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National oil companies could be early winners on the road to ‘net zero’
IEA roadmap poses big strategic opportunity for those sitting on the cheapest barrels
Oil-rich nations face an historic opportunity to seize market share as the world strives to pivot away from crude. State-owned oil companies can either string out supply while rivals fall by the wayside, or race to get their resources to market before it’s too late. Either way, those sitting on the cheapest barrels face fewer risks to monetising their reserves on the road to ‘net zero’ – although all oil suppliers will be squeezed along the way.
National oil companies (NOCs) face a strategic dilemma from decarbonisation, but one that could allow them to keep paying dividends if navigated to their advantage, the International Energy Agency’s 2050 ‘net zero’ roadmap implies.
If they play their cards right, NOCs could enjoy decades of firm (albeit lower) demand for crude exports as other more expensive suppliers are priced out of a declining market.
The IEA’s Net Zero Emissions (NZE) scenario assumes that NOCs restrict investment in new fields as global oil demand wanes, despite having lower cost resources at their disposal.
This approach “limits the need for the shutting in and closure of higher cost production” while allowing resource‐rich countries to increase their market share. That’s because many of their existing fields are very large in size with slow decline rates, the IEA report says.
Alternatively, state-backed oil exporters could respond to falling demand by hiking production to capture an even larger share of the market before demand falls off a cliff.
This is already happening in Russia and the Middle East, where members of OPEC and aligned non-members are expanding oil production capacity.
“In this event, the combination of falling demand and increased availability of low cost oil would undoubtedly lead to even lower – and probably much more volatile – prices,” the IEA said.
Race to the bottom
Much depends on each country’s resilience to lower oil prices. In the NZE scenario many producer economies would see oil and gas revenues drop to “some of the lowest ever levels,” leaving them struggling to finance essential spending.
“This could have knock‐on effects for social stability, and that in turn could potentially threaten the smooth delivery of oil and gas to consuming countries,” the IEA added.
There are risks inherent in both approaches. Whether NOCs open the taps to spark a price war, or string production out to squeeze the most value out of each barrel, there are big implications for governments that rely on oil revenues.
“Moves ... to gain market share or a failure to maintain upstream operations while managing the extreme strains that would be placed on their fiscal balances could lead to turbulent and volatile markets, greatly complicating the task facing policy makers,” the IEA said.
Responding to the IEA report, the Natural Resource Governance Institute said there is a moral case to be made for allowing poorer oil exporters to take market share.
“Globally inclusive dialogue is needed around which countries should reduce production first; developing and emerging market producers are already calling on wealthy countries to lead the decline,” the non-profit said.
Oil exporting nations face “dramatically lower” revenues and public assets “wasted by excessive concentration in a declining sector”. This calls for greater transparency over the exposure of national budgets to climate-related financial risks, NRGI added.
Oil crunch warning
As discussed in the last issue of Energy Flux, the NZE is predicated on a swift fall in oil demand. There is less discussion about what might happen if climate regulations stifle supplies without ensuring demand drops in tandem.
Oil and gas lobbyists were quick to caution against triggering supply-demand imbalances by curtailing upstream investment.
“Scenarios where demand is projected to outstrip supply could deepen energy poverty, and stifle innovation and progress,” the American Petroleum Institute said in a statement.
“As policymakers consider climate targets, it is essential to implement effective and achievable measures that drive further emissions reductions while at the same time, ensuring adequate affordable and reliable energy to meet growing global needs.”
The Australian Petroleum Production & Exploration Association took a different tack, suggesting the IEA report be taken “with a grain of salt”.
“There are many ways to get to net zero and the IEA just looked at one narrow formula,” APPEA CEO Andrew McConville said. “The IEA report doesn’t take into account future negative emission technologies and offsets from outside the energy sector.”
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