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Fossil fuel headwinds to challenge OPEC in a post-coronavirus oil market

OPEC’s long-term prospects took a hit in recent weeks, with BP declaring peak oil demand may have already been reached, California mandating a phaseout of internal combustion engine cars by 2035 and China vowing to be “carbon neutral” by 2060.

The policy details are vague and the forecasts uncertain, but the announcements were yet another reminder that oil’s day in the sun could be drawing to an accelerated end, as COVID-19 prompts governments and companies to rethink future energy generation and use.

OPEC, which controls roughly one-third of global crude output capacity and just celebrated its 60th birthday, has long promoted its low production costs as evidence it will be the “last producer standing,” even in a diminished market.

The organization will release its latest long-term forecast, the World Oil Outlook, on Oct. 8, which will include projections on how COVID-19 is expected to impact global supply and demand in the decades to come.

OPEC officials — and most analysts — maintain that oil will be a vital energy source, with renewables and alternatives largely yet to scale up, and population growth requiring more of every kind of fuel.

“Oil is expected to maintain its leading role in the global energy mix [through 2045],” Ayed al-Qahtani, OPEC’s director of research, said Sept. 27 at the G20 energy ministerial. “All energy sources will be needed to achieve the massive challenge of meeting future demand and expanding energy access to eradicate energy poverty.”

But if the oil market shrinks, competition for customers will intensify, particularly in Asia, which consumes some 40% of current global oil supply.

The policy shifts prompted by the pandemic could force OPEC, especially its core Middle East members, to examine its investment strategy and geopolitical ties with its main customers. Besides shipping much of its crude to Asia, many OPEC members have steadily been growing their downstream footprint there, entering into deals for refineries and storage terminals.

China’s ties with OPEC

The carbon neutral announcement by China — long on ambition though short on specifics — may have hit home the most for OPEC, which supplies about 60% of the country’s oil and is banking on it to drive demand growth as the world’s largest importer of crude.

Beyond the exports, many OPEC members have courted Chinese upstream investment, while Saudi Arabia and the UAE have sought partnerships for refineries and petrochemical projects in China.

OPEC and China have held a semi-regular energy dialog since 2015.

Analysts say China’s announcement — which includes a goal of having its CO2 emissions peak before 2030 — may have been political window-dressing, and the scant details raise doubts about the seriousness of the government.

Even so, OPEC’s core Middle Eastern producers “have plenty to worry about in terms of the Chinese market over the next decade or so,” said Vandana Hari, founder of energy consultancy Vanda Insights.

BP released its latest closely watched Energy Outlook on Sept. 14, before China announced its carbon neutral plans, projecting that Chinese liquids demand will peak in the next five years, driven by increased efficiency and fuel substitution. Its 2018 consumption of 13 million b/d will fall to 6 million b/d by 2050 under a “rapid” approach of stringent policy measures, and 4 million b/d under a “net zero” scenario that is even more aggressive, BP said.

“The bilateral relations may remain strong, but [OPEC] producers need to prepare for the market to weaken,” Hari said. “As [China] moves from industrial production to services to underpin its economic growth, it is likely to reach peak oil demand in the next few years.”

Circular carbon

To be sure, many OPEC members have been investing in renewables in recent years, particularly solar, conscious of changing global attitudes towards climate change.

But oil will no doubt remain OPEC’s economic bread and butter.

OPEC kingpin Saudi Arabia, the largest crude exporter in the world, has touted its “low-carbon” oil, with a 2018 study by Stanford University finding Saudi crude had the lowest carbon intensity among major producers, largely due to the kingdom’s relatively easy-to-access reservoirs and its ability to pump crude while flaring little associated gas.

State-run Saudi Aramco has also joined the Oil and Gas Climate Initiative, further pledging to lower its carbon intensity.

As global policies take aim at fossil fuel emissions, Saudi Aramco could be at least partially insulated and remain a key oil supplier to the world. This could be critical if it intends to pursue an international listing of its shares, with many investors increasingly guided by environmental, social and corporate governance principles.

“We won’t run out of fossil fuels anytime soon, and oil will still be relatively low priced due to the growing mix of options and alternatives,” said Sadad al-Husseini, a former senior vice president of upstream for Saudi Aramco who has set up his own consultancy, Husseini Energy. “Saudi Arabia will continue to diversify its economy regardless, but oil consumer and producer economics and resource abundance argue for an extended era for ‘clean’ oil.”
Source: Platts

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