu Dhabi National Oil Company (ADNOC) has acquired a 30 percent equity stake in Azerbaijan’s Absheron Gas Field, and Mubadala Petroleum is the second-largest producer of crude oil in Thailand.

Most overseas investments are concentrated in Asia, which is expected to be the center of energy demand in the future, but Gulf nations are also investing in both renewable and nonrenewable sectors in less stable, hydrocarbon-rich areas like Iraq and Lebanon, as well as emerging energy economies such as Azerbaijan. Of course, these investments do not come with economic guarantees; they are largely being driven by domestic energy security issues related to growing energy demands, population growth, industrial expansion, and mounting ambitions to diversify economies.

Investing in Clean Energy Sources

Gulf countries are simultaneously investing in clean energy sources and balancing hydrocarbon expansion ambitions with essential steps toward a diversified economy and energy mix. Gulf governments recognize that making advancements in clean energy, such as through investments in green and blue hydrogen, is essential to remaining competitive in rapidly changing energy markets. 

Almost all Gulf governments have committed to achieving net-zero emissions by or around 2050. National oil companies are also stepping up to contribute to the journey of green transformation: the UAE’s ADNOC moved its net-zero target from 2050 to 2045, Saudi Aramco set an ambitious target to reach net-zero by 2050 (ahead of the state target), and Petroleum Development Oman plans to become a net-zero company by 2050.

But to fulfil their commitments, Gulf countries are adopting different national energy transition strategies aimed at scaling up investments in alternative clean energy resources. These strategies include Oman’s National Strategy for an Orderly Transition to Net Zero, Qatar’s National Environment and Climate Change Strategy, Saudi Arabia’s cross-sectoral Circular Carbon Economy approach, and the UAE’s Green Growth Strategy.

Renewable energy, energy efficiency, hydrogen, and carbon capture and storage (CCS) are central to these energy transition strategies. Renewable energy resources, especially solar and wind, are available in abundance across the Gulf states. Having set targets for renewable energy expansion and rolled out policies and regulations to support their expansion, Gulf renewable energy installed capacity has increased from less than 500 megawatts in 2017 to nearly 4,000 megawatts in 2022.

Nuclear energy is also a part of the mix. Last year, the UAE completed the fourth stage of its nuclear power plant, with the aim to meet 25 percent of its electricity needs from nuclear energy. Saudi Arabia is also exploring civil nuclear activity to meet increasing domestic energy needs and meet its net-zero emission commitment. 

Additionally, Gulf Arab states are investing huge resources to tap into hydrogen potential. In 2023, Saudi Arabia invested $8.4 billion in a green hydrogen plant to be built in its developing region called NEOM (which means “new future”). The UAE, meanwhile, showcased its first operational plant at Expo 2020 Dubai. Oman established a national hydrogen company, Hydrom, in 2022, and designated locations for hydrogen production that are ready for foreign direct investments. The Gulf region is home to fourteen hydrogen projects that are scheduled to go online by the end of this decade.

Given the region’s ambitions to both expand hydrocarbon sectors and simultaneously cut greenhouse gas emissions, investing in CCS facilities is a top priority for Gulf countries. There are currently three major CCS facilities in the Gulf, accounting for 10 percent of global capture capacity: two in Saudi Arabia (Aramco’s Uthmaniyah Carbon Dioxide Enhanced Oil Recovery Demonstration Project and the Saudi Basic Industries Corporation’s Jubail carbon dioxide to chemicals plant) and a third in the UAE (the al-Reyadah project). At COP27 in 2022, Saudi Aramco is set to build one of the world’s largest CCS hubs in Jubail Industrial City, with operations beginning in 2027. In its first phase, the facility will capture and store 9 million mtpa of CO₂, contributing to Saudi Arabia’s goal of managing 44 million mtpa by 2035.

Supporting Homegrown Climate Innovations

Gulf countries also realize that without endorsing homegrown innovations and innovators (in other words, a knowledge-based economy), their oil-dependent economies will not be resilient or sustainable in the long run. To this end, Gulf states have made the transformation to a knowledge-based economy a main component of their economic diversification visions. Almost all Gulf governments have established non-hydrocarbon economic sectors in areas such as energy, water, agriculture, digital economy, health, and education. For example, in aiming to promote a culture of innovation, the UAE established a National Innovation Strategy in 2014; Oman renamed the Ministry of Higher Education to the Ministry of Higher Education, Scientific Research and Innovation in 2020; and Saudi Arabia established the Research, Development and Innovation Authority in 2021.

Water desalination, agriculture, food security, clean energy, and electric vehicles are some of the top areas that Gulf countries have prioritized for mitigating and adapting to climate change and building economic competitiveness beyond oil. In Oman, scientists are making biodiesel from dates that are abundant in the country. In a step to enhance homegrown food security, a UAE-based company has been growing mushrooms in chambers with high air pressure.

Local manufacturing of clean energy technology is also gaining momentum. For instance, Saudi Arabia is home to solar panel manufacturers such as Masdar Solar by Bin Omairah Renewable, with an annual production capacity of 1200 megawatts, and Desert Technologies, with an annual production capacity of 5000 megawatts. In October 2024, Oman signed an agreement with China-based Drinda to build a major solar photovoltaic panel manufacturing project in the Sohar Freezone.

Additionally, Gulf countries are accelerating their local electric vehicle (EV) manufacturing. In March 2024, Oman unveiled its first electric SUV prototype, Mays Alive, with plans for a road debut later this year. Saudi Arabia also launched its first local EV manufacturer, Ceer, in partnership with Taiwan’s Foxconn, targeting the production of various EV models by 2025 with an annual output of 150,000 vehicles. In 2023, Saudi Arabia’s Public Investment Fund, in collaboration with Lucid Motors, established an international manufacturing facility in Jeddah. In 2022, Dubai’s M Glory Holding Group launched its first EV manufacturing plant, aiming for 55,000 cars per year, while the UAE introduced its local Rabdan One SUV at ADIPEC 2023.

Energy Transition Strategies Beyond the Energy Sector

Carbon Markets and Nature-Based Solutions

To meet their net-zero emissions commitments, Gulf countries are also considering nonengineered low-carbon solutions such as carbon trading (or carbon markets). Carbon trading has been gaining momentum in recent years, with voluntary carbon exchange platforms being created across the region. 

Qatar has been hosting the Global Carbon Council since 2016. In 2021, the Abu Dhabi Global Market, an international financial center, teamed up with the Singapore-based company AirCarbon Exchange to create a carbon trading exchange and clearing house, while the Kuwait Finance House teamed up with Kuwait’s Sidra Initiative and Green Dream Team to create a carbon offset platform. In 2022, Saudi Arabia’s Public Investment Fund and the Saudi Tadawul Group Holding Company created the Regional Voluntary Carbon Market initiative. And, in 2023, Bahrain’s sovereign wealth fund Mumtalakat established a voluntary carbon offsetting platform called Safa. The next year, Oman established a national Green Alliance and a general policy framework for carbon markets to promote afforestation and unlock economic opportunities for carbon credits. 

Gulf countries are expanding nature-based solutions as well. In late October 2021, Saudi Arabia launched two initiatives: the Saudi Arabia Green Initiative Forum and the Middle East Green Initiative Summit. The former aims to rehabilitate over 74 million hectares of land and restore Saudi Arabia’s natural greenery by planting 10 billion trees across the kingdom. The latter aims to restore 200 million hectares of land by planting 50 billion trees across the Middle East. 

Climate Science Education

Gulf countries recognize the importance of integrating climate change awareness and sustainable practices into educational curricula. In the UAE, the Ministry of Education has established a Green Education Partnership with the United Nations Children’s Fund in order to train teachers and provide them with the climate education necessary to raise awareness and sustainable practices among students. At COP28, the UAE established the Greening Education Hub as the first of its kind in the history of COPs. In Oman, to equip students with essential knowledge and concepts related to the environment, its Environmental Authority announced in August 2024 that it would add environmental sciences to the school curriculum, starting with Grade 11 in the 2024–2025 academic year and expanding to Grade 12 in 2025–2026. Due to extreme weather events such as floods and cyclones, Oman’s government and others in the region have also begun to integrate disaster risk management into educational policymaking.

Moreover, Gulf countries have adopted strategies to cope with the physical implications of extreme weather events, which have become more frequent and intense over the last few years. In April 2024, at least twenty-one deaths were recorded in Oman following the severe rainstorms and floods that swamped numerous Gulf countries, including Bahrain, Qatar, Saudi Arabia, and the UAE. Gulf countries—lacking the resilience and infrastructure readiness to cope with heavy rainstorms—are prioritizing efforts to build drainage infrastructure: following recent floods that engulfed the region, the UAE’s government approved a $21.8 billion massive sewerage system plan.

Still, school closures and remote learning are becoming common practices during extreme weather events. And in response, online learning and digital infrastructures have advanced significantly, especially since the COVID-19 pandemic hit the world in 2020. Education technology (EdTech) platforms have been developed and integrated into most Gulf educational systems, offering personalized learning tools that cater to diverse student needs and create an inclusive learning environment.¹

Energy Transition Limitations

Despite ongoing efforts to advance clean energy development in the Gulf, several challenges and constraints continue to hinder progress, including, to varying degrees, financing gaps, lack of clear implementation frameworks, and insufficient human capital readiness. Expanding the clean energy sector domestically necessitates structural transformations that may entail significant trade-offs, potentially affecting political stability.

Clean energy efforts are highly capital-intensive, requiring substantial financial commitments. To encourage private sector participation and attract foreign direct investment—both key components of the region’s economic diversification strategies—governmental financial support is crucial. For super-rentier states such as Qatar, Saudi Arabia, and the UAE, which benefit from sizeable sovereign wealth funds, financing green projects poses relatively minimal challenges. However, for smaller Gulf states, such as Bahrain and Oman, securing adequate government funding for clean energy initiatives remains a significant hurdle.

In other cases, while financial constraints may be less pressing, such as in Kuwait and Qatar, a lack of political will and the absence of a clear strategic framework impede progress toward energy transition goals. This can be largely explained by the abundance of oil and gas resources and limited confidence regarding the future comparative economic gains of alternative energy sources.

Human capital readiness is another issue that Gulf countries need to address in their pursuit of an energy transition. Unlike with the oil and gas industry, the scale of alternative energy investments is proportional to the size of the investment capital that may only last for a few years. This uncertainty may make job seekers reluctant to join the green energy sector and prefer instead the traditional energy or public sectors, which may provide more long-term job security. In addition, green energy jobs, except at the managerial level, pay less compared to jobs in the traditional energy market. Furthermore, Gulf nations still need to bridge the gap between education outcomes and green energy market needs. The lack of policymaking confidence in the long-term sustainability of green energy investments leads to reluctance in integrating green energy education into the education sector. Note, however, that progress is being made in this area. Gulf nations have opened doors for green energy and sustainability education and training through offering overseas scholarships for their nationals, many of whom have completed their degrees and aspire to participate in newly emerging green energy markets. This practice has thus put some pressure on policymakers to accelerate efforts in attracting green energy investments and to absorb the returning graduates specialized in green energy.

Yet, even in countries where financial resources, governance structures, and human capital do not present major obstacles—such as in the UAE—policymaking hesitancy persists. This reluctance stems from concerns over the commercial viability and technological maturity of clean energy solutions. Given that Gulf nations are not among the world’s largest greenhouse gas emitters and that returns on clean energy investments may not match those of conventional energy projects, policymakers remain cautious about committing to large-scale clean energy investments. 

Against this backdrop, Gulf governments are in a delicate position to optimize today’s spending in order to achieve the national priorities of economic diversification, decarbonization, and climate resilience, while also maintaining the long-term fiscal stability crucial to avoiding any future political instability.

From a geopolitical perspective, as Gulf nations seek to maximize the value of hydrocarbons while expanding investments in clean, alternative energy resources, they are likely to compete in an anticipated volatile and shrinking energy market. Assuming that fossil fuels will retain a role in net-zero transition pathways, Gulf countries are liable to compete in securing long-term contracts and partnership with importers. And this competition will intensify should oil markets face declining demand and oversupply while countries and companies around the world shift away from fossil fuels. Gulf nations will increasingly compete to secure buyers for both hydrocarbons and clean energy such as hydrogen and ammonia. Indeed, Gulf governments have already forged bilateral deals and agreements with governments and companies in clean energy, and they already show more variance in their international hydrogen alliances than similarity. In hydrogen partnership, for example, Oman, has bilateral deals with Belgium, Germany, the Netherlands, and the United States. Meanwhile, Saudi Arabia has a bilateral trade agreement with Japan and in March 2021 it signed a memorandum of understanding to enhance bilateral cooperation on hydrogen with Germany.

Signs of competition are already present between major Gulf countries such as Qatar, Saudi Arabia, and the UAE. In the race to attract foreign investments, Saudi Arabia recently required multinational companies to move their regional headquarters to Riyadh. The UAE hosted Expo 2020 in Dubai, as a means of using soft power to attract investments, and in response, Saudi Arabia secured the hosting of Expo 2030. Meanwhile, competition is clearly evident in other areas of diversification. After Qatar successfully hosted the 2022 FIFA World Cup soccer tournament, Saudi Arabia will host the 2034 FIFA World Cup and has increased its investment in sports, attracting top soccer players. Similar trends are being seen in tourism and entertainment: Royal Diriyah Opera House, Jeddah Opera House, and MDLBEAST are recent entertainment developments in Saudi Arabia that aim to attract 150 million tourists by 2030—almost four times the UAE’s target of 40 million. Competition is also heating up in transportation: Qatar Airways and soon Saudi Arabia’s Riyadh Air will be in constant competition with the UAE’s Emirates airline. And Saudi Arabia’s Port of NEOM and Jeddah Islamic Port are challenging the UAE’s dominance as an air and sea transportation hub. In sum, the energy transition appears set to intensify the competitiveness already in full swing among Gulf countries in other areas of economic diversification. 

In sum, Gulf nations face the complex challenge of balancing the costs of energy transition with the urgent need to diversify their economies and strengthen resilience against climate impacts. Despite efforts to reduce reliance on fossil fuels, oil and gas remain central to their economies and play a critical role in mitigating climate vulnerabilities. The region’s arid climate imposes natural constraints on a full transition away from hydrocarbons, making a nuanced approach essential. It emerges that Gulf governments must carefully allocate resources to advance economic diversification, decarbonization, and climate resilience—while ensuring long-term fiscal stability to safeguard against future political instability.