The wave of climate action, focus on renewable energy and rise of natural gas sweeping across the globe could signal oil’s move out the energy spotlight, leaving some oil-producing countries in a quagmire.
But there are ways for the world’s biggest oil producers to maintain oil exports and manage in the near term and beyond. Strategies include diversifying into alternative sectors and protecting the oil business against so-called climate threats, according to Jim Krane, a fellow at Rice University’s Baker Institute. Speaking on climate strategies for producer countries, Krane focused on Saudi Arabia during an event this week on energy and politics in the Persian Gulf.
“From a Saudi perspective, climate action is seen as an encroaching threat to its main export business and the [oil] rents that its political system needs to survive. So what can they do about it?” he asked. “They can try to mitigate the risk through economic diversification. Climate change provides a real impetus for these oil-dependent states to get serious about diversification and get beyond the oil business.”
Another option is for producer countries to “position their oil sectors themselves to survive during this transition period which promises to unfold over multiple decades,” he added.
Krane recently published a paper on the topic and presented his views during an International Energy Agency event for the forthcoming World Energy Outlook 2018. In the paper, he has developed three strategies that Saudi Arabia and other producer states have already taken or may take in upcoming years to keep oil exports flowing “amid the emergence of restrictions on fossil fuels.”
The talk was delivered as energy outlooks point to an increasingly more diverse energy mix. BP’s energy outlook to 2040, for example, shows that oil, gas, coal and non-fossil fuels could each contribute about 25% to the world’s energy mix. In the decades to come, renewables are predicted to be the fastest-growing fuel source, which BP said could increase five-fold to provide about 14% of primary energy. Together, oil and gas are expected to meet half of the world’s energy needs before oil demand plateaus as natural gas grows strongly.
A global push to reduce carbon emissions has set the world on a path toward less carbon intense forms of energy, and several energy companies are already gearing up for the transition. Some have pledged to cut greenhouse gas emissions while stepping up investments into wind, solar and other renewables and focusing on natural gas.
Krane shared three strategies oil-producing countries such as Saudi Arabia could pursue or are pursuing:
- Dig in by keeping oil and exports alive;
- Join in by launching a credible decarbonization policy; and
- Throw in (the towel) by accepting that some climate damage is acceptable.
Specific strategies include focusing on non-combustion uses for oil and gas such as petrochemicals.
“This is probably Saudi Aramco’s most promising climate hedge. Carbon is locked inside the resins and polymers that form those end products whether they are couch cushions or paint or airbrushes, auto parts, etc. Plastics/petrochemicals’ demand is growing faster than oil demand in the developing economies of Asia and around Saudi Arabia,” Krane said. “So it makes sense in lots of ways. Also, if you’re manufacturing petrochemicals you can also build a manufacturing sector and use it to diversify your economy. So it’s actually a diversification strategy as well as a strategy to protect crude oil.”
If carbon taxes were launched, countries that produce crude with minimum upstream emissions from flaring or energy-intensive EOR processes could have an advantage if such taxation policies differentiated between different grades of crude, Krane added.
Another “dig in” move is locking in market sources by ensuring oil remains dominant in the transportation sector. Saudi Arabia is doing this by buying refining capacity outside the kingdom in countries seen as future key growth markets, primarily in Asia, Krane said.
Saudi Aramco, for example, is helping back a $27 billion refinery and a petrochemical complex in Malaysia. The deal, known as the Refinery & Petrochemical Integrated Development (RAPID) project, with Petronas would be a channel for Asia-bound oil and gas from the Middle East. Aramco would provide up to 70% of the refinery’s crude feedstock requirements.
The “join in” strategy involves taking part in climate action. Krane pointed out that some producer countries, including Saudi Arabia, have already joined in some kind of climate action.
“They’re reforming, raising energy prices and we’re seeing demand for fossil fuels in Saudi Arabia begin to taper off and plateau a bit. The Saudis will probably overshoot their pretty modest Paris goal quicker than their date,” Krane said. But “These reforms are not being done primarily for the Paris agreement; they’re economically rationale reforms that reduce opportunity costs of doing oil at home rather than exporting it and the cost of spending on subsidies. They serve double duty as climate action.”
Internationally, efforts include promoting carbon capture and storage as well as flaring and emissions reduction. “Suppliers that minimize their emissions should gain competitive advantage and allow consumers to differentiate between cleaner fuels and dirtier ones,” Krane said.
The “throw in” strategy may involve pushing to relax the 2 C warming limits and developing a more pragmatic approach, he said.
“Climate action and competition from non-fossil technologies is going to cause producer countries and firms to start to compete in new and more intense ways. I think countries are going to start leveraging their unique advantages,” Krane said. “I think Saudi Arabia has some very strong ones to bring to bear in this competition. In the end, I really think it’s going to be economic diversification for those countries that ultimately helps them build a backstop for climate risk.”
Velda Addison can be reached at email@example.com.