By Sopuruchi Onwuka
Global leaders with mandate on saving the planet from environmental decrepitude will have tough time in Glasgow, United Kingdom, early November in achieving convergence on acceptable strategies of curbing greenhouse gas emissions.
The meeting of the Conference of Parties (COP26) to the United Nations Conference on Climate Change is scheduled to bring parties together to accelerate action towards the goals of the Paris Agreement and the UN Framework Convention on Climate Change (UNFCCC).
With world’s biggest energy consumers and largest oil producers polarized on the acceptable strategies for arresting global warming, COP26 promises to form a babel of dissenting voices on sustainable and realistic climate action.
Setting goals and targets is expected to be difficult especially now that prevailing energy prices for both green energy and traditional fuels slow down global economic recovery from the pandemic downtime which has lingered from the last quarter of 2019 to the third quarter of this year.
All along, the industrialized countries of the world are locked in mortal argument with the global oil factors on the roles and impacts of energy transition in achieving climate goals.
The renewable energy industry which produces electricity from mainly solar farms, wind farms, fuel cells and hydro stations across the world is still slow in development, low in capacity and cost-intensive; making the global haste to totally exit fossil fuels currently untenable.
On the other hand, migration of investments and long-term demand outlook from coal and petroleum has created immediate supply crunch that has sent prices for traditional fuels soaring as demand rebounds from post-pandemic economic recovery.
Though not the main focus of COP26 meeting scheduled for November 1 – 12, the predicament posed by prevailing market crisis will not escape mention as key oil producers enter climate debate with key industrialized energy consumers who obviously seek independence from the oil market.
World’s key oil economies bound in a Declaration of Cooperation (DoC) with the Organization of Petroleum Exporting Countries (OPEC) are not great friends of group of industrialized economies hosted in the Organization of Economic Cooperation and Development (OECD). But members of both groups cannot avoid transacting on crude oil and natural gas supplies.
However, rising concerns about climate change and the drive by the world for energy transition have led to the demonization of the petroleum and coal industries. And the rich industrial economies have also pressured global governments, lending institutions, investors and environmental activists to drain incentives from fossil fuel development and flow resources towards green energy evolution.
The International Energy Association (IEA) which keeps market intelligence for the OECD regularly points at indices of climate change as strong basis for sustained fight against the fossil industry; while OPEC sustains the argument for capturing all sources of emission and economic issues around them in one complete climate solution.
Secretary-General, Dr. Mohammad Barkindo, makes it clear that all issues including energy security, job security and socio-economic stability of oil economies that surround energy transition must be captured in an inclusive solution to climate change.
Valuechain reports that market imbalances and acute supply deficits currently hitting leading economies of the world have presented a huge challenge to the highly applauded energy transition with which advanced industrial economies demand drastic emission reduction and energy independence from oil producers.
Orchestrated campaigns for energy transition and associated demand for climate action target to eliminate methane emission from fossil-fired industrial plants and internal combustion engine automobiles in the next 30 years. Goal is to reverse the rate of global warming to about 1.5 degrees centigrade from current levels.
Caught in an ancient trade war between the OECD and OPEC; debate about climate change gathered significant momentum in 2020 when pandemic induced global economic downturn caused acute drop in energy consumption and related industrial pollution.
Whereas the OECD countries and the OPEC alliance agree on the need for climate action, both blocs disagree on energy transition from fossil fuel as the main plausible action plan to comprehensively address the prevailing ecological fallout of climate change.
Thus, the strategies of achieving the global climate goals have polarized the industrial economies against developing countries whose largely untapped petroleum reserves form their revenue, energy and development lifelines.
From the economic prism, whereas the advanced economies see energy transition as tool for independence from the vulnerability of international oil supply volatility and price shocks; coal and petroleum exporting countries see the planned migration of demand from their export commodities as a weapon to perpetuate their economies in underdevelopment and penury. And finding a middle point for the economic blocs on climate issues has remained a mirage.
However, market forces appear to have come with a verdict that the world still needs fossil fuel in the immediate to medium term. The highly desired green energy options are scanty. Coal and other liquid petroleum fuels are vilified by advocates as climate villains. Thus, demand pressure has mounted on cleaner natural gas as the acceptable post pandemic economic recovery fuel.
With the mounting demand pressure, gas prices have surged to record highs in Europe. Spot LNG prices in Asia have surged to record highs amid power shortages from China and India to Europe. Power shortages are also impacting households and businesses across Asia.
The high energy prices have forced factories to shut down or revert to dirtier fuels as nations of the world reactivate industries after pandemic downtime.
Our survey of market reports from Asia shows that Singapore LNG Corporation has resorted to the spot market for supplies after electricity prices jumped: a desperate move to secure supplies for about 95% of the country’s generation.
In China, the government has handed blank cheques to the country’s energy companies to secure supplies for this winter at all costs, pushing them into LNG supply deals with major US suppliers. Sinopec Corporation, China National Offshore Oil Company (CNOOC) and local distributors like Zhejiang Energy, are in discussions with American firms-Cheniere Energy LNG, Venture Global and others-to close deals worth tens of billion dollars.
In Europe, Spain’s gas network operator, Enagas SA, has allocated 23 additional import slots for LNG in the nation’s six terminals for the next 12 months, adding to the 22 secured in September as the country enters the scramble with Asian buyers.
Enagas said the additional slots put the total allocation for LNG purchases at 136 cargoes for the November-March period, up from 86 cargoes imported last winter.
Russia is also responding to Europe’s call for increased natural gas supplies. The pressure for more supplies which President Putin has interpreted as revenue opportunity under the prevailing high prices prompted commissioning of the Nord Stream 2 pipeline to ship additional Russian gas to Europe.
In the prevailing market context, Citi weekend raised the base case gas price for the fourth quarter of 2021, pushing the Asian and European natural gas prices above diesel and propane. Citi pushed its predictions for last quarter natural gas prices to average of $32 per million British thermal units (mmBtu) for the Japan-Korea-Marker (JKM), and $30.90 for the Dutch TTF hub. Both prices are up $3 from Citi’s previous forecasts.
A company analyst stated that the “current prices are above fundamentally justified levels, should remain volatile and could still reach $100 per mmBtu or above this season if the weather gets very cold.”
The gas crunch and consequent strong prices have also distributed pressure across the full energy commodity range, driving up demand and prices of crude oil and coal accordingly, our survey showed.
The IEA reported weekend that shortage of natural gas in Europe and Asia boosts oil demand and worsens supply deficit in crude markets where traders had anticipated that record gas prices would stimulate consumption of other fuels, particularly for power generation.
The IEA stated weekend that the demand spillover could add about 500,000 barrels a day to oil use on average over the coming six months. And despite gradual supply boost by OPEC, the agency predicts that supply deficit of about 700,000 barrels a day would still haunt the market for the rest of this year.
The outlook grows grimmer with persistent inability of some OPEC members to live up to their production quotas as the group strives to add volumes in response to market call. Recent market reports show that OPEC and its allies once again failed to pump enough oil to meet their output targets, exacerbating the existing supply deficit.
OPEC+ cut its production 15% deeper than planned in September, compared with 16% in August and 9% in July. September deficit translates to 747,000 barrels per day, reflecting the inability of Angola, Nigeria and Azerbaijan to raise output to agreed volumes due to capacity constraints.
OPEC’s third consecutive production deficit shows how deep the supply crisis has grown.
On the complexity of the energy crisis, analysts at Wood Mackenzie stated that gas supply has also been pulled into power markets, with wind capacity utilization low in Europe, hydro low in Brazil and China, and with coal and carbon prices rising to all-time highs.
Valuechain reports that the prices for other energy commodities including oil and coal have also escalated with benchmark Brent crude grade heading above $85 or some 67 % from January. The U.S. benchmark West Texas Intermediate or WTI has also followed the bullish trends at over $80 per barrel.
Secretary General of the Organization of Petroleum Exporting Countries (OPEC), Dr. Mohammad Barkindo, declared at a summit in Moscow that the global energy prices were responding to market forces and other evolutionary factors.
Russia which leads a group of 10 oil producing nations in the DoC with OPEC predicts even higher prices for oil. President Vladimir Putin stated that prices of oil could reach $100 per barrel as demand for all energy commodities grows amidst tight supply.
The worst hit by soaring energy prices are countries that currently lead the global campaign for energy transition, promoting switch to electric vehicles, decommissioning of coal plants, displacement of household gas with hydrogen fuel cells. These countries, mainly from the OECD bloc, target zero fuel emissions by 2050.
Ahead of the COP26, the IEA has already advanced its agenda for deeper dive into greener options to fossil fuel, blaming the prevailing strong energy prices on low investment in the renewable industry.
The agency stated in its World Energy Outlook 2021 that the current global volatility in the energy market and stronger prices would continue without a major boost in clean energy investment.
Executive Director, Fatih Birol, stated that robust financing is required to develop sources of new energy that would drive the transition to net-zero carbon emissions. He warned of a looming risk of greater turbulence and uncertainties for global energy markets at the current levels of investment in renewable energy.
The agency also reported that the prevailing energy crisis has led to a sharp rebound in coal and oil usage, putting the world on course for the second-largest annual increase in carbon emissions in history this year. It added that the situation demands triple investment in clean energy and infrastructure over the next decade to meet net-zero targets for carbon emissions in 2050.
While lamenting that the current climate pledges by countries of the world would yield only 20 percent emission cut by 2030, Birol decried the current rate of green economy evolution as too slow.
He said, “Some 70 per cent of that additional spending needs to happen in emerging and developing economies, where financing is scarce and capital remains up to seven times more expensive than in advanced economies.”
The IEA also estimates that oil demand would not peak until the mid-2030s without further action. It advanced propositions that would commit governments to incentivize manufacturing of wind turbines, solar panels, lithium-ion batteries, electrolysers, and fuel cells.
The agency also marketed the renewable energy services industry as promising trillion-dollar opportunities for investors by 2050.
These IEA’s incentives for renewable energy contrast with harsh indignation and blanket disincentives the OECD has slammed on petroleum companies and their projects.
The propositions by IEA also runs into direct conflict with the position of OPEC on climate action; and some members of the OECD are openly averse to further drastic demands on their economies to take costlier routes to clean energy.
Already, the prevailing high energy prices that hurt the economy of importing countries result from pressure for energy transition from fossil fuel. And, the anti-fossil strategies link directly with the debilitating prices.
Worse still, the renewable industry appears too feeble to respond to prevailing supply shocks. With approximately 10 percent of total global energy mix at prime production conditions, the combined power production capacity of solar, wind and hydro appear insignificant to displace fossil-fired power generation.
With unfavourable weather conditions looming large, the major sources of renewable energy including solar, wind and hydropower turbines may not be optimum in activity in the next few months, analysts say.
Barkindo says that there is no other energy option to fossil fuel available to the world at this time. And despite fervent movements against it, the fossil fuel industry also appears to be recovering not just its relevance in the global energy space but also its traditional niches in the markets.
For instance, coal has staged a comeback in power plants across Europe, Asia and the United States, thus rolling back the gains already scored in the energy transition drive.
According to reports, coal consumption in the United States alone is to rise by 23% in 2021, driven by surging natural gas prices and a global energy crisis that is forcing countries to burn dirtier fuels to keep up with demand.
According to forecasts by the US Energy Information Administration (EIA), U.S. utilities are poised to burn 536.9 million tons of coal, up from 436.5 million in 2020.
Also in battling energy crunch, China is massing up coal stock, with purchases rising 17 percent from last month to 32.9 million tons, the highest total this year; according to the customs administration.
The return to coal challenges long-held recommendation by climate activists to stop building new coal plants and eliminate the existing capacity to burn coal.
The Chief Executive Officer of the US National Mining Association, Rich Nolan, remarked: “The markets have spoken; we’re seeing the essential nature of coal come roaring back.”
Other predictions also challenge the projections made by the IEA in its World Energy Outlook 2021 which sees peak oil demand by 2030.
OPEC and its allies in the DoC, now called OPEC+, sustain the logic that only a very slow phase out of fossil fuels, allowing for continued investment in the sector for decades, will allow economies of the world to run optimally, and keep prices of goods and services affordable.
Dr. Mohammad Barkindo of OPEC, who had predicted that supply gaps would result from the unbridled sentiments in favour of energy transition, told Valuechain in an exclusive chat that rising global population, economic growth and low available capacity for renewable energy would lay basis for strong demand for petroleum fuel in the foreseeable future.
Russian Putin, who leads OPEC’s 10 coalition members, warned leaders of the European Union during a government meeting early in the month that the prevailing energy shortages and consequent price jumps are outcomes of faulty climate policies that squeezed fossil fuel investments.
He observed that European governments have pushed energy transition mindlessly without considering the impact on imminent supply. He pointed out that while some European countries have stopped new investments in petroleum projects, others have advanced climate change policies that directly impact the extractive industry.
“There needs to be a smooth transition,” President Putin declared.
Poorer European countries have also begun to arrive at logical conclusion that the push for radical shift in energy demand from fossil to green sources might not have been properly backed with concrete supply options.
Hungarian Prime Minister, Victor Orban, blames the gas price spikes in the continent on the carbon tax system adopted by the European Union, and demands that a planned expansion of the tax which is viewed as the E.U.’s main tool to drive down emissions be scrapped.
In the United States where President Joe Biden has sharply deviated from the energy security policies of former President Donald Trump, expansion of renewable energy is blamed for power crisis in Texas. And Republican lawmakers call for energy policy reviews.
Petroleum industry captains also agree that the push for demand shift from fossil fuel might have been driven too far.
Chairman of TotalEnergies, Mr Patrick Pouyanne, declared at a summit in Russia that too much expectation from renewable energy is responsible for current price woes that have unsettled global economies.
Mr Pouyanne has been consistent with warnings that total reliance on renewable energy to meet global demand would be risky without a guarantee of sustainable supply capacity. The warnings are based on the argument that the most popular sources of renewable energy-mainly solar and wind- are significantly influenced by weather conditions.
“So that is I think a lesson. Another is that the more we put renewables in our electric system, we put in intermittent sources which depend on the weather,” he is quoted by an agency reporter covering a conference in Russia.
The Chief Executive Officer of BP, Mr Bernard Looney, agrees with Pouyanne that “the sun doesn’t shine at night and the wind doesn’t always blow. So, we have that question of renewables’ intermittency to deal with.”
Barkindo had in an interview with Valuechain explained that the model of environmental decarbonization driven by the proponents of energy transition would inevitably spell market disaster for the global economy. He made it clear that projections by OPEC have clearly indicated strong position for petroleum in the global energy outlook for 2045.
According to him, “the energy transition, contrary to the hype, is not a transition for one set of energy sources to another. No. According to our World Oil Outlook up to 2045, all sources of energy will be required in order to meet not only current but future demands for energy. And oil and gas, for your information, will account for over 50 per cent of the global energy mix by 2045; over 50 per cent, almost 53 per cent. But we are also conscious of the fact that none of these sources, alone, will be sufficient to meet the world’s thirst for energy.”
He pointed out that whereas the renewable energy industry development gathers momentum, the global population continues to grow at faster rate; thus creating a consistent and strong demand for all options to address prevailing energy poverty in developing countries.
Barkindo said global population is expected to gain significant 1.8 billion people mostly from developing countries by 2045. He explained that the developing countries form the worst victims of the twin misfortunes of climate impact and abject energy poverty.
The situation, he argued, has made it mandatory for the world to address climate change and energy poverty simultaneously in a sustainable manner.
“Right now in the developing countries including here in Nigeria, climate change and energy poverty are two sides of the same coin. Whatever we do here, we must comprehensively address these two challenges.
“In Sub-Saharan Africa, our numbers show that over 600 million people have no access to electricity. In Africa, almost 900 million people have no access to clean cooking oil. So, we are facing abject energy poverty, and yet we are the worst affected by climate change. Therefore, we have every reason to join the rest of the world in finding inclusive and sustainable solutions to climate change. However, we cannot do that at the expense of energy poverty,” he contended.
Dr Barkindo also chided the rich industrialized nations for closing funding windows against petroleum projects, saying they were sowing the seeds of energy crisis at a time there exists no alternative to hydrocarbon fuel.
“I have just mentioned to you that, at the moment, there is no one single source of energy that will meet our current demand. Before COVID struck last year, the world was consuming an average of 100 million barrels every single day; and yet we have endemic energy poverty where our people have no access to electricity, no access to gasoline, diesel, and cooking fuels. So, if you are advocating for zero funding to this industry, which sources of energy will replace hydrocarbon? None!
“In 2045, the projection on renewable will be less than 20 per cent of the energy mix. You are sowing the seeds of fresh energy crises that will sentence the people of the developing countries to perpetual energy poverty,” he warned.
Valuechain reports that the prevailing global energy crisis is not directly a product of interventions by OPEC and its allies in 2020, but a consequence of shaken investment confidence as petroleum players and producing countries came under intense indignation of climate and economic activists.
Although the leaders of OPEC+ have all pledged to work towards production growth, intergovernmental policies and pacts that stifle investments in oil projects are still active. And the challenges of the prevailing energy crisis strongly challenge the credibility of the anti-fossil policies which still enjoy strong international sentiments.
What has become abundantly clear is need for the COP26 to review the existing strategies and targets of the global climate mitigation agenda as they relate to energy transition. Decisions must capture comprehensive views of all position blocs and reflect realistic long-term demand projections.
The current situation has shown that goals and targets that fail to align with realistic projections will shatter upon collision with market forces.