OPEC’s Middle East heavyweights make their case for oil in the energy transition
The confluence of an energy crisis, the UN Climate Change Conference and an OPEC+ meeting has given Middle East oil producers a platform for some finger wagging.
A spike in natural gas prices that has spilled into the oil market has consuming countries, including the US, India and Japan, entreating OPEC and its allies to pump a lot more crude – even as world leaders gather in Glasgow to hammer out a climate deal at the COP26 talks.
In the big picture, OPEC+ officials say the market volatility is the consequence of an ill-advised shunning of hydrocarbon investment driven by emissions-conscious western companies and heightened by the pandemic.
As they gather for a Nov. 4 OPEC+ meeting and the COP 26 negotiations, ministers are likely to highlight the costs of a too aggressive push on energy transition, and stake the case for oil and gas to play a critical role in the future fuel mix for decades to come.
It is, of course, an existential issue for the alliance.
“Oil remains the main source of the GDP of OPEC countries, which means that a switch over from oil to other energy sources will undoubtedly affect their economies,” said Yousef al-Shammari, the CEO of consultancy CMarkits, who advises the UN on sustainable energy.
In that context, the recent surge in oil prices to about $85/b, up some 70% year to date, is helpful to Middle East producers, not just in terms of their budgets, but also in fostering a more conducive environment for upstream investment.
S&P Global Platts Analytics forecasts upstream capex spending will rise 8% year on year in 2021 to $392 billion, after a 24% plunge in 2020 due to the pandemic. That is below the 2014 peak of $764 billion.
That explains why OPEC+ ministers, who control about half of the world’s oil production capacity, appear so far unmoved by the pleas to cool off the market with an aggressive ramp-up in output, even as some forecasters warn of further price rises to as much as $120/b. Instead, they have signaled they will reaffirm plans for a modest 400,000 b/d hike when they meet to set December output quotas.
“Reducing or increasing production suddenly by a large amount is not going to help. It will not allow investors to invest,” UAE energy minister Suhail al-Mazrouei said at an industry conference in October. “You will solve the problem in the short term but you will have a bigger problem later on.”
Saudi energy minister Prince Abdulaziz bin Salman, meanwhile, has criticized governments and companies for not holding sufficient inventories and failing to anticipate the global economy’s fast rebound from the pandemic. But he, too, cited the investment needs of the industry in defending the OPEC+ alliance’s resistance to unleashing more crude supplies.
“What we have today is, people are not focusing on the real cause of the issue,” Prince Abdulaziz said.
Immediate market gyrations and discussions on energy security aside, Middle East oil producers are also keen to show they are playing their part in greening the world, in seeking a voice at the COP26 talks, which run through Nov. 12.
For example, OPEC kingpin Saudi Arabia and Bahrain have announced they are aiming for net zero economies by 2060, closely following neighboring UAE, which unveiled a 2050 target.
The pronouncements raised many eyebrows, given the countries’ status as major crude producers and exporters, but advocates say it is vitally important for petrostates to back global climate efforts and invest their oil revenue warchests into green technologies, such as carbon capture, utilization and sequestration, that could significantly shrink the carbon footprint of hydrocarbon extraction and consumption.
“Really up to this point, especially on CCUS, for example, it’s been the US, Australia, the UK and Norway that have been big investors,” said Joe McMonigle, the secretary general of the International Energy Forum, which fosters dialog between energy producers and consumers. “But if you have somebody like Saudi Arabia and some of these other Gulf countries willing to back these technologies with serious dollars, which I believe they are very sincere about, that could be a big gamechanger.”
Sustaining oil production
Saudi Arabia, which is expanding its crude production capacity to a world-leading 12 million b/d, has heavily promoted the concept of a “circular carbon economy.” It involves capturing emissions and either using them in industrial applications or abating them in storage sites or carbon sinks – an approach that would allow its lifeblood oil industry to stay in business in a carbon-constrained world.
How receptive the rest of the COP26 delegations will be to the message remains to be seen, as environmental campaigners have urged a stop to all new upstream projects.
Saudi Arabia and the UAE, blessed with ample gas resources, are also trying to rapidly build up their hydrogen industries and have sold cargoes of ammonia to Asian customers for power generation.
They are also constructing several utility-scale solar projects to feed rising electricity consumption, while the UAE has begun operations at its first nuclear power plant.
The developments are part of what they say is a comprehensive and inclusive energy approach needed to fuel global economic growth.
Middle East producers “want to see other countries opting for more feasible paths towards their decarbonization strategies, including the need to set realistic targets and avoiding selectively subsidizing certain technologies over others while intervening in the markets,” Shammari said. “Such policies may prove to compromise global energy security, leading to high energy prices and reducing investments in the oil and gas sector.”