Backs to the wall: Oil exporting countries double down on fossil fuel subsidies

Energy producers disconnect from their decarbonising customers by channelling Covid-19 stimulus funds into gas, oil and coal

Fossil fuel-exporting countries are losing touch with their customers. As major import-reliant economies in Europe and Asia funnel large pots of Covid-19 stimulus funding into cleaner sources of energy, the suppliers that they still depend upon for natural gas, oil and coal are doubling down on fossil fuel subsidies—in the hope of keeping their flagship industries alive during the pandemic.

The US, Canada, Indonesia, Russia and Mexico have together pledged more than USD 95 billion in unconditional support to carbon-heavy forms of energy, and just USD 29 billion to clean sources—some of which is conditional and therefore not guaranteed. The split is thus at least 76% in favour of fossil fuels.

By contrast, countries that are net energy importers—Germany, France, China, the UK, India, South Korea, Italy, Brazil, Turkey and Japan—have pledged at least USD 109 billion to clean energy sources, and around USD 73 billion to fossil fuels. This split is 60% in favour of renewables, electric vehicles, efficiency and other decarbonising measures.

That’s according to Energy Policy Tracker, an online database that tracks Covid-19 government policy responses from a climate and energy perspective. Created by five NGOs and Columbia University, the tracker aims to answer the question of whether global leaders are following the Covid-era investment mantra of ‘build back better’.

The tracker, which was last updated on 19 August 2020, currently covers only G20 countries and a handful of others. OPEC members Algeria, Angola, Nigeria, Iraq, the United Arab Emirates, Venezuela and others are not yet included. Nor are major gas exporters Qatar, Kazakhstan, Azerbaijan or Bolivia.

None of these countries are known to be channelling significant stimulus funds into low carbon energies. They do, however, rely heavily on their respective national oil companies (NOCs) to generate revenues and jobs, so the global fossil subsidy bill might be much larger than reported.

Crude awakening

The last decade has been a roller coaster ride for both oil prices and NOCs, whose revenues rise and fall with the commodities they trade. Worldwide NOC net income dropped from a peak of USD 1,900 billion in 2012 to USD 570 billion in 2016 then rebounded to USD 1,100 billion in 2018, according to the International Energy Agency (IEA). This year, it fell off a cliff.

The pandemic-induced crash has been like no other, sending global oil benchmark Brent crude plunging 30% over three days in March and onwards to multi-decade lows of sub-USD 20/barrel in April—possibly the worst month the oil industry has ever witnessed.

After a brief price war between Russia and Saudi Arabia, the OPEC cartel and its allies agreed in April to remove almost 10% of global oil supply from the market in a bid to shore up prices—its deepest-ever production cuts deal, which is only now being unwound.

The combination of lower revenues and capped production devastated the state finances of oil and gas exporting countries, the vast majority of which rely overwhelmingly on NOC royalties from export revenues to pay for schools, hospitals and public transport, and on the industry itself for jobs.

Oil export-reliant economies are uniquely susceptible to oil market volatility. Every time the crude price drops, calls to diversify become louder. Yet the ability of NOCs to branch out is constrained on several fronts—not least the fact that a radical shift into non-fossil energies is plainly at odds with their raison d’être as custodians of sovereign resources tasked with monetising their nation’s oil and gas wealth.

Widespread lack of transparency hinders any meaningful comparative analysis of NOC business strategies. These entities are opaque and have for years shied away from the climate debate. That is now slowly changing; NOCs have started to highlight their efforts to reduce the carbon intensity of their operations, tilt their portfolios towards cleaner-burning natural gas or make modest forays into alternative energy sources.

Photo: Saudi Arabia’s Manifa oil field © Saudi Aramco

Climate laggards

State-owned oil companies are as varied as the countries that created them, and count several leviathans among their ranks. Saudi Aramco is the world’s largest oil company by production, pumping out 13.2 million barrels of oil-equivalent per day (boe/d)—around 15% of total global production today. Aramco is also the world’s most valuable company, at roughly USD 2.2 trillion (although its market capitalisation is a mere USD 33 billion since only 1.5% of its shares are listed).

PDVSA of Venezuela is the world’s largest by reserves, with ~303 billion boe—accounting for 17.5% of the global total. China National Petroleum Corporation (CNPC) is the world’s second largest by headcount, with an estimated global workforce of around 1.3 million people in 2018. Only Walmart has more people, with 2.2 million employees around the world.

Due to their sheer size, NOCs have an outsized emissions footprint and thus a pivotal role to play in the energy transition. While markets obsess over listed supermajors such as ExxonMobil, Chevron and Shell, the world’s seven largest international oil companies (IOCs) account for only 12% of the world’s hydrocarbons reserves, 15% of production and 10% of industry emissions. NOCs account for well over half of global production and an even larger share of reserves, the IEA said in a report in January.

NOCs tend to be climate laggards, but some are better than others. An enlightened few have joined the major IOCs in signing up to purportedly ‘Paris-aligned’ emissions reductions targets, via the Oil and Gas Climate Initiative.

The OGCI, which counts Saudi Aramco, Petrobras of Brazil and China’s CNPC among its members, aims to reduce the collective average carbon intensity of signatories’ aggregated upstream operations to between 20-21 kg of carbon dioxide-equivalent (CO2e) per boe by 2025, from a collective baseline of 23 kg CO2e/boe in 2017.

This target, while better than nothing, is less ambitious than the individual emissions reduction pledges of some of the OGCI’s own members. And it is above the global industry average of 18 kg CO2e/boe, according to OGCI member Equinor—which itself had an intensity of just 9 kg CO2e/boe in 2018.

Since the OGCI is aiming for an aggregate emissions reduction across its 12 members, it is conceivable that some companies will underperform against their more proactive colleagues. All rather underwhelming.

Different priorities

IOCs are more adaptable than NOCs, and play to a different rulebook. Beholden primarily to shareholders, IOCs can (and have) slashed capital expenditure, dividends and jobs to save cash during the downturn. NOCs sustain entire economies and a national workforce, and their CEOs answer to government ministers—for whom prioritising the next election cycle over longer-term considerations is usually the most politically expedient thing to do.

NOCs have always been strategically vulnerable to climate risks but less compelled to do anything about it. That vulnerability was deepening before the pandemic-induced shock to the market, which has only compounded matters. Asset owners and managers heaped pressure on European listed oil companies such as Shell, Eni, Equinor and BP, which all responded this year by beefing up their climate commitments.

Outside of Europe, NOCs are still largely unencumbered by such pressures. Only a few have publicly listed shares, and even those that do are still guided more by domestic strategic, political and socio-economic considerations than the small but growing divest movement. As such, they are at liberty to focus on incremental improvements to operational efficiencies aimed primarily at bolstering their financial resilience in order to maintain dividend payments to their number one shareholder: the state.

Considering the immediate challenges facing NOCs, this is an entirely rational response and more realistic than aiming for ‘net zero’ emissions while enduring a prolonged commodity downturn. But looking at longer term risks, it is also entirely inadequate.

As the world shifts slowly but surely to cleaner energy sources, crude oil demand will peak at some point between now and the early 2030s then enter terminal decline. Unless there is a coordinated effort to wind down production in tandem with demand, the world could gradually enter structural oversupply, characterised by a vicious cycle of heightened competition driving lower prices. This cycle could leave oil-rich developing economies ‘economically stranded’.

Race to the bottom

Short of options, NOCs have tended to approach the onset of peak demand as a race to monetise untapped hydrocarbons resources before softening prices and higher carbon taxes squeeze them out of the market. Pre-Covid, that race was seen as the start of a marathon.

As the recovery in global oil demand falters in the face of structural changes to how societies operate during a pandemic, with reduced air travel and more home working, the race is speeding up. While not yet a sprint, the runners might actually be further along the track than previously thought.

Unfortunately, as the Energy Policy Tracker shows, oil ministers are busy propping up their national champions rather than funding radical alternatives to business as usual. In March, Russia eliminated tax on oil and gas production in the Arctic to spur more drilling. In April, Mexico slashed the oil exploration and extraction tax bill of Petróleos Mexicanos (Pemex) by USD 3 billion. And in May, Indonesia bailed out PT Pertamina to the tune of USD 2.6 billion.

The scale of disconnect in Covid-19 stimulus spending between energy importers and exporters varies by country. Some big importers are not making bold strides: India is spending an order of magnitude more on fossil fuel subsidies than clean energy, and South Korea is subsidising dirtier fuels at almost four times the rate of renewables.

But these are exceptions to the ‘importers getting greener’ rule. China has committed seven times more to clean energy than hydrocarbons, and Japan has not yet directly subsidised oil, gas or coal at all. Stimulus spending in Germany, France and the UK is all tilted in favour of decarbonisation, to varying degrees.

The US—simultaneously a major producer, exporter, consumer and importer of oil—committed USD 68 billion to bail out airlines and airports. American oil and gas companies have received only small amounts through the US Federal Reserve’s corporate bond buying programme, although that could increase to USD 19 billion if early indicators are anything to go by. Meanwhile, US clean power and mobility sectors could receive around USD 27 billion of support—plus more time to access it.

Overall Covid-19 spending across all countries monitored is getting a bit greener over time. When the tracker launched a month ago, the fossil fuels share was 56%. Now it is 47%. This balance could tip further in either direction as policies firm up, a spokesperson for Energy Policy Tracker told Energy Flux.

In China, for example, provincial-level car bailouts are likely worth tens of billions of dollars but are not yet quantified. And the EU’s 27 members placed the bloc’s objective of climate neutrality at the heart of a EUR 2 trillion stimulus package in June, most of which does not yet feature in the tracker calculations, the spokesperson said.

On balance, it is too early to say categorically whether the world is building back better. Besides, Covid-19 stimulus spending was never likely to be a panacea for emissions. But the regional differences and direction of travel matter.

The contrasting spending priorities of energy exporters and their major customers can only exacerbate the structural imbalance risk posed by the energy transition that imperils coal and oil exporting countries. There might be sound socio-economic arguments for governments not to redress this situation; but only the short-sighted can fail to see it at all.

Seb Kennedy | Energy Flux | 24 August 2020