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Hello readers,
June was a busy month for the oil and gas industry, with war in the Middle East prompting speculation of an impending oil and gas supply crisis before Trump bombed his way to peace, and with it, returned oil prices to their downward trajectory. I’ll be looking at what this latest round of conflict means for the state of oil and gas and the energy transition, how investment in solar is outstripping oil, and a series of world firsts in the use of hydrogen and carbon capture and storage.
One bit of analysis that stuck with me this month – the biggest anticipated growth markets for LNG are all located in the global ‘sun belt’ where there is the highest potential for solar generation. These countries, so far led by South and Southeast Asia, are already seeing huge growth in solar. This increase signals “a structural shift in how electricity demand is being met—faster, cheaper, and more locally than new gas infrastructure can deliver”, according to a leading economist at a think tank founded by gas companies. Those in the industry hoping for a boom in LNG demand from these same countries could yet be disappointed.
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Thanks,
Murray
Oil markets shrug off the risk of war in the Middle East
Israel’s attack on Iran, the subsequent conflict and the US decision to bomb Iranian nuclear facilities pushed speculation about the impact on the oil and gas markets to the top of the news agenda this month. As well as risks from oil production in Iran and gas production in Israel, by far the biggest concern was whether Iran would attempt to disrupt or block shipping through the Strait of Hormuz, which carries a fifth of the world’s oil and gas. Should it have happened, oil prices were forecast to top USD 100 or even up to USD 300 per barrel. For gas, the impact would be comparable to the energy crisis of 2022, with prices in Europe and Asia likely to more than double.
While China is the largest buyer of oil and gas that flows through the Strait of Hormuz, our analysis found that Japan is at greatest risk from any disruption to shipping through this crucial channel. This is because fossil fuel imports only account for 20% of China’s energy needs, whereas Japan imports 87% of its energy as fossil fuels – leaving it hugely vulnerable. In Europe, we found that Belgium and Italy are most exposed to the direct risks of any disruption in the Strait, with a fifth to a tenth of their gas imports at risk. The early 2020s energy crisis showed the extent to which fossil fuel prices increase inflation, and how well renewables can reduce energy costs, inflation and economic volatility.
While President Trump was backing the Israeli strikes on Iran, he also kept a close eye on the impact on oil markets – posting on Truth Social “Everyone, keep oil prices down, I’m watching!”. While the message was definitely intended to include American drillers, I can’t help but think that “everyone” that Trump was watching was intended to include Saudi Arabia and the OPEC countries.
Yet, coming out of the crisis, what has become clear is that this was not a moment of historic volatility – but of an oil market supplied with so much oil, facing such little demand, that as the FT put it “war in the Middle East isn’t enough to save the oil industry from the threat of $50 barrels.” As the veteran Bloomberg columnist Javier Blas wrote, “the market finds itself swimming in oil.” It is oil producers who are facing the biggest risks right now, especially those trying to expand production. In the face of weak demand and falling prices, the world simply does not need more oil supply.
Oil and gas in the transition
Solar investment outstrips oil drilling
Investment in fossil fuels is set to fall this year, with a 6% drop in investment in oil production, according to the International Energy Agency (IEA). Fatih Birol, the head of the IEA, said that “This is the first time we have seen such a decline, except for Covid, because of lower prices and lower oil demand”. The report also highlights the huge shifts within investment in the industry, with state oil companies in the Middle East and Asia set to account for 40% of oil and gas spending, up from 25% a decade ago.
This decline in fossil fuel investment is in stark contrast to booming clean energy investment, which is set to reach USD 2.2 trillion this year, double the amount invested in fossil fuels. This means that spending on oil production will only reach USD 420 billion, USD 30 billion short of the amount going into solar.
Past the peak?
Despite all the talk of peak oil demand later this decade, crude oil production remains below the high of 2018 and isn’t set to top it next year either. One of the big reasons behind this has been the lack of demand from China where the “extraordinary” sales of electric vehicles prompted the International Energy Agency to bring forward its expectation of peak demand by two years to 2027. Hot on the heels of electric cars, electric trucks are now taking off in China, accounting for around a fifth of sales in April, eroding demand for diesel. All eyes will now be on India, which is forecast to see the sharpest rise in oil demand globally over the next five years. How much of the growing economy’s transport needs are met by internal combustion engines or electric vehicles will be crucial to determining the future of global oil demand.
What is OPEC’s plan?
OPEC continues to increase production, and – with supply exceeding demand – oil prices are falling, which generally speaking hurts OPEC producers as they get less money per barrel. This has prompted oil market watchers to wonder what OPEC is up to. One view is that production from outside OPEC, such as in the US, will level off, so the supply glut will be temporary. But there are a range of other factors at play: the production cuts OPEC had agreed to weren’t working to prop up prices any more, some countries were cheating on their quotas, Trump was pushing OPEC to deliver lower oil prices, and with lower prices OPEC can hurt international oil companies and prevent the US shale industry gaining a greater market share. As one anonymous commentator was quoted in the FT, it’s still unclear whether OPEC’s aim is “to regain market share, hurt US shale, please Trump, or all of the above”.
UK considers emissions, and economic benefits, of new fossil fuel projects
The UK has issued its new rules for the permitting of fossil fuel projects, bringing government policy into line with the Finch ruling by the UK Supreme Court, which found that the emissions from the burning of fossil fuels have to be taken into account as part of the permitting process. While this represents a major step forward in assessing the climate impacts of new fossil fuel projects, the policy also allows the harms of these emissions to be considered alongside the “potential economic and other advantages of the project”. One of the first key tests for the policy is likely to be in the decision over the controversial Jackdaw and Rosebank fields, where the licences had previously been revoked by the courts, but developers Shell and Equinor, respectively, are set to seek new approvals under the new guidance.
The EU’s Russian fossil fuel phaseout
The European Commission proposed several measures to put pressure on Russia, including a ban on Russian gas contracts using trade law to avoid a veto by Hungary and Slovakia, as well as ending imports of refined products made with Russian crude and pushing for a lower cap on crude oil prices. As a sign of the rifts that continue within Europe, the German government is working to block any attempts to start the remaining Nord Stream pipeline, while the Austrian energy minister suggested that the EU should be open to restarting Russian gas imports if the war ends.
Canada backs fossil fuel production while wildfires rage
The new Canadian Prime Minister Mark Carney has proposed a “grand bargain” with the oil industry, aiming to increase production and exports while (so he claims) reducing emissions. The Canadian legislature subsequently passed legislation fast-tracking major infrastructure projects, giving the government new powers to sidestep protections for the environment and Indigenous people. Yet with oil workers being evacuated from production sites in Alberta due to raging wildfires, it feels like there’s a subtle message about whether expanding fossil fuel production is wise.
Alaska at risk, but US production declining
The US Department of the Interior has put forward a proposal to scrap a Biden-era rule that protects huge swathes of Alaska’s National Petroleum Reserve from oil and gas extraction. The proposal is part of Trump’s “drill, baby, drill” agenda, however so far the results aren’t looking good for the President, with crude oil production in the US set to drop next year – the first time since 2015, outside of the pandemic.
Energy transition strategies
TotalEnergies is facing the first greenwashing court case in France, with claims that it misled consumers in the marketing of its 2021 rebrand from its previous name – Total. Three environmental NGOs claim that TotalEnergies made misleading statements in 44 pieces of communication, including claims that it was a “major actor in the energy transition”, as well as claims on its commitment to net zero and the promotion of natural gas. A judgement is expected in October.
Rumours continue that Shell is considering buying out BP, prompting Shell to make an official statement that it had not been in talks with BP and had no intention of making a bid for the company. Under UK takeover rules, Shell now cannot approach BP for the next six months, except in certain circumstances – such as if another company makes a bid for BP. Given BP’s continually lagging share price, even this statement may not be enough to end the speculation.
Clean energy investments
In May, Equinor secured a major u-turn from the Trump administration, allowing its USD 5 billion offshore wind project in New York to go ahead. It now turns out that the day before the government’s decision, New York’s governor called President Trump, offering to reopen negotiations over the construction of a USD 1 billion gas pipeline from Pennsylvania to New York, which Trump had supported but state regulators had opposed. It remains to be seen if that pipeline will now get the go-ahead, but it appears this may be the price of getting presidential approval for the wind farm.
BP made investments in two major solar projects this month, alongside other corporate partners. In Azerbaijan, it is building a USD 200 million photovoltaic plant which will provide power to BP’s Sangachal oil and gas terminal (reducing BP’s operational emissions) and to the Azeri electricity grid. In Taiwan, Lightsource BP has secured USD 200 million in financing for a fishery solar project, installing solar panels over fish farms.
Hydrogen and ammonia
A “world first” pilot of blending 50% hydrogen and 50% natural gas took place at a gas power station in the US. The project by Georgia Power and Mitsubishi Power claims to have reduced emissions by 22%, which highlights the challenges of using hydrogen blending to reduce emissions. As hydrogen has a much lower energy density than natural gas, using a 50:50 mix with natural gas means the majority of the energy still comes from the gas – so the emissions reduction is comparatively low. Given the expected high costs of hydrogen production, this is a lot of hydrogen spent for not a lot of carbon saved.
Carbon Capture and Storage (CCS)
Norway reached two firsts this month, with the opening of the world’s largest industrial carbon capture and storage project, and the first commercial transport of CO2 by ship for storage. The CCS project is estimated to cost USD 3.4 billion over its first ten years of operation, of which a massive USD 2.2 billion will be subsidised by the Norwegian government. The chief executive of Heidelberg Materials, where CO2 for the project is being captured, acknowledged that “this project would have been impossible without the support of the Norwegian government.” The government hopes that with the rising price of carbon in Europe, the project could be commercially viable within 10-15 years.
From Zero Carbon Analytics
As well as the briefings on risks linked to the conflict in the Middle East, we also published:
- An analysis showing that Trump’s policies have hurt the US economy and fossil fuel companies, but that the market value of clean industries has rebounded and investment remains at historically high levels.
- A joint ZCA and E3G briefing of 22 updated NDCs, including their commitments on fossil fuel subsidies, fossil fuel phaseout and alignment with the 1.5C target.
- An analysis of scenarios produced by an influential Japanese government-linked think tank, the IEEJ, showing that its predictions of high future gas demand are based on unrealistic assumptions about future emissions, renewables and CCS.
