• 3 hours Higher Oil Prices Reduce North American Oil Bankruptcies
  • 5 hours Statoil To Boost Exploration Drilling Offshore Norway In 2018
  • 6 hours $1.6 Billion Canadian-US Hydropower Project Approved
  • 8 hours Venezuela Officially In Default
  • 10 hours Iran Prepares To Export LNG To Boost Trade Relations
  • 12 hours Keystone Pipeline Leaks 5,000 Barrels Into Farmland
  • 18 hours Saudi Oil Minister: Markets Will Not Rebalance By March
  • 23 hours Obscure Dutch Firm Wins Venezuelan Oil Block As Debt Tensions Mount
  • 1 day Rosneft Announces Completion Of World’s Longest Well
  • 1 day Ecuador Won’t Ask Exemption From OPEC Oil Production Cuts
  • 1 day Norway’s $1 Trillion Wealth Fund Proposes To Ditch Oil Stocks
  • 1 day Ecuador Seeks To Clear Schlumberger Debt By End-November
  • 1 day Santos Admits It Rejected $7.2B Takeover Bid
  • 2 days U.S. Senate Panel Votes To Open Alaskan Refuge To Drilling
  • 2 days Africa’s Richest Woman Fired From Sonangol
  • 2 days Oil And Gas M&A Deal Appetite Highest Since 2013
  • 2 days Russian Hackers Target British Energy Industry
  • 2 days Venezuela Signs $3.15B Debt Restructuring Deal With Russia
  • 2 days DOJ: Protestors Interfering With Pipeline Construction Will Be Prosecuted
  • 2 days Lower Oil Prices Benefit European Refiners
  • 2 days World’s Biggest Private Equity Firm Raises $1 Billion To Invest In Oil
  • 3 days Oil Prices Tank After API Reports Strong Build In Crude Inventories
  • 3 days Iraq Oil Revenue Not Enough For Sustainable Development
  • 3 days Sudan In Talks With Foreign Oil Firms To Boost Crude Production
  • 3 days Shell: Four Oil Platforms Shut In Gulf Of Mexico After Fire
  • 3 days OPEC To Recruit New Members To Fight Market Imbalance
  • 3 days Green Groups Want Norway’s Arctic Oil Drilling Licenses Canceled
  • 4 days Venezuelan Oil Output Drops To Lowest In 28 Years
  • 4 days Shale Production Rises By 80,000 BPD In Latest EIA Forecasts
  • 4 days GE Considers Selling Baker Hughes Assets
  • 4 days Eni To Address Barents Sea Regulatory Breaches By Dec 11
  • 4 days Saudi Aramco To Invest $300 Billion In Upstream Projects
  • 4 days Aramco To List Shares In Hong Kong ‘For Sure’
  • 4 days BP CEO Sees Venezuela As Oil’s Wildcard
  • 4 days Iran Denies Involvement In Bahrain Oil Pipeline Blast
  • 7 days The Oil Rig Drilling 10 Miles Under The Sea
  • 7 days Baghdad Agrees To Ship Kirkuk Oil To Iran
  • 7 days Another Group Joins Niger Delta Avengers’ Ceasefire Boycott
  • 7 days Italy Looks To Phase Out Coal-Fired Electricity By 2025
  • 7 days Kenya Set To Give Local Communities Greater Share Of Oil Revenues
Alt Text

Oil Majors See Profit In Carbon Capture And Storage

carbon capture and storage technology…

Alt Text

Did This Startup Solve The Carbon Capture Challenge?

Costs have long prohibited carbon…

Is The Paris Climate Agreement Bearing Fruit Already?

Power plant

The COP21 agreement to limit global warming to less than 2 degrees Celsius, signed in Paris last year by nearly 200 countries, finally came into effect this month. Along with it, however, have come warnings that the measures pledged by governments to meet this target are insufficient and would allow temperatures to rise by a potentially catastrophic 3 degrees Celsius. Adding to this grim outlook, Donald Trump’s surprise win in the American presidential elections has cast doubts over the agreement’s ultimate fate. Such pessimism aside thought, an examination of commodities markets, namely oil, coal and aluminum, shows that the lower emissions targets prescribed by COP21 are already starting to yield results, as industry actors are adapting to the new regulatory environment.

In the oil sector, the agreement's impact likely played a part in OPEC’s announcement of a production cut to reign in excess supply, created when Saudi Arabia ramped up output and tried and drive US shale out of business. The result, as intended, was a precipitous decline in the price of oil, which reached a 13-year low of $26 a barrel at the beginning of this year. Even if Saudi production surged by an extra 1 million bpd (to around 10.6 million bpd) since 2014, tenacious shale companies managed to weather the storm better than the Saudis had expected. By that point, the war of attrition was already eating into the Saudi state’s finances to an unsustainable degree. Unemployment rose and the budget deficit ballooned.

The government decided that a change of tack was in order and a radical overhaul of the Saudi economy was announced. The Vision 2030 program, unveiled earlier this year, calls for massive investment in the Kingdom’s underdeveloped private sector, with economic diversification rather than domination of the oil market, as the blueprint for future growth. That one of the world's oil-dependent economies is openly touting its efforts to move beyond a petrol-based rentier economy entirely speaks to how leading oil producers view long-term prospects for oil prices. As the American shale industry rebounds and the new US President-elect boasts about his commitments to increasing fossil fuel production, it is highly unlikely that Saudi or any other major producer will be able to plan around high prices at any point in the forseeable future.

The engine for investment will be Riyadh’s sovereign wealth fund, which would take over ownership of Saudi Aramco and bring the value of assets under its control to over $2 trillion. In this context, the Saudi commitment to cut oil production comes from the realization that a higher price means the PIF’s oil industry assets, including Aramco itself, will see their value rise and generate more cash for investments. The hype surrounding the plan has started to attract willing investment partners. In October, a Japanese tech company, SoftBank announced that it was creating a $100 billion tech fund with $45 billion in help from Saudi money. Additionally, Riyadh has been courting UK investors scrambling for returns in the post-Brexit environment. The UK is already one of the country’s biggest economic partners, and Prime Minister Theresa May has identified Saudi as one of the government’s priority markets abroad. A Free Trade Agreement between London and Riyadh is also being assessed.

As is the case with oil, the oversupply in certain energy intensive industries (such as steel and aluminum) is causing producers to do some soul-searching. The chief culprit in these sectors has been China, whose combination of shoddy industrial standards and over-reliance on coal has created not just unprecedented overcapacity but quite possibly the world’s most polluting industrial sector. Having come in for a barrage of criticism and seen huge tariffs slapped on its steel exports, the Chinese government, in line with the environmental commitments made in Paris, has moved to cut back its production of both steel and aluminum. By the end of 2016, China aims to have shut down 1,000 coalmines with a view to reducing output from 2.17 billion tons this year to 500 million within three to five years. Out of the 7000-odd industrial projects that were built without proper environmental approvals, Beijing will look to closing some 1300 by the end of the year as they’re considered unsalvageable. Related: What Happens To Oil If Trump Tears Up Iran Nuclear Deal

The drive, meant to take out inefficient or illegal producers, is in keeping with plans to reduce China's steel production capacity by 13 percent within five years. Similar measures are taking place in the aluminum industry. After the Chinese government stressed the importance of strictly controlling production levels, officials began checking the way current smelters operate and whether they meet environmental standards. While these measures are welcome, enforcement remains a real problem. Local governments have proven quite ready to turn a blind eye to transgressors and sanctions have largely been ignored. For example, Xinfa Group’s smelters, one of China’s biggest aluminum producers, are emitting particulate matter levels (19 mg/m3) that are almost double the national standard (10 mg/m3) with impunity, while Hongqiao, another aluminum producer that was told to shut down half of its production capacity, has so far not taken any action.

With the COP 22 in Marrakech in full swing we can already discern a movement in the right direction taking place in two of the worst offending industries, oil and coal. What the COP 22 hopes to achieve is to put in place a standardized framework within which each country's carbon reduction measures can be monitored and measured against the pledges made in Paris. The COP 22 also proposes a regular appraisal of progress towards meeting carbon reduction goals, which it is hoped will further encourage states to meet and exceed their targets.

The newfound commitment to tackling the oversupply of steel and coal in China and oil in OPEC countries should just be a first step in the continuing global effort to tackle climate change – with or without Donald Trump, market forces are already in motion.

By Richard Talley for Oilprice.com

More Top Reads From Oilprice.com:

Back to homepage

Leave a comment
  • zipsprite on November 25 2016 said:
    The PM2.5 standard is 10 micrograms, not milligrams as stated, and presumably the offenders are emitting at 19 micrograms not 19 milligrams. A thousand-fold difference.

    If China were able to cut coal production from 2.17B tons to 500M tons in 3-5 years, without increasing imports, that would truly be impressive. Hope they can do it.

Leave a comment

Oilprice - The No. 1 Source for Oil & Energy News