Too fast energy transition may have devastating effects on oil exporting countries

According to a report from China Petroleum & Chemical Corporation News on June 2 today, this is a difficult time for the oil and gas industry.

At the virtual climate summit held with 41 world leaders last month, the United States announced an ambitious ten-year climate plan, proposing to cut US greenhouse gas emissions by 50-52% by 2030.

Just last week, after Chevron shareholders voted to further reduce emissions, some of the most well-known companies in the industry suffered a three-shot combo.

Environmentalists use the development momentum of clean energy and major policy changes of governments around the world to put pressure on the oil giants.

In 2019, 40 countries around the world exported crude oil worth 1 billion U.

Now, the International Energy Agency (IEA) warns that pursuing a net-zero emission target could be disastrous for many oil exporting countries.

This is an imminent disaster

If the goal of net zero emissions is achieved by 2050, OPEC will become dominant and will eventually account for more than 50% of world production, because supply will be concentrated in a few countries.

According to data from the International Energy Agency, those countries whose oil and gas exports account for a large portion of GDP may be hit hardest.

　　Iraq or one of them

　　Although Iraq has 145 billion barrels of proven crude oil reserves, Iraqi Finance Minister Ali Allawi recently warned that the goal of achieving net zero emissions by 2050 could be catastrophic for Iraq.

　　On the other hand, some oil giants, such as Saudi Arabia and Russia, are relatively less vulnerable due to their more complex economies and larger financial buffers.

　　The Saudi government is building a US$5 billion green hydrogen plant that will provide energy for the planned neom megacity when it is completed in 2025.

　　Bloomberg New Energy Finance estimates that the cost of Helios will be US$1.

　　In a recent conference call by Saudi Arabia’s National Petroleum Corporation, the company’s CEO told investors that Saudi Arabia’s National Petroleum Corporation has abandoned its plan to immediately develop the LNG sector in favor of hydrogen.

　　Last year, Saudi Aramco produced the world's first batch of blue ammonia-from Saudi Arabia to Japan.

　　Shrinking foreign exchange reserves

　　However, the oil giants are facing a greater survival crisis, and this crisis may affect the country earlier: reserves are rapidly declining.

　　Last year, the proven reserves of large oil companies decreased by 13 billion barrels of oil equivalent, equivalent to 15% of their underground inventory levels.

　　Exploration investment is shrinking rapidly

　　Global oil and gas companies cut capital expenditures by a staggering 34% in 2020 in response to shrinking demand and investor concerns about the industry’s continued low returns.
This trend shows no signs of slowing down: According to Rystad data, the proved reserves in the first quarter were 1.
2 billion barrels of oil equivalent, the lowest level in seven years, and only a few discoveries were made.

　　After the Canadian oil sands and U.
S.
shale gas reserves have been greatly reduced, ExxonMobil’s proven reserves will be reduced by 7 billion barrels of oil equivalent in 2020 compared to 2019, a drop of 30%.

　　At the same time, Shell’s proven reserves fell by 20% last year to 9 billion barrels of oil equivalent; Chevron lost 2 billion barrels of oil due to impairment expenditures, while BP lost 1 billion barrels of oil.
In the past ten years, only Total and Eni have avoided the reduction of proven reserves.

　　Wang Jiajing excerpted and translated from today's oil prices

　　The original text is as follows:

　　Rapid Energy Transition Could Doom Oil Exporting Countries

　　It’s a tough time being in the oil and gas business.
Big Oil has lately come under a plethora of attacks from all directions, ranging from uncooperative financiers and investors amidst a global shift to renewable energy to hostile governments and hardline climate activists.

　　And although the major oil-exporting economies of the world weren’t necessarily in the environmental crosshairs like Big Oil was, the shift could have a devastating effect on those oil-dependent economies.

　　In a virtual climate summit with 41 world leaders last month, President Joe Biden unveiled an ambitious ten-year Climate Plan that has proposed cutting U.
S.
greenhouse gas emissions by 50-52% by 2030.
That represents a near-doubling of the U.
S.
commitment of a 26-28% cut under the Obama administration following the Paris Agreement of 2015.

　　Just last week, some of the biggest names in the business suffered a trifecta of blows after Chevron (NYSE:CVX) shareholders voted to further cut emissions; Exxon Mobil (NYSE:XOM) lost at least two board seats to an activist hedge fund while a Dutch court ordered Royal Dutch Shell (NYSE:RDS.
A) to cut its greenhouse gas emissions harder and faster than it had previously planned.
Never mind the fact that Shell already had pledged to cut GHG emissions by 20% by 2030 and to net-zero by 2050.
The court in The Hague determined that wasn’t good enough and demanded a 45% cut by 2030 compared to 2019 levels.

　　Things are looking decidedly murky at a granular level, with environmental activists taking advantage of the clean energy momentum and major policy changes by the world’s governments to turn the screw on Big Oil.

　　But what happens when you zoom out and look at the bigger picture—Entire nations that depend on oil to power their economies.
How will economies that are heavily dependent on oil exports cope with the shift to low-carbon fuels?

　　In 2019, 40 countries across the globe exported crude worth $1 billion or more, with some like Iraq depending on oil sales to finance upwards of 90% of their budgets.
Fossil fuel-dependent economies represent almost one-third of the world’s population and are responsible for a fifth of global greenhouse gas emissions.

　　And now the International Energy Agency (IEA) has warned that pursuing net-zero emissions target is likely to be catastrophic for many oil exporters.

　　A Looming Catastrophe

　　Pursuing a net-zero emissions target by 2050 would see OPEC become even more dominant and end up accounting for more than 50% of world production as supplies become concentrated among a smaller number of countries.
Unfortunately, it would also mean there’s a lot less pie to go around, with annual per capita income from these commodities predicted to fall by as much as 75% in little more than a decade.

　　According to the IEA, countries where hydrocarbon exports make up a large part of GDP are likely to be the hardest hit.

　　However, countries that are the least resilient—where the revenues from the sale of fossil fuels have not been adequately managed by means such as using the cash to diversify into other domestic industries or create sovereign wealth funds that invest abroad to secure long-term revenues—will also bear the full brunt of the energy transition.

　　One such country is Iraq.

　　Despite harboring ~145bn barrels of proven crude reserves, Iraq’s finance minister Ali Allawi recently warned that pursuing a net-zero target by 2050 could be catastrophic for the country.
Allawi has been desperately trying to push sweeping state and economic reforms in a bid to avert this eventuality, but has seen his efforts thwarted by a government more concerned with more prosaic matters.

　　The World Bank has named Iraq, Equatorial Guinea, Nigeria, Guyana, Algeria, Azerbaijan, and Kazakhstan as the most vulnerable oil-producing countries due to their high exposure to the oil and gas sector and relative lack of diversification.

　　On the other hand, some oil giants such as Saudi Arabia and Russia are seen as being less vulnerable thanks to their more complex economies and bigger financial buffers.

　　A good case in point: When it comes to embracing the energy transition, Saudi Arabia appears to be ahead of most of its OPEC peers.

　　The Saudi government is building a $5 billion green hydrogen plant that will power the planned megacity of Neom when it opens in 2025.
Dubbed Helios Green Fuels, the hydrogen plant will use solar and wind energy to generate 4GW of clean energy that will be used to produce hydrogen.

　　But here’s the main kicker: Helios could soon produce clean hydrogen that’s cheaper than oil.

　　Bloomberg New Energy Finance (BNEF) estimates that Helios’ costs could reach $1.
50 per kilogram by 2030, way cheaper than the average cost of green hydrogen at $5 per kilogram and even cheaper than gray hydrogen made from cracking natural gas.
Saudi Arabia enjoys a serious competitive advantage in the green hydrogen business thanks to its perpetual sunshine, wind, and vast tracts of unused land.

　　During the company’s latest earnings call, Saudi Aramco CEO told investors that Aramco had abandoned immediate plans to develop its LNG sector in favor of hydrogen.
Nasser said that the kingdom’s immediate plan is to produce enough natural gas for domestic use to stop burning oil in its power plants and convert the remainder into hydrogen.
Blue hydrogen is made from natural gas either by Steam Methane Reforming (SMR) or Auto Thermal Reforming (ATR) with the CO2 generated captured and then stored.
As the greenhouse gasses are captured, this mitigates the environmental impacts on the planet.

　　Last year, Aramco made the world’s first blue ammonia shipment—from Saudi Arabia to Japan.
Japan—a country whose mountainous terrain and extreme seismic activity render it unsuitable for the development of sustainable renewable energy—is looking for dependable suppliers of hydrogen fuel with Saudi Arabia and Australia on its shortlist.

　　Dwindling reserves

　　Big Oil, however, faces a bigger existential crisis that could hit home even sooner: Rapidly dwindling reserves.

　　Massive impairment charges saw Big Oil’s proven reserves drop by 13 billion boe, good for ~15% of its stock levels in the ground, last year.
Rystad now says that the remaining reserves are set to run out in less than 15 years, unless Big Oil makes more commercial discoveries quickly.

　　The main culprit: Rapidly shrinking exploration investments.

　　Global oil and gas companies cut their capex by a staggering 34% in 2020 in response to shrinking demand and investors growing wary of persistently poor returns by the sector.

　　The trend shows no signs of moderating: First quarter discoveries totaled 1.
2 billion boe, the lowest in 7 years with successful wildcats only yielding modest-sized finds as per Rystad.

　　ExxonMobil, whose proven reserves shrank by 7 billion boe in 2020, or 30%, from 2019 levels, was the worst hit after major reductions in Canadian oil sands and US shale gas properties.

　　Shell, meanwhile, saw its proven reserves fall by 20% to 9 billion boe last year; Chevron lost 2 billion boe of proven reserves due to impairment charges while BP lost 1 boe.
Only Total (NYSE:TOT) and Eni have avoided reductions in proven reserves over the past decade.