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4 October 2021updated 05 Oct 2021 12:33am

What future for oil nations in a zero-carbon world?

By Nick Ferris

The transition to clean energy represents an existential threat for ‘petrostates’ already struggling to balance their books due to volatile oil prices, writes Nick Ferris.

An oil and gas discovery used to be a dream for developing countries, bringing immense foreign investment and the chance of a miraculous route out of poverty. After 13.1 million tonnes of gas were discovered off the coast of Mozambique in 2010, French energy giant Total announced an investment in the country worth $20bn – nearly twice the size of the country’s economy.

Now, though, as the clamour of scientists warning about a high-carbon future grows ever louder, it’s becoming clear that these commodities are no longer the boon they once were. Many petrostates are finding themselves over-exposed and at risk of stranded assets.

Mozambique’s resources dream now looks like it may never get off the ground: an armed insurgency, in part provoked by a lack of local profit from the new gas investment, has crippled the country’s north since 2017, killing 3,000 people and displacing a further 820,000. Total has suspended its operation indefinitely in the country, no longer willing to expose itself to the same high risks as oil companies may have done in yesteryear.

For those countries already embedded in oil and gas, volatile prices in recent years have left many struggling to balance their books. In July 2008, oil prices peaked at $145 a barrel before dropping 80 per cent in the following six months. They fluctuated between $80 and $120 from 2010 to 2014, before dropping to under $40 due to booming US shale oil production. At the outset of Covid in April 2020, the price crashed to $18 a barrel, before gradually rising to around $60, and more recently hitting the $80 mark amidst the ongoing global energy crisis.

Unstable oil receipts have meant that average petrostate government debt increased from 24 per cent of GDP in 2010 to 46 per cent in 2018, says climate think tank the Carbon Tracker Initiative (CTI). Moreover, the impact of Covid-19 “provided a cautionary vision of the future if ongoing efforts to diversify [oil nations] do not succeed”, says a 2020 analysis from the International Energy Agency (IEA). No Arab oil producer, except uber-wealthy Qatar, could balance its books at 2020’s average oil price of $40.

“Some of the poorest oil-dependent countries are in complete turmoil,” says Thijs Van de Graaf, associate professor of international politics at Ghent University in Belgium. “Look at Libya, Venezuela, Nigeria or Iraq. This pattern may spread to other petrostates.”

War-fatigued Iraq relies on oil and gas for 89 per cent of its income. The 2020 downturn in oil demand has left the country struggling to pay salaries. Iran cut off electricity exports to the country at the start of 2021, citing non-payment.

Nigeria, which relies on oil and gas income for 45 per cent of government revenue, entered its second recession in five years in 2020, both of which were triggered by a depression in oil prices. The World Bank reports that 40 per cent of the country’s 83 million people live below the poverty line.

Venezuela and Libya are in the midst of political and economic crises that developed in the wake of the deaths of former authoritarian leaders – a political characteristic of producer nations.

A combination of chronic mismanagement of the Venezuelan oil industry and US sanctions have reduced the country’s oil output to around a tenth of levels seen in the early 2000s. GDP has plunged more than three-quarters in the past five years and more than five million people have left the country.

Libya, meanwhile, is ruled by two governments operating in different regions. One shut down the country’s oilfields and terminals for the first nine months of 2020 to put pressure on its UN-backed rival in Tripoli. Oil output fell to less than a sixth of the previous year and economic performance in 2020 was the worst on record, says the World Bank.

Oil is not simply the main export of many petrostates, but “the central factor around which domestic economies and domestic politics have become established”, says Van de Graaf. The clean energy transition “represents an existential threat for many of these countries”.

Decarbonising along the trajectory of the IEA’s Sustainable Development Scenario (which gives a 50 per cent chance of limiting temperature rises to 1.65°C) with a long-term oil price of $40 a barrel would lead to all oil-producing nations collectively losing $13trn over the next two decades compared to a scenario of continually growing oil demand, forecasts the CTI.

Deborah Gordon, leader of oil and gas solutions at global energy and climate think tank RMI, says investors are more likely to back oil extraction in wealthier and more politically stable countries if demand starts to fall.

“It is the smaller petrostates that will particularly struggle,” she says. “Countries that are war-torn, or with non-democratic governance, or with a lot of corruption. If you can’t rely on Iraq, Iran or Venezuela, then those marginal barrels will not be consumed in the market. You will double down on Russia and Saudi Arabia instead.”

It can be “hard to understand the scale of the problem” in many petrostates, says Greg Muttitt from the think tank the International Institute for Sustainable Development. “Countries like Nigeria or Angola, with oil exports providing around half of government revenue, are facing dramatic change. Half the salaries of public sector workers – medical staff, teachers, public transport workers and civil servants – come from oil revenues.”

Countries need to develop business interests in other areas in order to avoid the worst impacts of oil demand collapse on their economies. Wealthy gulf states like Oman and Saudi Arabia have begun investing in renewable energy and international tourism. Nigeria is investing heavily in new infrastructure, including several multi-billion-dollar railroad projects backed by China and a $1.6bn deep sea port.

But attempts at change by poorer petrostates are hampered by a lack of capital at home and because they are often unattractive to international investors. “Countries with strong governance and business climates are more likely to succeed in the push to diversify,” says Ed Parker, from ratings agency Fitch.

“If petrostates can no longer produce oil and gas, they won’t have the capital to diversify,” adds Gordon. “The most successful way to diversify is to do so slowly, but if petrostate short-term economic strategies are to ‘get rich quick’, it is hard to shift priorities to long-term economic growth.”

Of course, the world will still need energy even after fossil fuel demand falls. The warm climate of petrostates in the Middle East and North Africa offer some of the best conditions for solar energy. But the lack of a stable investment climate has also stymied the development of renewables.

“There is a clear pattern where fossil fuel importers generally have higher levels of renewable energy,” says Parker. “Countries where fossil fuels are cheap and plentiful tend to give fossil fuels a much higher weight in electricity generation.”

Valérie Marcel, an oil and gas expert at Chatham House, adds: “Oil companies are masters of risk. Risk is their business. Renewables want stability, probably because the rates of return aren’t so high.”

Moreover, while renewables can transform the domestic economy of petrostates, it would be difficult to replicate oil export revenues. “Oil is an extremely valuable export commodity,” says Muttitt. “Though it is crucial that petrostates decarbonise, the amount of revenue that can be generated by exporting renewable energy equipment, for instance, would never be on the same scale as oil.”

Some wealthier petrostates are attempting to sustain their fuel producer status by trying to become major hydrogen producers, touted by many as a fuel for the clean energy transition. Saudi Arabia, the world’s largest producer of oil, has announced plans to build a green hydrogen plant powered by 4GW of renewable electricity, with hydrogen output of 650t a day. Oman has a national hydrogen strategy, with plans for a green hydrogen plant announced in November 2020.

However, hydrogen remains unlikely to take the place of oil. “Hydrogen exporters are basically selling the conversion process,” says Van der Graaf. “Anyone can harvest solar or wind energy: you are entering a much more competitive market. I don’t imagine it will ever be able to yield the same level of revenues as fossil fuels once did.”

Ultimately, petrostates are likely to need outside support to be able to meet the global challenge of tackling climate change.

Gordon would like to see “serious study and scenario planning for an oil and gas transition” to meet the demands of a low-carbon future. “We are basically undoing over a century of interdependence between these nations and the global economy,” she says. “Unwinding this tightly integrated, global market needs to be surgical.”

Van der Graaf agrees: “We have had many phase-in plans for renewables, but they have entered the system without necessarily displacing fossil fuels. We need a global plan that understands how to support certain countries and deliver the best energy transition for all.”

One of the pillars of the Paris Agreement is a commitment from wealthy nations to provide £100bn in climate finance every year from 2020 – a commitment that has yet to be realised, but which could yet offer support to poorer petrostates. And in addition to financial aid, “wealthy countries can also offer technical assistance”, says Mike Coffin from the CTI. “This could be through retraining workers, helping countries design new tax systems or supporting them with the roll-out of renewables.”

Different countries could also move at different speeds to support developing countries. “For some countries, such as the UK or Norway, the process of transitioning is not so difficult compared to poorer or more oil-dependent countries,” says Muttitt. “Oil only contributes a negligible share of government income, and though there might be lots of jobs in oil and gas, there is also a lot of money to support a just transition. Both these countries – and the US and Canada – should move faster to allow the likes of Angola and Nigeria more time to transition.”

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