The Big Picture: Opec's Greatest Challenge

• Opec-plus proved its value in the Covid-19 pandemic and has emerged a stronger organization, its cohesion strengthened and credibility enhanced. • But the energy transition poses a genuine existential threat, on a different plane from past geopolitical and market challenges. • Publicly, producers are maintaining a brave face, but privately they are concerned -- and some are accelerating plans to monetize their hydrocarbon wealth. Opec has never been short of obituary writers and it has made fools of them all. Today it is as relevant as ever, having successfully navigated, together with its non-Opec allies in Opec-plus, the Covid-driven demand rout. Yet never has the organization faced such an existential challenge as the structural demand destruction now threatened by international climate mitigation efforts. Last week’s International Energy Agency (IEA) Net Zero by 2050 study, prepared ahead of this November’s UN climate conference in Glasgow, sees global oil use restricted to just 24 million barrels per day by 2050 if temperature rises are to be capped to 1.5°C and net-zero emissions achieved. Oil prices would slump to just $35 per barrel in 2030, $28/bbl in 2040 and $24/bbl in 2050. Much of what the report laid out should not have come as any surprise for Opec, given that it comes on the back of an earlier IEA net-zero scenario, argues former Algerian Oil Minister Nordine Ait-Laoussine. But the assertion in this report that all exploration and sanctioning of new projects should stop was “new” and “shocking,” he says. “I don’t think people expected the IEA to say that immediately, because of all the dramatic implications it could have for the producing countries.” IEA Takes Aim Opec has yet to publicly respond, but an internal note to members warns the report, coming as it does from the influential OECD energy watchdog, will impact energy "investment decisions, which may curb demand [growth] for fossil fuels” (IOD May21'21). The IEA has traditionally encouraged investment to avoid a supply crunch. “To change direction like this overnight, it is too much,” notes one producer official (EC May21'21). There are other gripes. The report -- in line with its remit -- excludes carbon offset schemes, such as the mega-afforestation program promoted by Saudi Arabia. Further, a projected 7% fall in global energy demand to 2050 despite continued economic growth appears to run counter to historical norms, and relies on sharp energy efficiency improvements. The study is unashamedly ambitious, and has to be to achieve its goals, IEA Senior Analyst Christophe McGlade, one of the report’s authors, tells Energy Intelligence. Rather than a set of prescriptive instructions on how governments should respond to the climate change challenge, “this is just one possible pathway to limit temperature rises to 1.5°C,” he argues. The report admits the obvious -- producer economies will be hard hit if the road map is adopted. Opec’s market share will at least rise from 37% in 2019 to 52% in 2050, a historical high, the report notes -- but this would be a larger share of a much smaller market. Some producer economies are well placed to compensate for oil revenue losses, through developing carbon capture and the hydrogen economy, McGlade argues (EC May21'21; EC Mar.19'21). Others, Energy Intelligence flagged last year, may get left behind. Decisive Shift