Risky Bet: National Oil Companies in the Energy Transition

KEY MESSAGES
• If national oil companies follow their current course, they will invest more than $400 billion in costly oil and gas projects that will only break even if humanity exceeds its emissions targets and allows the global temperature to rise more than 2oC.
• Either the world does what’s necessary to limit global warming, or national oil companies can profit from these investments. Both are not possible.
• State oil companies’ investments could pay off, or they could pave the way for economic crises across the emerging and developing world, and necessitate future bailouts that cost the public. Some oil-dependent gov- ernments in Africa, Latin America and Eurasia are making particularly risky bets with public money.
• Many national oil companies have incentives to continue spending big on new oil and gas projects. As a result, company officials might not, on their own, change course to account for the energy transition away from fossil fuels toward green energy, nor make investment decisions that serve the interests of citizens.
• Governments—through finance and planning ministries, presidential offices and public accountability bod- ies—must act to promote a more sustainable economic path. Governments should:
o Understand the extent of national oil companies’ exposure to a decline in oil and gas prices
o Revisit rules on cash flows into and out of state-owned companies
o Require or incentivize lower-risk investment decisions
o Benchmark and measure national oil company performance, improve corporate governance, and report
consistently to citizens

You can access the full report in the link below. The executive summary is available here.

Annual Meeting 2020

The 8th Annual Meeting of the New Producers Group took place from 1–3 December 2020, with a focus on fostering resilience in emerging producers.

The meeting was held in the context of the COVID-19 pandemic, which has precipitated a crash in oil markets, hampered or halted operations across the hydrocarbon sector and caused many oil and gas investments to be delayed or shelved. In addition to these immediate effects, there will be long-term ramifications associated with the global energy transition towards a lower-carbon economy.

The meeting focused on how new producers can adapt their approaches in light of the shocks from the pandemic, and the prospects that the global energy transition will precipitate significant changes in oil and gas markets.

At the outset, the group’s organizers encouraged participants to see the meeting as an opportunity to rethink their assumptions about the value of the oil and gas sector to their countries, and to work together to develop resilient strategies that can benefit emerging and established producers alike. Acknowledging apprehension over the uncertainty of the moment and the long-term ramifications of the global energy transition, the host organizations emphasized the value of capacity building and collaboration across agencies, nationally, regionally and internationally.

A summary of the Annual Meeting is available at the link below.

Fostering Resilience in Emerging Oil Producers

Summary

  • COVID-19 and the spring shock to oil markets had significant impacts on the emerging oil and gas producer countries that make up the New Producers Group. The crisis affected individuals, organizations and national plans for hydrocarbon sectors. The group held a series of discussions from March 2020 that aimed to assist governments in the development of crisis responses and strategies
    that could be adapted to an energy sector in transition.
  • In response to a crisis, the main priority is to understand its causes and review its impact. When much of public life shut down due to the pandemic in March 2020, it struck a blow to oil demand at a time when the market was already oversupplied. Oil prices fell sharply, which, together with the health crisis, prompted oil companies to reassess projects, upending operations in many countries.
  • While oil prices recovered partially in the months that followed, the sector remains in crisis – particularly in the more expensive emerging oil and gas producer countries. Prior to COVID-19, oil companies were already more risk averse in response to investor pressure.
  • The focus of the New Producers Group has turned to understanding what the new normal might look like post-crisis and in particular what impact the pandemic might have on the pace of the energy transition. The development of scenarios helped meeting attendees manage multiple uncertainties, such as the path of the pandemic, its economic impacts, policy responses and public support for the concept of building back better.
  • ‘Boom time’ is over for the oil sector. For emerging producers, the poor outlook means that there will be fewer projects and those that do go ahead will be low risk. But even in areas where continued oil company interest is likely, government planners should understand the risks associated with fiscal dependence on the petroleum sector and also with building up industry-specific local content.
  • National investment in the petroleum sector should be considered in relation to the potential returns it can generate and the negative impacts it could have on other national objectives, such as climate goals, environmental wellbeing, and fiscal stability.

The paper is available to download below.

You are invited to the launch of the report 3 March 2021 at 2pm GMT.

Covid-19 Impact on the Oil and Gas Sector

The global health crisis caused by the COVID-19 pandemic has required extraordinary measures across the world and led to unprecedented disruption in global oil markets. This policy brief gives an overview of the oil market price crash, the subsequent response by companies and how COVID-19 has impacted the outlook for oil and gas markets. It also provides a summary of the oil and gas sector in Commonwealth countries to highlight the member states that will be most affected by the current crisis. It ends with an overview of key issues for the oil and gas sector going forward and discusses the implications for Commonwealth countries.

The paper is available at the link below.

Energy Transition Brings New Challenges for New Petroleum Producers

The article covers the 2019 New Producers Group annual meeting. Held in Uganda, the meeting focused on the impact of the global energy transition on the pursuit of long-term economic benefits from oil and gas production. The uncertainties surrounding transition permeated the week-long series of events, including a dedicated training session on navigating emerging risks in the sector, a plenary discussion examining various market scenarios and a discussion of the intersection between Uganda’s oil ambitions and climate commitments as part of a “national seminar” organised by the host government.

A link to the original article is available below.

Post-pandemic outlook for the oil and gas industry

Atul Arya from IHS Markit returned to the Fostering Resilience in Crisis series to give us an updated outlook for the energy sector post-Covid. This meeting was under Chatham House Rule. Watch the highlights in the below video. The full recording is available on the members’ platform.

Highlights of the meeting

 

Finance and the energy transition

For this panel discussion on the role of finance in the energy transition, the New Producers Group brought together a range of different actors in the investment community, from banking and international finance institutions to private equity capital and fund managers. We asked them how they perceive the relative risk of oil, gas and renewables in emerging markets in light of Covid and the oil price slump. This meeting of the Fostering Resilience in Crisis series was on the record.

Highlights of the meeting

 

Full webinar recording 

 

Impact of Covid and the oil price crash on the local content policies

The risks associated with global supply chains are more prominent as a result of the crisis. But there are also risks associated with local suppliers. Will international oil companies’ own commercial and strategic interests drive them to invest more in developing the capabilities of local suppliers? How can governments reduce the vulnerability of their national suppliers to pandemic risks? This meeting in the Fostering Resilience in Crisis series was under Chatham House Rule. The full recording is available on the members’ platform.

Highlights of the meeting

The impact of Covid-19 and the oil market crash on the pace and course of the energy transitions

This meeting in the New Producers Group series Fostering Resilience in Crisis examined the impact of the oil price crash and the Covid pandemic on the pace and course of the energy transition, with a specific focus on the impact on oil and gas vs. energy alternatives. Two scenarios helped structure the discussion. The full recording is available on the members’ platform.

Highlights of the meetings