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Ambition Meets Reality: A New Modus Vivendi

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On the eve of the Russian invasion of Ukraine, we called for collaboration between oil exporters and importers to smooth the inevitable energy transition toward reduced reliance on fossil fuels. Soon thereafter, the CEO of Saudi Aramco called for a “global energy transition forum” to “bridge the gap between idealism and pragmatism with a practical, stable and inclusive transition plan, without compromising our climate goals.” A few weeks later, the United Arab Emirates' energy minister said that “we need to be wise and long-term planners, and to sit with IOCs [international oil companies] and NOCs [national oil companies] if we want to have a sustainable and affordable future of energy.” Such invitations from major oil exporters constitute a welcome relief from long-standing oil producer-consumer misunderstandings. Too often, producers and consumers have appeared to live in different worlds. Today, rather than confronting each other, all parties need to sit on the same side of the table to discuss how to facilitate the energy transition.

The war in Ukraine has disrupted the transition path by stimulating demand for fossil fuels from sources deemed secure in the short term, while simultaneously motivating more rapid investment in renewable energies and thereby accelerating the transition. The war has highlighted time-lags between energy investment and energy supply. Yet these same time-lags are a primary reason why collaboration among energy stakeholders is essential.

No reasonable investor will develop new natural gas production and transportation capacity to meet Europe’s urgent supply-diversification needs without assurance that customers will continue to use the additional fuel for the life of the investment. The Aramco CEO put it this way: “Who is going to invest when demand is supposed to decline just when you get a return [from your investment]?”

Energy importers, who may seek additional oil and gas only temporarily, to bridge their needs until sufficient alternative energy capacity can be built, will find that they must make more than a temporary commitment. Energy exporters logically expect that the assets they develop to supply importers’ immediate needs will not become stranded as soon as customers no longer need them.

The war in Ukraine brings another, related challenge that can be resolved only by collaboration. If cross-border investments have enjoyed a long period of relative calm, during which most disputes could be resolved through renegotiation or arbitration, the abrupt rupture of energy trade and investment relations with Russia has brought that era to an end. Investors cannot ignore the painful impacts of recent sanctions and divestitures, and will become more cautious and risk-averse in the future.

Getting Back On Track

Without collaboration, the global energy transition, which requires massive investment, could stall. The International Energy Agency (IEA) estimates that getting the world on track to limit global warming to 1.5°C requires a surge in investment to $4 trillion per year by 2030. The Intergovernmental Panel on Climate Change (IPCC) estimates that the same goal will require an average $2.7 trillion per year 2023-50 for the electricity sector alone. Large portions of these investments must be made in low-income countries. Mobilizing investment of this magnitude will require a new level of collaboration among all stakeholders, whether energy exporters or importers.

Perhaps the best argument for collaboration, however, is that the net-zero scenarios developed by the IPCC or by the IEA are not self-executing. These complex models yield what appear to be smooth curves toward dramatically lower emission levels later in the century. The energy transition, however, requires implementation of numerous individual projects and the development and deployment of technologies of which some are not yet commercially viable. Each project may face local opposition, in jurisdictions where opponents’ appeals can persist for a decade or more. Coordination among investors and governments can help assemble individual projects into a coherent program that will approximate the modeled scenarios.

Immediately, importers and exporters must adapt to redirections of fossil fuel flows provoked by the war in Ukraine and related sanctions. To many, this will seem an undesirable distraction from the longer-term transition challenge to reduce fossil fuel volumes. Energy price increases, along with supply-chain disruptions in other goods and materials, have contributed to a surge in inflation. A solution requires additional supplies, supplemented by drawdowns of strategic inventories. For decades, Opec has maintained idle production capacity in several member countries and called upon such capacity to moderate sudden price rises in circumstances analogous to the present — for example, during the Iran-Iraq war in the 1980s and during the 1990-91 crisis in Kuwait.

Over the longer run, the most recent IEA and IPCC studies indicate that, in order to reach net-zero emissions by 2050, fossil fuels must soon begin a steep consumption decline, yet must also continue for many decades to play an important role in global energy supply. Stakeholders should, therefore, accept the Aramco CEO’s challenge to collaborate to move from idealism to pragmatism, thereby facilitating the energy transition.

Global Collaboration

A “global energy transition forum” could build on and enhance existing collaborations working to reduce methane emissions, to develop new carbon capture and sequestration projects — particularly for power plant and industrial emissions, to vastly accelerate reforestation efforts and to bring renewable energy to populations without current access to electricity. Skills and resources currently in the hands of consumers, producers and corporations, if brought to bear jointly and in a coordinated manner, could achieve far more than they could through any one group working alone.

Opec, IOCs and NOCs complain that they have felt ignored at international climate gatherings, saying these are dominated by consumers and environmental organizations. Without the collaboration of energy exporters and corporations, however, the transition risks missing its target. Collaboration of all parties on high-visibility projects such as those mentioned here would help to align stakeholders’ interests and capabilities, and advance the common goal. Today we must reiterate our conclusion in 2019: “The option of continuing on the present path is not a serious option. We must all do better.”

Nordine Ait-Laoussine is a former Algerian oil minister and John Gault is an independent energy economist based in Switzerland.

Topics:
Opec-Plus Supply , Oil Prices, Oil Demand, Low-Carbon Policy
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