Macro Trends

COP26: Producers Make Their Case in Glasgow

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High energy prices arguably came at a perfect time for producers, providing an opportunity to highlight the dangers of underinvestment in the run-up to and during COP26 climate talks in Glasgow. The ultimate aim of megaproducers Russia and Saudi Arabia in Glasgow is to preserve a role for fossil fuels in the energy system for as long as possible, including by highlighting energy security. Their efforts do not seem to be denting the overall pace of the transition, but do appear to be influencing the near-term trajectory.

  • Opec Secretary-General Mohammed Barkindo may have summed up producers' aims in Glasgow by calling the energy transition's narrative of a switch from fossil fuels to renewables "misleading" and "potentially dangerous."

Saudi Arabia and Russia see benefits from being both inside and outside the COP tent. Both announced net zero by 2060 targets ahead of the event — a sign of what’s now necessary to have a seat at the table. But their strategies center on extending the shelf-life of fossil fuels, by lowering oil’s carbon footprint, embracing carbon capture and carbon sinks, and promoting lower-carbon uses such as petrochemicals and hydrogen. Their basic objective is to head off the emerging Western narrative of a world weaned off fossil fuels completely.

“It is imperative that we recognize the diversity of climate solutions ... without any bias towards or against any particular source of energy,” Saudi Energy Minister Prince Abdulaziz bin Salman told the conference.

Saudi Arabia used its recent presidency of the G20 to advance its agenda, with the group in 2020 adopting the kingdom's circular carbon economy strategy, emphasizing carbon capture. More recently, Saudi Arabia’s hand was apparent in the G20 communiqué out of Rome, which calls for the Riyadh-based International Energy Forum to organize a producer-consumer dialogue to bolster energy market stability.

But both held back from engaging at COP at the highest level: Neither Russian President Vladimir Putin nor Saudi Crown Prince Mohammed bin Salman attended the event — possibly seeing few political wins, with both leaders likely to attract criticism from climate activists, as well as on other sensitive matters.

  • The kingdom mostly worked behind the scenes, while Moscow appeared to put its cards on the table.

Saudi Arabia stuck to tradition by seeking to influence the COP process from within. Greenpeace accused Saudi Arabia of blocking progress on the conference’s “cover text,” or COP summary declaration proposed by the UK, that focuses on accelerating action to reach net-zero emissions by 2050 to keep hopes of 1.5°C alive. Brazil and Australia faced similar criticism.

COP observers say this is par for the course: Every country in its own way is trying to influence the cover text. Prince Abdulaziz rejected the Greenpeace allegation as false, but the Saudis have long been accused of foot-dragging on COP resolutions, a tactic enabled by their (and others') insistence from the start that substantive decisions be adopted by consensus rather than majority vote. Notably, after early criticism, the UK released a more ambitious draft cover text that urged parties to accelerate the phasing out of fossil fuel subsidies.

Russia, by contrast, set out its objectives more clearly, saying it was going to raise three issues at the conference: natural carbon sinks, technological neutrality (emphasizing nuclear), and the rules of the game for carbon trading within Article 6. The latter is aimed at avoiding effective double-counting in future carbon tax regimes, particularly for Russian exports to the EU.

Less clear was what became of Moscow's promised “toxic surprises,” although delegation head Deputy Prime Minister Alexei Overchuk did take aim at sanctions, calling for sanctions-free climate cooperation that excludes limiting access to "technologies and financial resources," while also emphasizing the need for affordably priced energy supplies.

  • COP doesn’t recommend specific technologies or paths, so measuring producer influence comes down to tone and language, or future policy shifts at regional or national levels.

Momentum at COP26 showed few signs of slowing in response to recent energy crises or producer pressure, even if there have been the usual political tensions — and accusations of lack of ambition. But rising energy prices have helped producers make some traction in raising awareness of the disruptive potential of too rapid a transition.

This is evident in recent positioning by both the US and EU. Both now openly acknowledge that fossil fuel supplies cannot be attacked too hard in the near term. But longer term, neither is backtracking on transition plans.

The US in recent days has been striving to argue that its call for Opec-plus to supply more oil to the global market today is not at odds with its longer-term decarbonization agenda. More oil and gas supply, it says, is needed to protect the current global economic recovery until alternatives are in place. Saudi Arabia has pushed back on this, with Energy Minister Prince Abdulaziz bin Salman rejecting the notion of being needed "for three years" as workable.

A similar duality is emerging in Europe, hit by spiking gas prices. EU policymakers now appear to be conceding a continued role for gas in the transition, but in the near-term.

Investor outlook amid high near-term energy prices also appears mostly unchanged, albeit amid some concern from major institutions about unintended consequences like choking off oil supply too soon or channeling supply to higher-emitting producers. In Glasgow, new layers of public and private initiatives to restrict fossil fuel financing and direct investment emerged, despite repeated recent producer emphasis on the need for upstream investment. Chief among them was a commitment by 26 countries and development finance agencies to “end new direct public support for the international unabated fossil fuel energy sector by the end of 2022."

Notably, use of the term “unabated” in this and other recent initiatives leaves the door open for carbon capture and storage, a key element of Saudi and other producer transition plans.

  • Energy market pressures offer revenue wins — but might not be affording producers as much leverage as they hoped.

Holding firm on restricted supply while prices are high is one way to drive home the message of fossil fuels’ importance. Russia has been clearest about how it intends to use high prices as leverage, making the case for long-term gas contracts, arguing that the price spike arose from Europe’s overreliance on renewables and spot gas supplies. Long-term contracts would also help underpin upstream investment at home, it argues. The EU, however, is unlikely to budge on its diversification aims, even as it reconsiders gas’ near-term role.

Saudi Arabia has rebuffed US calls to open the taps beyond Opec-plus’ agreed monthly increments of 400,000 b/d. But that's not seen as reversing Biden’s climate agenda, reinforced by a surprise US-China climate deal.

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