The Fog of Transition | مركز سمت للدراسات

The Fog of Transition

Date & time : Wednesday, 20 September 2023

Sarah Miller

It’s an awkward moment for the oil industry to have at last won its long-sought “seat at the table” in international climate talks. The contradictions and conflicts in play at this opaque moment in the energy transition are mind-boggling. Global temperatures are flaring. War-related market disruptions are fading. The economic outlook is extremely fuzzy. Neither Mideast oil exporters — whose voices will be loudest at this autumn’s COP28 gathering in Dubai — nor the Western majors in their backup chorus have a coherent, well-supported message. It is possible through the fog to glimpse two pillars underpinning such proposals as the industry does have: More unabated oil and gas now, and lots of oil and gas with carbon capture and storage (CCS) later. It’s a scenario as close to business-as-usual as it’s feasible to promote in a world beset by climate disasters. It will be a hard sell — particularly given that most of the industry isn’t confidently investing in either pillar of its own platform.

This summer’s climate breakdown is so severe and so geographically widespread that it has shattered climate-change denialism and made the topic a near-constant of mainstream news coverage this summer. Yet there’s little sign of reemergence of the massive protest actions that marked 2019 and were derailed by Covid-19.

The next UN climate talks, COP28 in November, will be in the United Arab Emirates (UAE) under the chairmanship of Abu Dhabi National Oil Co. (Adnoc) CEO Sultan al-Jaber and private oil industry lobbyists will be out in force. Yet the UAE and other oil exporting countries’ positions on oil and gas in the talks appear to rest almost solely on the shaky base of CCS, the implicit keystone for the “abatement” of carbon emissions from fossil fuels.

The Western oil industry is no help: It has no clear strategy beyond business-as-usual either for saving itself or for helping in a major way to limit the impacts of climate change. On the contrary, the Western majors have backed off emphasizing goals to reduce oil and gas production and sales but, with the exception of Exxon Mobil, have not rushed towards solid action on CCS.

The ironies stop don’t stop there. The last two years have also seen solar and onshore wind generation and electric vehicles (EVs) pass the point on their rapid growth curve where they become visible and financially viable — only to see the oil majors largely disavow interest. Here, the exception is France’s TotalEnergies. The profit margins on solar, wind, batteries, electricity transmission and EV charging aren’t high enough to justify investment, the other majors explain. It’s a bit like arguing that nobody is going to a once-favorite restaurant anymore because it’s too crowded.

Over the last year, the message from both the Western industry and Middle Eastern oil exporters has been that oil and gas will be needed in large quantities for a long time, and more money and attention should be going into making sure supplies are adequate to meet that need. Yet Opec-plus feels compelled to shut in more capacity for longer in order to prop up prices.

Still, at least two coherent threads that can be usefully discerned in this chaotic fabric:

CCS is being pushed to a make-or-break decision point more quickly than many in the industry apparently want. With its Inflation Reduction Act (IRA), the US provided a potentially huge shot in the arm for this technology in the form of an $85 tax credit to CCS developers for every ton of CO2 or other greenhouse gases removed from emissions. Washington has also been vocal in its support for al-Jaber and his CCS-dependent approach in negotiations leading up to COP28.

Why would a US administration that has proclaimed battling climate change a top priority adopt that approach? US climate envoy John Kerry in an interview this spring with Associated Press hinted that US support for CCS under the IRA and at COP28 amounts to a dare to the industry to gear up the technology fast, or give up and accept that renewable electricity is the key energy source of the future. Kerry said he has “serious doubts” as to whether all the needed CCS technologies can be developed and, if they are, whether they will be price-competitive. But the industry is being given a chance to erase those doubts.

It remains to be seen whether oil exporting countries, much less shareholder-owned Western oil majors, are willing to take on the gargantuan, risky task that Kerry’s dare implies. It’s one thing to try a bit of CCS-for-profit on the US Gulf Coast or use it to make blue hydrogen from Middle East gas that would otherwise be flared and so is effectively free. Scaling up this technology enough to keep a hefty portion of today’s oil industry running in a post-carbon world is quite another.

Shareholder demands for high payouts are raising the minimum crude price companies need to operate over time — perhaps beyond levels that allow much new investment. This is problematic for several reasons. Renewable energy costs are starting to fall again, pushing down the price at which oil and gas become uncompetitive for various uses, and putting future demand at greater risk. Also, high prices undermine the commercial logic of CCS, given the incremental cost increases it would entail.

Quarterly results are seldom significant in and of themselves, but they sometimes flag larger realities. Second-quarter 2023 results are a case in point. With quarterly average oil prices just under $80 per barrel, the Western oil majors basically saw their entire free cash flow go to cover dividends and share buybacks. Even Saudi Aramco reported shareholder payouts of some $29.4 billion, $19.5 billion in the form of a regular quarterly dividend and $9.9 billion as one of a series of quarterly “performance-linked” dividends. That roughly equals Aramco’s reported net income for the quarter and exceeds its free cash flow by 30%.

This in a quarter in which oil prices, while well below the $100/bbl-plus levels of 2022, were not low in historic terms: $80/bbl is slightly above the average oil price since 1980, adjusted for dollar-based inflation. What’s more, Saudi Arabia and other Opec-plus members have cut production repeatedly to prop up prices. Without those cuts, prices would certainly have been a lot lower.

This is not to say that any of these companies — least of all Aramco — is in financial trouble. What it does mean is that prices need to stay well over $80/bbl most of the time if the industry is to cover not just payments to shareholders but also any increases in capital spending — for purposes such as raising oil and gas production capacity or CCS.

With global oil demand approaching its all-time peak, holding prices at the needed heights could be difficult. Aramco is so far sticking to its capacity expansion plans, but the Western majors are decidedly cautious in their approach to capital spending. They evidently fear that lower dividends would send their share prices plummeting.

All this runs directly counter to the two central pillars supporting the industry position in climate talks. The need for continuing high investment in oil and gas and for massive funding of CCS. It’s a circle that will not easily be squared. Unfortunately, the climate isn’t waiting for clarity to emerge. Check out the floods around Beijing if you can’t read the thermometers in Texas. This is the moment to act — or make way for someone who will.

Sarah Miller is a former editor of Petroleum Intelligence Weekly, World Gas Intelligence and Energy Compass. The views expressed in this article are those of the author.

Source: energyintel


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