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A number of bullish factors…

Alan Mammoser

Alan Mammoser

Alan Mammoser writes about energy, environment, cities, infrastructure and planning. He writes the weblog, www.warmearth.us

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Why We Cannot Just “Unplug” Our Current Energy System

  • Oil and gas industry leaders made it clear during the Atlantic Council’s Global Energy Forum that fossil fuels will play an indispensable role in energy security for decades to come.
  • A special emphasis was made on the role of fossil fuels in the growth of developing nations, as the leaders attempted to widen the definition of the term ‘energy transition’.
  • The current energy crisis has highlighted the importance of global energy security, and oil and gas leaders are determined to ensure energy security is a central part of an energy transition.

OPEC’s Secretary General and other industry leaders had much to say about ‘Oil and Gas in a Net-Zero World’ in Dubai this week. They appeared newly confident in the central role they will play in an energy transition.  Speaking at Atlantic Council’s Global Energy Forum, held in conjunction with the annual World Government Summit, oil and gas leaders acknowledged that the war in Ukraine has suddenly shifted priorities. But they highlighted other factors at play, which will likely be central in their argument for the staying power of fossil fuels in the decades ahead. 

Over and over again, panelists emphasized the importance of a ‘smooth transition,’ in which oil and gas, as well as nuclear power, will play indispensable roles in ensuring energy security, even as renewables and other carbon-free energy sources are added. In this context, they decried the ongoing lack of sufficient investment in upstream development. 

But another argument was deployed by oil and gas advocates, one often highlighted during the two-day conference that may indicate a subtle shift in their emphasis. They implied that while the rich world may well continue its push to transition away from oil and gas, the developing countries will not have this luxury. The needs of their burgeoning populations will ensure a steady and even growing market for carbon-based fuels for decades.  

In this manner, the speakers signaled a possible inflection point in the dialogue on energy. They recast it by seeking to widen the concept of an energy transition.  

As Dr. Sultan Al Jaber, Managing Director of the Abu Dhabi National Oil Company (ADNOC) said in opening remarks, “We cannot and must not unplug the current energy system before we have built the new one.”

He listed the UAE’s considerable commitment to new energy, with its three enormous solar parks and ambitious commitment to achieving net-zero carbon emissions by 2050. But, alongside this, he called for increased investment in oil and gas and stated a need “to inject a dose of realism into the planning for the energy transition.”

History is on our side 

“The role of oil and gas is guaranteed for the foreseeable future,” said Mohammad Sanusi Barkindo, Secretary General, OPEC. “It will continue to account for 50% of the global energy mix to 2045.”

A key reason for this, he explained, is sheer population growth in the developing world, which will hold most of the world’s expected 20% population increase up to 2045. It is this part of the world where energy poverty is evident, he noted, while access to energy is a UN-recognized right. 

Dan Brouillette, who served as US Secretary of Energy in the Trump Administration, also emphasized the industry’s secure place by looking to the long history of energy. He said that energy transitions have not been from one source to another but from fewer to more sources, from those less energy-dense sources to those more energy-dense ones. 

“Will renewables get to 100 percent?” he asked rhetorically. “They’re less energy-dense than nuclear, than oil and gas.” Based on this historical observation, he continues to see a vital role for oil and gas looking 20 years out.

In this light, he did not expect much actual deviation in US energy policy no matter the administration. Brouillette said he anticipates the continuation of a kind of ‘all of the above’ approach that really began during the Obama Administration. 

Hunter Hunt, CEO of Texas-based Hunt Consolidated Energy LLC, carried the idea further. 

“In absolute terms, we consume more of all types of energy than ever,” said Hunt, noting just one exception in the case of whale oil. 

“So how do we get 2050 to work?” he asked, referring rhetorically to the Paris Accord’s climate goals. “For industry there are no mile markers along the way.” 

Seen in this historical context, he noted, reducing global oil consumption to 80 million barrels per day would be an unprecedented feat.  

Investment indecision

Conference participants expressed hope that a changing perception of fossil fuels’ role in the energy transition will help the industry recover from its shortfall in upstream investment in recent years. They emphasized that the messaging to investors is critical. 

“Investment is key at the moment,” said Brouillette. “ So it’s important to be careful with the words we use.”

“It’s difficult to invest $2 billion or more in development if investors think that demand for the product will continue drop.”

“We have to resolve the rhetoric,” he continued, “because oil and gas is critical for investment in renewables.” 

“We have to see them as complementary.”

“For seven to 10 years prior to last year, the energy sector was the worst-performing part of the S&P 500,” said Hunt. “So access to capital is a difficult problem.” 

Hunt went on to say that, in the face of the current crisis in Europe, he thinks it’s highly unlikely that the US would be able to quickly produce another million additional barrels per day, and in fact will probably add less than half of that. The constriction is directly the result of the capacity investment shortfall of recent years.  

Related: Saudi Arabia May Raise Its Oil Prices For Asia To Record Premiums

Barkindo expressed concern about an ongoing downcycle and was insistent in his call for more capital in oil-sector development. 

“We had not recovered from the 2014-15 contraction by 2020, when (the Covid crisis) caused an unprecedented contraction of 30%,” in investment, he said.  

“The World Oil Outlook (report) shows total oil-related investment will require $12.6 trillion by 2045 to catch up, and this was before the war in Ukraine,” he said. 

COP coming to MENA

The UN’s 27th session of the Conference of the Parties (COP 27) will be held in Egypt this fall, while COP 28 is to occur in Abu Dhabi next year. This setting of the event in the Middle East and North Africa (MENA) may well amplify a shift in emphasis in the conversation about the energy transition. Conference participants in Dubai this week certainly hoped so.    

Barkindo saw a strategic opportunity. He said that he would like to see Egyptian and Emirati leaders use their roles as conference hosts to, as he put it, “refine” the conversation on the energy transition. Again, he referred to the question of the developing world. 

He noted that the COP, being held back-to-back in these countries, would foster discussion of “inclusiveness, that no country is left behind.”  

He said the discussion should also encompass “investment in the industry, and…reset the conversation on capping (global temperature rise) at 1.5C, that this and the role of oil and gas are not mutually exclusive.”

Brouillette said he thought the current crisis could, as he put it, “rebalance the equation,” on oil and gas in the energy transition. He said that energy security is a critical factor of equal importance and wants the world “to look at energy policy as more than through the prism of climate policy.”   

Hunt also saw broader significance in the Ukraine crisis. “We might see the event as a reset in the dialogue,” he said, such that fossil fuel and climate advocates can come to some agreement.  

“If they can view each other with new clarity, then the energy transition will be much more successful,” he said.   

And he returned to the theme of developing nations’ needs when he conveyed a lesson that he took from a recent visit to Peru. There, he saw that a village with a truck had more ability to market its products than another village at a higher elevation that lacked a vehicle. 

“It is mobility that will get people out of poverty,” he said. “And that will require internal combustion engines, not Teslas driving up the mountainside,” he said. 

Of course, one might ask whether innovators, given the right encouragement and incentive, will not find better ways than 20th-century motor technologies to let villagers in Peru get their products to market. After all, affordable Teslas could come about.  

The need for more aggressive and creative approaches than the measured steps of oil and gas industry leaders will likely arise at upcoming COPs, wherever they may be. These international meetings are, after all, a colorful cavalcade of people and interests, a metaphorical meeting of OPEC and Woodstock.  

Anticipating that, George Frampton, who is Distinguished Senior Fellow at The Atlantic Council Global Energy Center, suggested that COP 27 and 28 organizers should start considering the role of the civic sector now. 

“They will need to bring in the civil society sector, in its full range including business, innovators, and non-profits,” he said, after listening to industry advocates have their say in Dubai this week. “That will bear the most fruitful discussion,” about the energy transition, he said. 

By Alan P. Mammoser for Oilprice.com

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Leave a comment
  • Mamdouh Salameh on March 30 2022 said:
    The Atlantic Council’s Global Energy Forum deliberations in Dubai boil down to one quintessential fact that oil and gas are here to stay well into the future underpinned by a rising world populations and a growing global economy.

    Global energy transition can’t succeed without huge contributions from fossil fuels. So attempts to unplug the current energy system which is overwhelmingly based on fossil fuels are doomed to fail.

    And while energy transition is important for the developed countries, fossil fuels will continue to be pivotal for the growth of the developing nations well into the future.

    A peaceful coexistence of both is the way forward for global energy security.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Lee James on March 30 2022 said:
    A lot of the talk these days is about a petroleum industry hurting for investment because the energy sector underperformed in recent years. Additionally, the planet needs to transition away from fossil fuel. Is there anything else holding the industry back?

    I wonder if, in the U.S. and other areas too, it has become harder to make a profit extracting fossil fuel. Certainly market price for petroleum products is not a problem, currently. The piece I am wondering about is production cost. Related to production cost is the idea that oil reservoirs underground are not so plentiful and sweet spots have been sucked dry. And of course everything is more expensive these days, or unavailable.

    Maybe we can see an article that looks at production cost, the challenge of diffusely-held oil (in shale) versus reservoir petroleum, and if sweet spots can still be found. I have the feeling there is this lingering hope that industry production will bust-loose once again.

    Or, is there anything different, this time?
  • Peter Farley on April 03 2022 said:
    Energy use in developed countries is falling and will continue to fall as energy efficiency efforts will only be enhanced by the current price and strategic situation. There are very few regions on earth that can't get all their energy requirements from renewables including wind, solar, hydro, geothermal, tidal, biomass with some contribution from nuclear in some regions. At current rate of electrification Europe will have halved its gas use and reduced oil consumption by at least 1/3rd by 2030 and China and Japan not far behind

    The cheapest new vehicle in the world today is the Honguang mini that sells for US$5,000. With sodium or sulphur based batteries larger vehicles and small pickups based on similar concepts could be supplied in Africa and South Asia for even less within 3-4 years. This is less than ICE vehicles. Cheaper to buy and cheaper to fuel from rooftop solar, by about 2026, there will be very few reasons for anyone to buy a new ICE vehicle. Then even though it will take many years for ICE vehicles to disappear the lower running cost of electrics will mean that they take over most of the high use applications by about 2032

    As Earnest Hemingway noted many years ago, you go broke slowly at first and then all of a sudden.

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