Energy Security: Is the World Aligning with OPEC?

By Ikenna Omeje

The Organisation of the Petroleum Countries (OPEC), before now,  has been a lone voice against energy transition without fossil fuels.  OPEC has been advocating for a multilateral approach to net-zero, noting that with the increasing global population, fossil fuels have a place in energy transition.

The energy sector is said to be the source of around three-quarters of greenhouse gases emissions as at today and cutting down emissions will be central in  preventing possibly the worst effects of climate change, according to the International Energy Agency (IEA).

To achieve net-zero by 2050, the IEA has articulated several dramatic milestones that would be necessary including: no approvals of new oil and gas field development and no new coal mines or mine extensions beginning from 2021; electric vehicles reaching 60 percent of global car sales by 2030; and nearly 70 percent of global electricity generation produced from solar and wind by 2050. The quest to reach  these milestones  has led to slash in investments in the upstream end of the oil and gas industry.

According to OPEC, cumulative investment of $12.6 trillion in the upstream, midstream, and downstream is required, between now and till 2045, in order to meet the global energy need.

While Net-Zero target is a great policy, a hasty approach towards its realization made the world to forget other key factors like rising global population, energy poverty and the intermittent nature of renewable energy.

Despite $3.8trn investment in renewable energy sources in 10 years,  global consumption of fossil fuel, has dropped only by 1 percent during the period – from 82 percent to 81 percent, the Global Head of Commodities Research in the Investment Division, Goldman Sachs, Jeff Currie, told CNBC last year.

Also, global population is estimated to increase from 7.3 billion in 2015 to 9.2 billion in 2040. The additional 1.8 billion people will mainly come from developing countries, according to OPEC in its World Oil Outlook 2040 report.

“In the Organization for Economic Co-operation and Development (OECD) region, population is forecast to increase by 116 million people in the period to 2040 partly supported by immigration. The share of the global working age population (that is, individuals aged between 15 and 64 years) peaked in 2012, following a steady increase since 1970. Individuals aged 65 or more are anticipated to account for 14 percent of the world population in 2040, up from today’s level of 8 percent. Children are estimated to represent 22 percent of the population by 2040, down from 26 percent today,” OPEC said.

On oil demand during the period under review, OPEC said, “Reflecting the underlying assumed developments of the key drivers, total primary energy demand is forecast to increase by 96 mboe/d between 2015 and 2040, rising from 276 mboe/d to 372 mboe/d. In relative terms, this represents a 35 percent increase compared to the base year of 2015, with an average annual growth rate of 1.2 percent during the forecast period.”

The ongoing war between Russia and Ukraine has exposed the deficiency in Net-Zero target. Russia in February 2022 invaded Ukraine, a war that has escalated geopolitical tensions and led to disruption in supplies of petroleum products and other commodities.

 

Russia accounts for about one-third of oil supply to Europe and about 40 percent of natural gas supplies. However, the sanctions imposed on the country by western countries has impacted on  its production output, causing tight supply of products. European countries continue to face energy crisis as a result of the war, and this has rattled nations across the world, and reinforced the need for energy security.

‘Cutting oil and gas production is not healthy’

Countries, particularly in Europe, are reactivating abandoned coal fire plants and nuclear power plants. This is an indication that these countries are prioritizing their energy security over achieving Net-Zero target.  Speaking recently, the new Chief Executive Officer of Shell Plc, Wael Sawan, noted that cutting oil and gas output would not be good for consumers.

“I am of a firm view that the world will need oil and gas for a long time to come,” Sawan said in an interview with Times Radio as reported by Bloomberg. “As such, cutting oil and gas production is not healthy.”

“We’ve seen of course through 2022 the fragility of the energy system,” Sawan said. “To see prices start to skyrocket, that’s not healthy for anyone, particularly consumers,” he added.

Shell’s position is similar to that of BP, which announced last month that it has scaled back plans to cut carbon emissions. The energy giant is one of the first oil majors to set target to cut emissions to net zero by 2050. BP had pledged to cut its emissions by between 35 and 40 percent by 2030.

However, the company has now reversed this target, and has adopted a modest target of a 20-30 percent cut, adding that it needs to keep investing in oil and gas to help meet the world energy demands.

Oil demand forecast

Oil demand is expected to rise to 2 million bpd this year, while prices are expected to hover around $90/bbl, according to data analytics firm, Refinitiv.

“As far as price forecasts are concerned, oil is expected to average around $90/bbl. Bullish forecasts see prices increasing to $115/bbl in the latter part of 2023,” said Head of EMEA Oil & Shipping Research at Refinitiv, Ranjith Raja,  during a Refinitiv-ICC Qatar seminar held at Doha as reported by Oil price.com.

Also, in its January 2023 Monthly Oil Market Report for December 2022,  the Organisation of OPEC is projecting  world oil demand to rise by 2.22 million barrels per day (mbpd), or 2.2 percent in 2023, unchanged from December 2022 forecast.

OPEC also expects China’s oil demand to bounce back to what it was before the recent lockdown in the country following re-emergence of Covid-19 pandemic, which slowed down economic activities, thereby affecting oil demand.

“For 2023, the forecast for world oil demand growth s also the same as in the previous month’s assessment at 2.2 mb/d, with the OECD increasingby 0.3 mb/d andnon-OECD growthat1.9mb/d. Mnor upward adjustments were made due to the expected better performance in China’s economy on the back of its reopening from Covid-19 restrictions, while other regions are expected toseeslght declines,due to economic challenges that are ikely towegh on oi demand.

Accordngly, in 1Q23, oil demand is expected to rise by 1.7 mb/d y-o-y. Total world oil demand is anticpated to reach 101.8mb/d in 2023. However, this forecast is subject to many uncertainties, including global economic developments, shifts in COVID-19 policies, and ongoing geopolitical tensions,” OPEC said.

However, unlike OPEC, IEA in its Oil Market Report for January 2023  is projecting global oil demand to rise by 1.9 mbpd in 2023, to average 101.7 mbpd. According to IEA, almost half the gain will come from China as the country  lifts its Covid restrictions, adding that “jet fuel remains the largest source of growth, up 840 kb/d.”

Carbon emissions

The global carbon emissions are projected to rise to about 39 gigatonnes per year (Gtpa) in 2025 before maintaining  annual decline as industries clean up their carbon footprint, according to Rystad Energy research and analysis.

Rystad said that many countries as a measure to ensure energy security, adopted more carbon-intensive fuels in 2022, because of the ongoing Russia-Ukraine war, which it noted, led to record high in carbon emissions.

“The inflection point for fossil fuel carbon dioxide (CO2) emissions is nigh, with emissions on track to peak by 2025, according to Rystad Energy research and analysis. On the current global pathway of announced policies, projects, industry trends and expected technological advancements, global CO2 emissions are poised to hit about 39 gigatonnes per year (Gtpa) in 2025 before settling into a steady annual decline as industries clean up their carbon footprint.

“Emissions hit a record high in 2022 as countries scrambled to secure reliable, affordable fuel for power generation on the back of Russia’s invasion of Ukraine. As a result, many turned to more carbon-intensive fuels as a short-term solution to their energy security crises, reviving mothballed coal plants and prioritizing gas over cleaner alternatives. While these fuels will still have a role to play in the global economy for decades to come, the broader push towards a cleaner future is showing no signs of slowing down.

“As a sign of things to come, direct CO2 emissions – carbon dioxide originating from fossil fuel combustion at the plants worldwide – from power and heat generation will peak this year. The decline will be minimal initially before gathering momentum in the coming years, becoming a significant factor behind the decrease in total CO2 emissions from all sectors by 2025,” Rystad said in a statement.

“Fossil CO2 emissions reached an all-time high of about 38.3 Gtpa last year, raising eyebrows and questions about the world’s ability to deliver on ambitious climate goals to limit warming to between 1.5 and 2.0 degrees Celsius. However, our comprehensive emissions modeling points to an imminent emissions inflection point. Our data shows a peak of 39 Gtpa in 2025, but that timeline could move up to as early as next year if the short-term macroeconomic outlook accelerates the energy transition,” it added.

Steming carbon emission is a priority for world leaders, but even more worrisome is energy poverty bedeviling some parts of the globe. Finding a balance between achieving Net-Zero target and maintaining energy security, appears to be the headache for these leaders.

Government support for fossil fuel rises

Despite pledges by many countries to lower carbon emissions, overall government support for fossil fuels – coal, natural gas and oil, almost doubled in 2021, according to August 2022 analysis from the Organisation for Economic Cooperation and Development (OECD) and IEA.

Globally, overall government support for fossil fuels in 51 countries almost doubled to $697.2  billion in 2021, from $362.4  billion in 2020, as energy prices rose with the rebound of the global economy, OECD and IEA data showed.  In addition, consumption subsidies were expected to rise even further in 2022 occasioned by higher fuel prices and energy use, slowing progress toward international climate goals.

With efforts to protect households from surging energy prices, major economies have increased support for the production and consumption of coal, oil and natural gas, with many countries struggling to balance well-established pledges to phase out inefficient fossil fuel subsidies.

“Russia’s war of aggression against Ukraine has caused sharp increases in energy prices and undermined energy security. Significant increases in fossil fuel subsidies encourage wasteful consumption though, while not necessarily reaching low-income households,” OECD Secretary-General Mathias Cormann said.

“We need to adopt measures which protect consumers from the extreme impacts of shifting market and geopolitical forces in a way that helps keep us on track to carbon neutrality as well as energy security and affordability.”

Also commenting on the analysis, IEA Executive Director Fatih Birol said: “Fossil fuel subsidies are a roadblock to a more sustainable future, but the difficulty that governments face in removing them is underscored at times of high and volatile fuel prices. A surge in investment in clean energy technologies and infrastructure is the only lasting solution to today’s global energy crisis and the best way to reduce the exposure of consumers to high fuel costs.”

Breakdown

Total fossil fuel support in G20 economies rose to $190 billion in 2021 from $147 billion in 2020, according to the OECD analysis of budgetary transfers and tax breaks linked to the production and use of coal, oil, gas and other petroleum products.

Also, support for producers reached record high in OECD tracking efforts, rising to $64 billion in 2021 – up by almost 50 percent year-on-year, and 17 percent above 2019 levels.

“Those subsidies have partly offset producer losses from domestic price controls as global energy prices surged in late 2021. The estimate of consumer support reached USD 115 billion, up from USD 93 billion in 2020,” OECD and IEA said in a statement.

“The IEA produces estimates of fossil fuel subsidies by comparing prices on international markets and prices paid by domestic consumers that are kept artificially low using measures like direct price regulation, pricing formulas, border controls or taxes, and domestic purchase or supply mandates. Covering 42 economies, the IEA finds that consumer support increased to $531 billion in 2021, more than triple their 2020 level, driven by the surge in energy prices.”

OECD and IEA have consistently called on governments to  phase out support for inefficient fossil fuels  and channel public funding toward the development of low-carbon alternatives alongside improvements in energy security and energy efficiency.

“Subsidies intended to support low-income households often tend to favour wealthier households that use more fuel and energy and should therefore be replaced with more targeted forms of support,” OECD and IEA argue.

OECD and IEA produce complementary databases that provide estimates, which cover 51 major economies, spanning the OECD, G20 and 33 other major energy producing and consuming economies, representing about 85 percent of the total global energy supply.

Upstream investments

In February 2020, before Covid-19 started impacting the global energy sector, Rystad had  estimated that the global upstream investments for the year would end up at around $530 billion, almost at the same level as in 2019. Its forecast at the time suggested 2021 investments would remain in line with the previous year’s level.

“However, as the Covid-19 pandemic triggered a collapse in oil prices during the early part of the second quarter last year, E&P companies slashed investment budgets to protect cash flow. This spending trend was not reversed in 2021, when prices rose. Compared to pre-pandemic estimates for 2020 and 2021, we observe that spending fell by around $145 billion last year and will end up losing $140 billion by the end of this year. This implies Covid-19 removed 27 percent of planned investments.

“Upstream spending was limited to $382 billion in 2020 and is forecast to marginally grow to $390 billion this year. Rystad Energy expects the effect of the pandemic to be a lasting one as – even though spending will start growing from 2022 – it will not return to the pre-pandemic level of $530 billion. Growth will be limited and investments will only inch up annually, rising to just over $480 billion in 2025, when this report’s forecast ends,” Rystad stated

According to the Oil and Gas Outlook report by the International Energy Forum (IEF) and IHS Markit, the investment environment for the oil and gas sector is becoming more challenging due to unprecedented uncertainty and risks, including record price volatility, evolving government regulations, increasingly diverging long-term demand narratives, and non-standardized ESG criteria.

The report noted in its executive summary that “The lower-price cycle of the past six years and long-term demand debates have driven up investment hurdles and the cost of capital for long-cycle oil projects. This is fostering an environment of “pre-emptive underinvestment” for oil and gas supply, where investments are lagging robust demand.”

“Oil and gas upstream investment will need to increase and be sustained at near pre-COVID levels of $525 billion through 2030 to ensure market balance despite slowing demand growth. Upstream investment in the oil and gas sector in 2021 was depressed for a second consecutive year at $341 billion – nearly 25% below 2019 levels. Meanwhile, oil and gas demand is now near pre-pandemic highs and will continue to rise for the next several years, particularly in developing countries,” said IEF and IHS Markit.

They proposed that between 2022 and 2023, there should be intense sanctioning and allocation of capital toward new projects to ensure adequate oil and gas supply comes on stream within the next 5-6 years.

Although renewables are developing rapidly, the world’s economy is set to double, which experts say requires that all energy resources will be needed to meet this growing need. This is in addition to projection that oil will remain the largest contributor to the energy mix up till 2045 with more than 27 percent, according to the OPEC World Oil Outlook.

COP-26 outcome

Moving away from fossil fuels was  the most contested decision at COP-26 in Glasgow, Scotland last year. After extensive deliberations, countries agreed to a provision calling for a phase-down of coal power and a phase-out of “inefficient” fossil fuel subsidies. However, because  coal, oil and gas are said to be the main drivers of global warming, many countries, and NGOs, expressed dissatisfaction with  the language on coal, saying that it was significantly weakened (from phase-out to phase-down) and consequently, described it  as an unambitious.

Many African oil producers are adopting gas, which contains methane, as their transition fuel. This is happening even though 103 countries signed up at COP-26 to the Global Methane Pledge, which aims to limit methane emissions by 30 per cent by 2030, compared to 2020 levels.

“The approved texts are a compromise,” said UN Secretary-General António Guterres. “They reflect the interests, the conditions, the contradictions and the state of political will in the world today. They take important steps, but unfortunately the collective political will was not enough to overcome some deep contradictions.”

However, at COP 27, which took place in Sharm El-Sheikh, Egypt, between November 7-18, 2022, deliberations were  on striking a balance between energy transition and energy poverty, especially with the seemingly energy crisis confronting the world now.

According to the Chief Executive Officer of Seplat Energy, Roger Brown, focus now should be  on how best to achieve  balance for the benefit of tomorrow’s 2.5 billion Africans, of whom 500 million will be Nigerian, adding that given current low emission levels, Africa can achieve a disproportionate improvement in living stands through a globally small increase in emissions from cleaner gas for power and cooking.

“We have seen coal plants being fired up in several European Countries recently, and a renewed interest in natural gas supply from Africa. There are also reports of increased oil and gas drilling operations in the USA with spontaneous permits being granted recently,” said Nigeria’s Minister of State for Petroleum Resources, Chief Timipre Sylva,  at an energy event.

“Anticipated economic growth and rising global population, especially in Asia and Africa, will significantly push energy demand upward to a level that renewable energy sources only cannot meet by 2050.

“All these imply that the global energy mix will remain with us, amidst greater dominance by hydrocarbon energy sources, at least in the foreseeable future. It also indicates that energy transition will remain a gradual process, as against a rapid and radical shift as some have presented it.”

What’s next?

Investment in the upstream end of the oil and gas dropped by more than 30 percent in 2020, occasioned by the impacts of COVID-19 pandemic, even worse than the dramatic declines seen during the 2015-2016 industry downturn.

OPEC argues that this portends danger as the energy security risk that would result from too little investment would heavily affect both producers and consumers alike. Developing countries who are oil-producers, particularly in Africa, would be most impacted. This is because, according to the former Secretary General of OPEC, late Mohammad Barkindo, history has shown that energy insecurity brings about economic insecurity and geopolitical instability.

“Achieving net zero emissions by 2050 is already a great challenge for advanced economies, some of whom have expressed their doubts about the reality of achieving this ambitious goal. And thus, for developing nations, it is even that much more daunting, particularly as they are occupied with ensuring their basic needs are met day in and day out. Each day is a challenge to simply put food on the table and earn a decent living wage,” Barkindo  noted in his speech at the 2021 Nigeria Oil and Conference and Exhibition.

“There are emerging doubts as to how realistic the net-zero approach is, particularly when considering the unique circumstances of developing countries, especially in combatting another scourge, namely energy poverty.

“Allow me to point out three significant challenges to achieving net-zero emissions by 2050, namely scale and timing, supply chains and the developing world.

“In terms of scale and timing, the 28-year period from now until 2050 is not adequate to achieve net-zero emissions, considering the scale of investments required, the availability of land, the required massive expansion of the electricity grid and a host of nearly 400 milestones that would need to be reached to achieve the net-zero goal. The last transition took nearly 200 years to cycle through, and now we want to achieve an even more ambitious transition in less than 30 years! This is simply not realistic.

“Additionally, a swift transition to clean energy sources would be highly reliant on the steady, robust supply of critical minerals such as copper, cobalt, lithium, nickel and aluminium, many of which are produced in a geographically centralized area. We must also consider that the amount of mineral material needed to produce energy is higher than with fossil fuels.

For example, a typical electric car requires six times the mineral inputs than that required to power a conventional vehicle with fossil fuels, and an onshore wind plant requires nine times more mineral resources than a gas-fired plant of the same capacity. Furthermore, lengthy lead times on mining projects, which can surpass 16 years, could inhibit the sector from responding to increases in demand,” he said.

Inclusive energy transition has been identified by OPEC  as a  key element as the 2050 net-zero goal gathers momentum, to ensure that no country is left behind. And Carbon Capture Utilisation, Storage technologies are anticipated to play big roles in this regard.