Fast Changes in the Energy Sector and the Renewables Pressure

With controlling global warming becomes a world priority, is it still time to explore for hydrocarbons?

The climate change and Paris Agreement pressure on international oil companies (IOCs) carries on increasing no matter what concessions they make. And this affects their operations and investments, in the East Med and also in Lebanon.

The world has veered towards bringing climate change issues to the forefront, not only in terms of energy but also politically. Europe took the lead in this direction with its ambitious Green Deal. But the election of Joe Biden to the US presidency gave this the additional momentum it needed.

With rapidly declining costs of renewables, policymakers, banks and investors are prioritising action to control global warming. The world’s largest banks and investment institutions are committing to a low-carbon future.

The IOCs are now forced to adjust and operate in this new, highly challenging, environment – their very existence in under threat.

Under the combined effects of a global collapse in energy demand, brought about by Covid-19, and the inexorable growth of renewables, IOCs suffered massive losses in 2020 and were forced into unprecedented write-offs of tens of billions of assets.

A new report by the International Energy Agency (IEA) presenting a ‘Roadmap to Net Zero’, has tightened the screw much further. The IEA is “calling time” on the fossil fuel industry. It is calling for a stop to new oil and gas exploration – by asking investors to stop funding such projects and instead divert all funding to clean energy – and a faster transition to cleaner fuels.

This may not be practical or feasible at present and neither is it clear how the world will get there. But it is fueling the climate debate.

It is also affecting the role of natural gas as a cleaner transition fuel. The IEA states in its new report that in order to keep global temperature increases this century to 1.5C global natural gas demand must peak by 2025 at 4.3 trillion cubic meters per annum (tcm/yr) and drop to 1.75 tcm by 2050. Low demand and ample supply capacity will also lead to low prices, with the IEA now projecting average LNG prices staying below $4/mmbtu in the longer-term. That creates a huge problem for all oil majors and financing of new projects.

European Commission vice-president Frans Timmermans said in March that there will only be a “marginal role for fossil gas” on the path to net zero emissions by 2050, with gas demand expected to drop substantially by 2030, the time where Lebanon is expected to start pumping its first gas.

Entering 2021, the IOCs have been presenting their strategies for the future to their shareholders, outlining plans to face these fast-evolving global challenges.

Facing investor anger over its high spending and accumulated debt, ExxonMobil reduced planned capital expenditures massively and has shelved plans for a rapid rise in oil production during the next four years. But it is still facing huge activist pressure, calling for a board overhaul and major changes to the company’s strategy on climate and capital allocation, despite returning to profit.

Chevron has committed to “higher returns, lower carbon,” based on a more disciplined and lower capital and cost program, investing in only the highest-return projects.

As a demonstration of its future plans and its clean energy strategic commitments to achieve net zero by 2050, Total is changing its name to ‘Total Energies’.

Eni released its ‘Strategic Plan for 2021-2024’, committing to spend $7billion by 2024 towards carbon-neutrality by 2050.

The world will not transition from oil and gas to renewables overnight. It will need time. Apart from everything else, the technologies to achieve this are still under development and relatively costly. If, as a result of this pressure, under-investment in oil and gas projects continues, supply shortages and higher prices may be the eventual outcome. What is needed is a transition that matches the development and deployment of new cleaner energy sources. But the pace of political pressure and change may be endangering that.

In the meanwhile, with IOCs being forced to lower spending and concentrate on larger, easier-to-develop and higher-margin projects, Lebanon and Cyprus may end-up becoming the victims. Some exploration activities may return, but it is unlikely to return back to the levels and plans prior to Covid-19. These plans will be revisited.

The East Med is no longer a high priority for the IOCs, battling for survival in a fast-changing energy world. Their priority is to get transition right and their future development strategies are geared in that direction.

Similarly, Lebanon must re-assess its future energy plan. Outdated policies developed during the last decade require complete overhaul. Plans based on exports to global markets are fast-becoming untenable.

Lebanon will have to rethink the future. Relying on the IOCs and gas exports may no longer be viable. Future developments are likely to be regional, centered around transiting to clean energy. In order to avoid being left behind – with vast economic and energy consequences – the cedars country requires new and vastly different energy strategies and policies.

Author: The Oil Man