Oil leaders give the ‘energy trilemma’ a reality check in Houston

Oil and gas leaders in Houston this year for CERAWeek by S&P Global have sought answers to the energy trilemma of supply security, transition and affordability. They will leave having added a fourth problem to the list: energy reality.

“Maybe the trilemma should become the quadrilemma and add to it energy reality,” OPEC Secretary-General Haitham Al-Ghais told delegates numbering over 7,500 in total at the event in the hydrocarbon capital of the US. “The sense of reality and realism and practicality when we talk about energy transition is what I would add to that energy trilemma.”

For Ghais, replacing all hydrocarbons with renewables is neither realistic nor possible with current technology, and instead the world will have to accept that all forms of energy are necessary to meet the demands of a global population expected to reach almost 10 billion by 2050. His point was that rather than focusing on demonizing hydrocarbons, focus on demonizing emissions.

By OPEC’s own estimates, the oil sector alone will require $12.1 trillion of investment over the same period, but investment in all levels of the supply chain is in short supply outside the wealthier producing nations of the Persian Gulf. Countries like Saudi Arabia, the UAE and Kuwait belong to a shrinking club of global producers that are investing at scale to boost production capacity.

Global capital spending picture

Capital spending in oil remains under the $475 billion average in the three years to 2010 and well below the $690 billion average achieved during the oil price boom years of 2010-2014, according to S&P Global Commodity Insights data. At the same time, hydrocarbons are fighting with renewables for finance, which in the current economic climate is becoming more expensive.

The International Monetary Fund estimates that at least $4 trillion needs to be invested in renewable energy annually until 2030 if the world is to achieve net-zero emissions by 2050, a target that few oil and gas executives at CERAWeek believe is achievable. Total energy spending on renewables and hydrocarbons was thought to be up 8% last year to $2.4 trillion, with the increase driven by low-carbon spending, according to the International Energy Agency.

Nowhere is the challenging reality of funding new hydrocarbons projects being felt more than in Africa, a continent crucial to both energy transition and fossil fuel demand. Angola’s oil minister and top OPEC official, Jose Barroso, echoed the thoughts of many producers in the region, which holds vast proven reserves but increasingly struggles to attract investment.

“It all depends on the funds,” Barroso said on the sidelines of CERAWeek. “We need to invest to produce our production. We’re doing all we can do offset declining production. Today we have enough challenge keeping the production rates we have today.”

Reframing the discussion

Despite the push for energy transition, all indications are that more oil will be needed even as the world strives to limit global heating to below a 1.5 degrees Celsius rise. In their reference case scenario, S&P Global analysts currently expect global oil demand — including biofuels — to peak at 112.4 million b/d in 2035, up from 103 million b/d this year.

CEOs from the world’s largest international oil companies attending the conflab in Houston echoed Ghais in their concern over future investment into hydrocarbons and the need to balance the reality of meeting future energy demand with reducing emissions.

“The issue of how we best move toward a lower carbon energy system is one that is getting reframed as we get some real experience in the challenges of pushing some of these new technologies forward, the realities that affordability and energy security actually do matter, and so I think the discussion is moving to a more balanced state,” said Mike Wirth, CEO of Chevron.

Add this to more immediate concerns over supply disruption caused by Russia’s ongoing war in Ukraine along with the global economy’s economic recovery pains, and market watchers mostly see more turmoil for prices ahead. But few attending CERAWeek were anticipating crude surging beyond $100/b or a repeat of last year’s natural gas shock in Europe. Russia’s energy is finding a way into new markets, and the world is getting better at responding to the Kremlin’s weaponization of its oil and gas.

Russian crude continues to find homes at a discount, and traders are increasingly learning to trade these flows against a backdrop of changing sanctions and price controls. Seaborne crude exports remained resilient in February, pulling back from an eight-month high a month earlier, the data shows, as Moscow redirected record volumes to India and a growing gray market in offshore transfers.

Platts, part of S&P Global Commodity Insights, last assessed benchmark Dated Brent crude at $82.36/b March 8, roughly the same as where it was trading at the beginning of January 2022, a month before Russia’s tanks crossed the border into Ukraine.
Structural volatility

“We may be moving into a world where we’re more likely to see more structural volatility,” said Spencer Dale, chief economist at BP and a former member of the Bank of England’s rate-setting committee. Dale argued that China’s economic growth and not Russia was the biggest unknown for oil markets later this year.

Even US Energy Secretary Jennifer Granholm, speaking at a CERAWeek lunch event, rowed back on the energy transition rhetoric by acknowledging fossil fuels will be essential for many years to come.

Still, new policies like the Inflation Reduction Act in the US, partly designed to wean the world’s largest consumer of commodities away from fossil fuels by subsidizing renewable investments, or Europe’s Carbon Border Adjustment Mechanism could radically reshape the hydrocarbons industry over the next decade. But as one senior executive attending CERAWeek said: When it comes to oil and gas, “trade will conquer all.”
Source: Platts