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Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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Rapid Energy Transition Could Doom Oil Exporting Countries

It’s a tough time being in the oil and gas business. Big Oil has lately come under a plethora of attacks from all directions, ranging from uncooperative financiers and investors amidst a global shift to renewable energy to hostile governments and hardline climate activists.

And although the major oil-exporting economies of the world weren’t necessarily in the environmental crosshairs like Big Oil was, the shift could have a devastating effect on those oil-dependent economies. 

In a virtual climate summit with 41 world leaders last month, President Joe Biden unveiled an ambitious ten-year Climate Plan that has proposed cutting U.S. greenhouse gas emissions by 50-52% by 2030. That represents a near-doubling of the U.S. commitment of a 26-28% cut under the Obama administration following the Paris Agreement of 2015.

Just last week, some of the biggest names in the business suffered a trifecta of blows after Chevron (NYSE:CVX) shareholders voted to further cut emissions; Exxon Mobil (NYSE:XOM) lost at least two board seats to an activist hedge fund while a Dutch court ordered Royal Dutch Shell (NYSE:RDS.A) to cut its greenhouse gas emissions harder and faster than it had previously planned. Never mind the fact that Shell already had pledged to cut GHG emissions by 20% by 2030 and to net-zero by 2050. The court in The Hague determined that wasn’t good enough and demanded a 45% cut by 2030 compared to 2019 levels.

Things are looking decidedly murky at a granular level, with environmental activists taking advantage of the clean energy momentum and major policy changes by the world’s governments to turn the screw on Big Oil.

But what happens when you zoom out and look at the bigger picture—Entire nations that depend on oil to power their economies. How will economies that are heavily dependent on oil exports cope with the shift to low-carbon fuels?

In 2019, 40 countries across the globe exported crude worth $1 billion or more, with some like Iraq depending on oil sales to finance upwards of 90% of their budgets. Fossil fuel-dependent economies represent almost one-third of the world’s population and are responsible for a fifth of global greenhouse gas emissions. 

And now the International Energy Agency (IEA) has warned that pursuing net-zero emissions target is likely to be catastrophic for many oil exporters.

Source: The Financial Times

A Looming Catastrophe

Pursuing a net-zero emissions target by 2050 would see OPEC become even more dominant and end up accounting for more than 50% of world production as supplies become concentrated among a smaller number of countries. Unfortunately, it would also mean there’s a lot less pie to go around, with annual per capita income from these commodities predicted to fall by as much as 75% in little more than a decade.

According to the IEA, countries where hydrocarbon exports make up a large part of GDP are likely to be the hardest hit. 

However, countries that are the least resilient—where the revenues from the sale of fossil fuels have not been adequately managed by means such as using the cash to diversify into other domestic industries or create sovereign wealth funds that invest abroad to secure long-term revenues—will also bear the full brunt of the energy transition.

One such country is Iraq.

Despite harboring ~145bn barrels of proven crude reserves, Iraq’s finance minister Ali Allawi recently warned that pursuing a net-zero target by 2050 could be catastrophic for the country. Allawi has been desperately trying to push sweeping state and economic reforms in a bid to avert this eventuality, but has seen his efforts thwarted by a government more concerned with more prosaic matters.

The World Bank has named Iraq, Libya, Venezuela, Equatorial Guinea, Nigeria, Iran, Guyana, Algeria, Azerbaijan, and Kazakhstan as the most vulnerable oil-producing countries due to their high exposure to the oil and gas sector and relative lack of diversification.

On the other hand, some oil giants such as Saudi Arabia and Russia are seen as being less vulnerable thanks to their more complex economies and bigger financial buffers. 

A good case in point: When it comes to embracing the energy transition, Saudi Arabia appears to be ahead of most of its OPEC peers.

The Saudi government is building a $5 billion green hydrogen plant that will power the planned megacity of Neom when it opens in 2025. Dubbed Helios Green Fuels, the hydrogen plant will use solar and wind energy to generate 4GW of clean energy that will be used to produce hydrogen.

But here’s the main kicker: Helios could soon produce clean hydrogen that’s cheaper than oil.

Bloomberg New Energy Finance (BNEF) estimates that Helios’ costs could reach $1.50 per kilogram by 2030, way cheaper than the average cost of green hydrogen at $5 per kilogram and even cheaper than gray hydrogen made from cracking natural gas. Saudi Arabia enjoys a serious competitive advantage in the green hydrogen business thanks to its perpetual sunshine, wind, and vast tracts of unused land. Related: IEA Backpedals, Says Oil Demand Will Soon Reach Pre-Crisis Levels

During the company’s latest earnings call, Saudi Aramco CEO told investors that Aramco had abandoned immediate plans to develop its LNG sector in favor of hydrogen. Nasser said that the kingdom’s immediate plan is to produce enough natural gas for domestic use to stop burning oil in its power plants and convert the remainder into hydrogen. Blue hydrogen is made from natural gas either by Steam Methane Reforming (SMR) or Auto Thermal Reforming (ATR) with the CO2 generated captured and then stored. As the greenhouse gasses are captured, this mitigates the environmental impacts on the planet.

Last year, Aramco made the world’s first blue ammonia shipment—from Saudi Arabia to Japan. Japan—a country whose mountainous terrain and extreme seismic activity render it unsuitable for the development of sustainable renewable energy—is looking for dependable suppliers of hydrogen fuel with Saudi Arabia and Australia on its shortlist.

Dwindling reserves

Big Oil, however, faces a bigger existential crisis that could hit home even sooner: Rapidly dwindling reserves.

Massive impairment charges saw Big Oil’s proven reserves drop by 13 billion boe, good for ~15% of its stock levels in the ground, last year. Rystad now says that the remaining reserves are set to run out in less than 15 years, unless Big Oil makes more commercial discoveries quickly.

The main culprit: Rapidly shrinking exploration investments.

Global oil and gas companies cut their capex by a staggering 34% in 2020 in response to shrinking demand and investors growing wary of persistently poor returns by the sector.

The trend shows no signs of moderating: First quarter discoveries totaled 1.2 billion boe, the lowest in 7 years with successful wildcats only yielding modest-sized finds as per Rystad.

ExxonMobil, whose proven reserves shrank by 7 billion boe in 2020, or 30%, from 2019 levels, was the worst hit after major reductions in Canadian oil sands and US shale gas properties. 

Shell, meanwhile, saw its proven reserves fall by 20% to 9 billion boe last year; Chevron lost 2 billion boe of proven reserves due to impairment charges while BP lost 1 boe. Only Total (NYSE:TOT) and Eni have avoided reductions in proven reserves over the past decade.

By Alex Kimani for Oilprice.com

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  • Mamdouh Salameh on June 02 2021 said:
    Environmental activists and divestment campaigners along with the IEA are blinded by dogma and political agenda respectively that they can’t or don’t want to separate the wheat from the chafe. They don’t want to accept the obvious, namely that the global economy will come to a standstill with devastating consequences such as wars, starvation, a breakdown of law and order and the end of civilized life as we know and enjoy without oil and natural gas. The consequences will be far worse and more immediate for peoples of the world than zero emissions and climate change that may or may not happen in hundreds of years. The facts speak for themselves.

    Fact 1 is that no global energy transition could succeed without major contributions from natural gas. This negates zero emissions in 2050 or 2100 if ever.

    Fact 2 is that the global economy including the global transport system is driven by oil and gas. Without these two quintessential sources, the global economy comes to a standstill.

    Fact 3 is that without oil the global petrochemical industry collapses leading to a collapse of fertilizers, insecticides and ultimately global agriculture.

    Fact 4 is that the story of energy transitions through history has been a constant move toward fuels that are more energy-dense and convenient to use than the fuels they replaced.

    Fact 5 is that the best way to combat climate change is to focus on reducing carbon emissions from fossil fuels and not their actual use. That is exactly what the global oil industry is doing.

    Western imperialist powers have in the past used military power to get their hands on the oil reserves of the world for the purpose of maintaining their economic prosperity as evidenced by the ousting of Iran’ leader Mohammed Mosaddegh in a coup d’etat in the 1950s or the assassination of the late Saddam Hussein in the invasion of Iraq in 2003 or the tough sanctions imposed on Venezuela by the United States to effect a regime change and get its hands on the world’s largest oil wealth.

    Now they are planning to use military force if necessary to force Arab Gulf producers to keep their reserves underground. That is what smacks of the IEA’s futile and reckless roadmap for zero emissions.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • KZBFF ELF on June 02 2021 said:
    The greenhouse effect was discovered in the early 19th century, yet the oil industry lobbied its way through it, there is nothing rapid about the transition really.
  • MurrayGrigg on June 02 2021 said:
    Great article. There are also large structural changes in government income for many countries with shrinking royalty and severance tax revenues and ad velorem taxes as well as county gasoline taxes and various pump taxes and refining taxes.The federal and state tax bases from all these 3rd party income stream will have a large effect on budgets everywhere.

    Since these is a huge part of not only USA but many country budgets and the excess cash flow is subsidizing solar abs wind and electric cars, then one day the money will run out to squeeze the oil barrel and then the subsidizes will also have to slow down for the alternative energy.

    M

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