Climate Policies Could Hand Power and Profits Back to OPEC

While U.S. President Joe Biden preaches a net-zero emissions goal for 2050 to slow global warming, and activist shareholders force Exxon Mobil Corp. to embrace solar and wind power, Saudi Arabia sees a bright future for what it knows how to do best: pumping oil.

Let others indulge their fantasies that alternative fuels can nullify the need for new investment in petroleum supplies, said Saudi Energy Minister Prince Abdulaziz bin Salman. Asked about a report by the International Energy Agency that made such a recommendation, the 61-year-old royal was ready with a snappy comeback. “I believe it is a sequel to the La La Land movie,” he said at the online OPEC+ press conference on June 1. “Why should I take it seriously?”

Prince Abdulaziz, who brings his message to Wall Street this week at the JP Morgan/Robin Hood investors conference, is not alone in warning that the pressure to shift away from fossil fuels is getting ahead of itself. While U.S. and European oil majors and other energy companies are busy selling off assets to comply with decarbonization mandates, global demand for fossil fuels continues to rise—especially in China and India, the world’s most populous countries. This leaves national oil companies such as Saudi Aramco with the opportunity to reclaim market power, earn vast profits, and shift the center of oil and gas production back to OPEC.

It also points to the potential for a new energy crisis in the West. In the United State, the shale revolution’s boom days appear to be in the rear-view mirror. Fracking companies, such as Devon Energy and Occidental Petroleum, are now more concerned with paying down debt than drilling new wells. They are fearful of shelling out cash to expand now that the Biden administration has frozen permits for new wells on federal land. As a result, the United States is back to being a net importer of petroleum, including crude oil and petroleum products such as gasoline, after finally becoming a net exporter in 2020. Oil and gasoline prices are almost at six-year highs.

As soon as he took office in January, Biden made reducing fossil fuel use a banner priority, creating a cabinet position for former Secretary of State John Kerry as climate envoy and pledging to pursue the goal of net-zero emissions by 2050, a target also set by nearly 60 other nations.

The results would be disastrous, heralding a return to an era when Gulf monarchs controlled the oil market and soaring oil prices plunged economies into deep recession.

Institutional investors are paying attention. In late January, the world’s largest asset manager, BlackRock, formally warned the companies it invests in that they would need to disclose their own long-term net-zero strategies. The IEA report said that if the global campaign is to meet its zero-emissions timeline, then investment in new oil and gas production must be halted. At the same time, however, the report predicts demand for carbon-based fuels will expand for the next two decades.

Prince Abdulaziz’s mocking of the report was echoed by Igor Sechin, the CEO of Rosneft, Russia’s largest oil producer. Speaking at the St. Petersburg International Economic Forum on June 5, Sechin said the world “runs the risk of facing an acute deficit of oil and gas” if investment in production is cut. He warned against focusing primarily on alternative energy sources.

State-owned oil companies in OPEC+ countries may be the only ones that can resist the pressure to wind down fossil fuel production. A small activist hedge fund, Engine No. 1, managed to unseat three board members of ExxonMobil because the activists felt the oil major hadn’t sufficiently adjusted its corporate strategy to climate change.

Similar pressures led French oil company Total to rebrand itself under the new name TotalEnergies and pledge to devote 20 percent of its current annual investment budget to renewable energy sources. A Dutch court, meanwhile, ruled that Royal Dutch Shell will have to reduce its carbon emissions by 45 percent from 2019 levels by 2030. Total, Shell, and BP are all reorganizing their assets to drop less profitable fossil fuel projects and add renewables.

National oil companies like Saudi Aramco and the United Arab Emirates’ Abu Dhabi National Oil Company, known as Adnoc, are relatively isolated from these pressures. Even Biden sending Kerry to Abu Dhabi on his first trip abroad couldn’t prevent the princes of petroleum from snickering. OPEC producers are also particularly well positioned to profit from Western retrenchment in fossil fuels. In fact, their strategy is to invest primarily in their traditional core business of producing oil and gas while using some capital to invest in just enough clean and renewable projects—promoting concepts like “green hydrogen” and “blue ammonia”—that they can tout their energy-transition credentials to the public.

Aside from oil, Saudi Arabia most recently connected its first solar installation (a 300 MW solar voltaic facility) to its electricity grid, and other ambitious projects are planned. But it is Aramco that largely keeps the air conditioning running in Riyadh’s 110-degree heat with crude oil and natural gas. The world’s largest oil company is also investing billions of dollars to increase its maximum sustained crude oil production from 12 million barrels per day to 13 million barrels per day.

Aramco has shown greater interest in reducing the carbon intensity of its fossil fuel operations and researching carbon capture than in actually transitioning from fossil fuels. Its push into the renewable and clean tech arena is in its infancy, having set up a $500 million venture capital fund to invest in renewable and energy efficiency technologies. Still, Aramco firmly believes fossil fuels will be necessary for much longer than firms like BP and Shell are banking on. With Aramco’s low cost of production, it can maximize profits on fossil fuels while dabbling in the renewable and clean tech space without any real financial risk.

In the UAE, Adnoc has pivoted more towards renewables than Aramco, but is still doubling down on its core fossil fuel business. In November 2020, Adnoc committed to investing $122 billion over five years to increase its oil and gas production. At the same time, it has pledged to cut emissions by 25 percent by 2030.

The reality is that oil and gas will be a major part of the world’s energy mix for decades to come—especially if the developing world is to finally escape widespread energy poverty.

As some major Western oil companies slow down production or divest themselves of supplies while national oil companies do the opposite, the implications of these contrary strategies could be profound. Can the industry and government regulators transform energy production and consumption so radically that oil and gas become nothing more than feedstocks for specialized markets, such as making plastics? It’s theoretically conceivable—but the technology to get there isn’t even close to market-ready.

What if the Saudis and the Emiratis are correct and fossil fuels continue to remain a vital part of the global energy and transportation economy? That’s not a scenario the political leaders in the United States and Europe seem willing to contemplate right now. In fact, the results would be disastrous, heralding a return to an era when Gulf monarchs controlled the oil market and soaring oil prices plunged economies around the world into deep recession.

A middle path is being pursued by Norway. While Petroleum and Energy Minister Tina Bru has declared that state-owned Equinor isn’t giving up on pumping oil and gas, the Scandinavian country will continue to develop its own renewable energy sources and cut carbon emissions. Norway currently gets most of its energy from hydropower and is committing to developing more offshore wind farms—both floating and fixed.

Among the alternatives to petroleum that Gulf countries are exploring is nuclear energy. In April, Abu Dhabi inaugurated the region’s first nuclear power plant. Saudi Arabia also has nuclear intentions but will need to pursue international cooperation and conform to global standards to get their plants up and running.

The reality is that oil and gas will be a major part of the world’s energy mix for decades to come if Western economies hope to maintain their standard of living—and if the developing world is to finally escape widespread energy poverty. Acting as though the world can prosper without fossil fuels will disadvantage those countries, companies, and populations that have adopted the strictest policies. Net-zero by 2050 is a worthy goal, but it risks leaving Western economies and the developing world at the mercy of autocratic oil producers who laugh at their aggressive efforts to put the brakes on fossil fuel emissions.