Should the Islamic Republic utilize the March 1 elections to end effective enforcement of the hijab law, it will remove a source of constant friction between state and society in Iran, but the regime will also lose an instrument of intimidating the urban middle class.
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BP’s annual energy outlook is always keenly awaited, as it provides a detailed look into the future by an organization with a sizeable stake in the game. This year’s edition, which came out on September 14, was particularly interesting for taking stock of the impact of the coronavirus pandemic. The messages within did not make comfortable reading for Gulf oil producers.
Headlines have mostly focused on BP’s scenarios showing that the all-time peak in oil demand is likely behind us. In its “business-as-usual” case, demand recovers slightly from the pandemic by 2025 but drops away slowly thereafter. If there is a rapid energy transition because of climate concerns and the rise of non-oil technologies, oil demand of around 100 million barrels per day in 2019 drops to 89 mb/d in 2030 and just 47 mb/d by 2050. The outlook for natural gas is more promising in the business-as-usual case, but in a rapid transition scenario, gas demand too is projected to decline after 2035.
This analysis is given some salience by aligning with BP’s own new corporate strategy. While some of these steps had already been announced, this still marks a sharp turnaround for the British giant. By 2030, oil and gas production would drop by 40%, while the company’s renewable energy capacity would rise from 2.5 gigawatts to 50 GW.
BP’s plans are not unique, though the company has perhaps been bolder in talking about them. The idea of the “integrated energy company,” dabbled with in the early 2000s, is back as a model that can reconcile the continuing importance of hydrocarbons with the rise of new energies and tightening of climate policy around the world. All the major European oil firms have announced plans for variations of “net zero” greenhouse gas emissions by 2050. Shell is also in the process of deep transformation, looking to cut costs by 40% and focus its oil and gas production on a few key regions. Shell, BP, Total, Equinor, and Eni are investing in a mix of solar, wind, batteries, and electric charging stations.
The viability of such visions relies on three key pillars. First is the growing competitiveness of low-carbon energy. Solar and wind are already the cheapest form of new electricity in many regions. Battery costs are coming down, while electric vehicles are approaching cost parity. Affordable “green” hydrogen made using renewable energy is also likely to be readily available sooner than many expect. But replacing or recycling fossil-based plastics, fueling long-distance ships and airplanes, and driving high-temperature and ore-reduction processes in heavy industry, such as steel and cement, remains technically and commercially much harder.
Second is stricter climate policy around the world. The European Union continues to tighten its emissions targets and introduce plans to decarbonize sectors beyond electricity. The United States’ position depends crucially on the November presidential election. Other developed countries, such as Australia, Canada, and Japan, have pursued tepid or inconsistent policies. Most countries are so far falling short of their Paris Agreement pledges on addressing climate change. On the other hand, financial institutions and cities are increasingly pursuing climate action themselves. The success of global action will hinge on the directions chosen by China and India, as giant, fast-growing, and, so far, coal-dependent economies.
Third is the ability of the oil majors to compete in this new world. Hydrogen, carbon capture and storage, and biofuels are obvious fits with their core hydrocarbon skills. Offshore wind can play to engineering expertise, as with Equinor’s floating wind technology.
But to achieve acceptable returns on investment in the very competitive solar and electricity retail businesses will require quite different models. The supermajors’ low-carbon efforts have been largely experimental over the last decade and so they have slipped behind. Spain’s Iberdrola, one of the largest renewable utilities, now has a larger enterprise value than BP. Bernard Looney, BP’s CEO, thinks his company’s trading skills could add 1-2 points to the basic 5% to 6% internal rate of return from renewable projects.
BP’s view on oil is not universal. In 2019, ExxonMobil still posited oil demand rising out to 2040. Also last year leading trader Vitol had forecast 2034 as the peak. In mid-September CEO Russell Hardy said that the level of peak demand might fall when revised to take the pandemic into account, but he still sees the peak ahead of us, around 2030.
Even slow demand decline, 0.4% annually in BP’s business-as-usual view and 2.2% in the case of rapid transition, requires further investment in new supplies, since natural field declines are around 5% per year or more. Nevertheless, as John Kemp of Reuters suggests, discussing OPEC, “In the second half of the 2020s and into the 2030s, the organisation will become increasingly preoccupied with allocating production and investment in a fully mature industry likely to be plagued by chronic overcapacity.”
This raises two major questions for the oil exporting Gulf countries. First, how should they think about the prospect of peak oil demand, or at least a major slowdown in demand growth and sluggish recovery from the pandemic? OPEC’s production cuts are still scheduled to amount to 5.8 mb/d until April 2022 and would likely have to be extended beyond that to avoid a price crash. BP sees OPEC losing market share by 2030, gaining by 2050 but still producing less in absolute terms, possibly much less. Meanwhile, the United Arab Emirates, Saudi Arabia, and Iraq all plan substantial gains in capacity.
Ultimately, to avoid stranding much of its reserves, OPEC will have to move to a strategy of higher output and lower prices to drive out high-cost competitors such as U.S. shale and Canadian oil sands from a stagnant or shrinking market. But, as Bassam Fattouh of the Oxford Institute for Energy Studies notes, several OPEC members could not cope economically with the short-term revenue drop, even if it is the optimal long-term strategy.
Second, how should oil exporting Gulf countries approach low-carbon energy? Unlike BP, the raison d’etre of Saudi Aramco, Qatar Petroleum, the Abu Dhabi National Oil Company, and the Iraqi Ministry of Oil is to be stewards of national hydrocarbon wealth. Yet they have now to lay out a path compatible with a carbon-neutral world around mid-century. That may seem distant, but oil fields or refineries developed today will still be operating then.
The Gulf Arab countries have created some low-carbon vehicles such as Masdar in Abu Dhabi or the planned Neom city in Saudi Arabia. But the leading national oil companies need to make the most of their hydrocarbons. So far, they have bet on rising Asian demand, a shift to natural gas, and petrochemicals. But gas, though much cleaner than coal, is not zero carbon. In domestic and regional markets, gas power faces increasing competition from very cheap renewables. A continuation of strong growth of gas consumption in the Middle East itself is unlikely.
The Gulf states could turn to the production of “blue hydrogen” from natural gas, with carbon capture and storage, using their exceptional geology to dispose of carbon dioxide safely. Hydrogen transportation is expensive; it likely won’t resemble the oil or liquefied natural gas businesses. Instead, like aluminum smelting, hydrogen production will migrate to areas with cheap reliable electricity or fossil fuels. Then the products, such as “green” ammonia and steel, will be exported to markets willing to pay a premium for them.
Another option is to become the world center of direct air capture – scrubbing the atmosphere of more than a century of accumulated carbon dioxide. The “net zero” strategies of European oil companies mean that someone will be buying a lot of carbon offsets by 2050.
But none of these approaches promise a continuation of the vast oil rents enjoyed since the early 1970s. And at the moment, Gulf states are in a mode of retrenchment. Very soon, they need to show some of the urgency and boldness of BP’s new strategy. At worst, a failure by BP will hurt its shareholders; for the Gulf, nations’ futures are at stake.
is a non-resident fellow at the Arab Gulf States Institute in Washington. He is CEO of Qamar Energy and author of “The Myth of the Oil Crisis.”
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