Sinking Future for Frontier Oil and Gas Exploration
By Amy Myers Jaffe
Denmark’s announcement that it will phase out oil and gas production in its waters by 2050 and cancel all future licensing of acreage for oil and gas exploration may be symbolic given the country’s shrinking number of prospective areas but it is significant nonetheless. It is the largest oil and gas producer to set a firm end date for oil and gas development and builds on a trend of developed nations working towards ending oil exploration within their national borders including New Zealand, France, and Belize. The Danish decision will add pressure to other countries like Norway to rethink their oil and gas policies in the wake of commitments to climate change action. Several oil producing countries have failed to generate strong interest in auctions for exploration licenses recently amid flagging oil prices, including notably Brazil whose offering of exploration acreage failed to attract bids from the international oil majors in late 2019.
The fact that a few smaller, near fully developed petroleum-endowed countries are exiting the oil and gas exploration business takes on greater salience when juxtaposed with other trends leaning in against frontier oil and gas development. The large international major oil companies are cutting back, at least for now, on frontier exploration. BP has said it will forego frontier exploration altogether as part of their pivot to cleaner energy, while other European majors like Italy’s ENI say they will be more selective about exploring for oil and gas in new regions. Equinor has said it won’t look for oil and gas in the Arctic frontier of the Barents Sea. For its part, ExxonMobil, while still squarely focused on oil and gas, has capital constraints and will likely attend to its most promising prospects under development like large reserves in Texas and Guyana. All this leaves new petro-aspirants like Ghana, Uganda, and Lebanon with fewer bidders for their nascent oil and gas, making it harder to finance development. The financing challenge is heightened by the fact that multilateral organizations like the World Bank and European Investment Bank have said they intend to stop financing fossil fuel projects including oil and gas exploration. In the past, such international funders played a crucial role in helping less developed nations get lucrative oil and gas projects off the ground. Major commercial banks have committed to not fund oil and gas development in the Arctic, including Goldman Sachs, Bank of America, Citi, and JP Morgan Chase.
Denmark’s transparent (while distant) deadline to end its oil and gas production raises interesting questions about whether it is feasible for new oil nations to argue that wealthy economies that have benefited from decades of oil and gas production should step aside and leave whatever remaining carbon budget there is for future oil and gas development to nations yet to achieve economic stability. The 2017 Lofoten Declaration—signed by some 600 organizations in 76 countries—laid out that principle, calling on wealthy nations to lead the way in abandoning fossil fuel production. But no such mechanism exists to determine which countries with new discoveries should be given priority to sell their oil and gas and which countries should shutdown, and it is hard to imagine how, even in the context of future global climate negotiations, such a pecking order could be established.
A choice by the incoming Biden administration to limit future drilling on federal lands could be interpreted as a step in a similar direction to Denmark, as voluntarily taking oil reserves off the block for future production, although U.S. oil and gas production on private lands continues apace. Some other countries like Colombia are choosing to slow walk continued oil and gas development to get off the treadmill of volatile national commodity revenues.
But the sustainability inclinations of a handful of Western industrialized countries when it comes to future oil and gas exploration belies the bigger problem when it comes to transitioning national budgets away from oil and gas revenues. First and foremost, even countries like Denmark will have a long glide path of oil and gas production from already developed or permitted areas. Secondly and perhaps more to the point, the reality is that the line of less developed countries who would like to want to join the ranks of new oil and gas producers to foster economic development is a long one, as was underscored by a recent gathering of the new producers group at the U.K.’s Chatham House thank tank last week. Countries like Ghana, Lebanon, Liberia, Sierra Leone, South Sudan, Senegal, Somalia, Trinidad & Tobago, Timor-Leste, Namibia, Uruguay, Cote d’Ivoire, Malawi, Mauritania, Suriname, and Tanzania have either recently launched or would like to launch exploration licensing rounds for oil and gas exploration. Mozambique is among several African nations with export ambitions and who have faced recent delays getting natural gas export industries off the ground.
Even more problematical to the idea of a managed transition that would phase out oil and gas exploration in a “just” manner, starting with the West, is the fact that the plight of new aspiring oil and gas producers is all the more daunting due to stiff competition from well-established giant oil producers in Russia and the Middle East. The Organization of Petroleum Exporting Countries (OPEC) and other major producers met last week to determine how to cope with continued curtailments in oil demand related to the COVID-19 pandemic. The “OPEC plus” producer group opted to have a phased increase in output in the early months of 2021 as unity to intervene to hold up oil prices was starting to fray.
Some key international oil players like Saudi Arabia and the United Arab Emirates have begun to pivot their economies to diversify to clean energy as well as other to promote other economic sectors to replace oil in the long run. However, that effort does not always involve simultaneously tamping back their oil activities in the fashion highlighted by BP’s planned leading-edge approach. For example, the United Arab Emirates’ national oil company ADNOC recently committed $122 billion to boost oil and gas output by over 1 million b/d by 2030, among other projects. Similarly, state-run energy firm Gazprom has moved to improve its energy efficiency substantially and to increase the share of renewables in its power generation mix, but Russia also continues to look for ways to develop its Arctic resources and to increase its role as a global natural gas player.
All this means that as climate conscious countries succeed in suppressing demand for fossil fuels in the coming decade market competition among oil and gas suppliers could intensify, leading to volatility in commodity prices and financial challenges for both new and existing oil and gas states. The International Monetary Fund reported in 2019 that emerging market oil and gas state enterprises (SOEs) had doubled their debt levels over the past 15 years while many SOEs were simultaneously struggling with reduced profitability. Middle East region oil exporters have seen total government net national debt reach over 20 percent of gross domestic product (GDP) this year, up from only 3 percent of GDP in 2016. All of this will be brought to bear in future climate negotiations as the United States pivots to take a leadership role anew and raises some thorny questions about how to navigate a smooth financial transition for energy producers like Mexico and Ecuador who will have to manage large debt payments rendered worse by the COVID-19 crisis.
Amy Myers Jaffe is the Managing Director at Climate Policy Lab and a Research Professor at The Fletcher School, Tufts University.