Energy and green transition have taken centre stage at numerous conclaves since the adoption of the Paris Agreement in 2015. A rise in world population and disposable income has fuelled demand for energy. Growth in global energy consumption has averaged one percent per year for the last five decades. This led to the adoption of advanced exploration and production (E&P) technology, which facilitated higher output and efficiency. As numerous oil and gas facilities age worldwide, scores of virgin territories have been accessed for exploration. This, despite the increase in initiatives towards reducing inveterate dependence on fossil fuels to ensure a healthier future.
Huge potential exists in the world’s renewable energy resources, but the cost of harnessing or ‘capturing’ such energy entails high initial costs. The recent announcement of the Global Biofuels Alliance at the G20 is an optimistic attempt to intersect the relentless growth in fossil fuel consumption and the soft launch of a green revolution in the hydrocarbon industry. Biofuels are no doubt environmentally benign. However, their lower energy density and the price of raw materials makes them more expensive to produce. Blending has its constraints beyond just the price of oil, as higher the biofuel content, the lower the energy density and resultant energy efficiency, translating to higher fuel consumption.
As G20 leaders agree to accelerate efforts to triple renewable energy capacity by 2030, a different story is emerging elsewhere. Despite the Glasgow Financial Alliance for Net Zero in 2021, its actors have continued to extend billions of dollars to the largest fossil fuel E&P companies. It’s business as usual at some of the big names like Citigroup, Morgan Stanley, Barclays, BNP Paribas, and Mitsubishi UFJ Financial, among others. BlackRock alone holds bonds and shares worth over $190 billion in such entities. The combined holdings are worth almost a trillion dollars, some of which come from pension funds.
Wind energy has its limitations owing to the inconsistency of nature’s elements and its conveyance over long distances. While halting work at Norfolk Boreas wind farm in the North Sea, Vattenfall’s chief executive commented, “Higher inflation and capital costs are affecting the entire energy sector, but the geopolitical situation has made offshore wind and its supply chain particularly vulnerable.” The recent absence of bidders for the UK government’s auction of offshore wind farms was a further blow to alternatives to fossils, sealing the fate of expensive gas purchases by Britain.
Extensive oil and gas exploration and collaborations are underway in vast regions of Latin America and the Caribbean, with major players like Chevron, ExxonMobil and Sinopec participating. Shell and TotalEnergies have recently geared up efforts to exploit oil resources discovered off Namibia’s coast in South Africa. Similar joint ventures and alliances with Indian companies are being pursued in Guyana and Suriname, with long-term rights.
Saudi Aramco’s Jafurah gas field project, spread over 17,000 sq km, is estimated to hold the world’s largest shale gas reserve outside of the USA. With the involvement of L&T in its development and the evolving political and economic relations between India and Saudi Arabia, the two countries have committed to pursuing a deeper energy relationship. This could well be the harbinger of a gas pipeline in the future, from the eastern province of Saudi Arabia to India’s west coast, like Gazprom’s Power of Siberia pipeline which transports natural gas from Yakutia in Russia to China.
The induction of the African Union into G20 is truly inclusive . India has aced its “tight embrace of diplomacy” (TNIE: Oil Spills and Slips at G20, March 31, 2023), adhering to the spirit of multilateralism. Energy holds substantial political relevance in present times. With more than 12 percent oil and eight percent natural gas reserves in the world resting with AU nations, their presence is pertinent on the path to oil security and a cleaner transition. Many nations depend heavily on oil-generated revenue and their thrust is to “phase out fuel emissions—not the production of oil and gas”. The richer nations’ call for accelerated green transition, they feel, would herald economic distortions across Africa. Sourcing oil from this region will “support mutual fiscal prudence” while also providing capital adequacy for development of renewables that require large investments.
The mention of oil brings to mind transportation and energy generation, eclipsing the relevance of petrochemicals in daily life. Petrochemicals are slated to constitute 30% of the growth in global oil demand by 2030 and will influence the pace of oil demand far more than transportation.
A growing intimacy between refineries and petrochemicals is facilitating an increased flow of oil into the chemicals sector. Privy to the shift, Aramco is participating in the development of huge petrochemical complexes in China and the revival of the Ratnagiri Refinery and Petrochemicals project on the West Coast of India. The vision is shared by players like Exxon, Dupont and SABIC, with their expansion plans in line with the burgeoning demand of the next few decades. Limited substitute availability of oil feedstock shall continue to make demand for oil soar in the future.
A 50% increase in world energy usage is projected by 2050, led by growth in Asia. Red herring calls of peak oil supply have surfaced on numerous occasions in the past and have indirectly hinted at limiting or halting new investments in oil and gas. This is a dangerous narrative, as a hurried energy transition could trigger a surge in oil prices once the existing supply sources begin to dry up.The planet’s vintage and torrid love affair with oil has matured enough to withstand any “turbulence and conspiracy” orchestrated for its ouster from the energy landscape. It shall surely last a very long time.
Senior markets specialist and author