Indeed, per the above, USD 10 trillion of fossil fuel investment must be redirected towards energy transformation by 2030.
Abu Dhabi, United Arab Emirates, 12 January 2020 – The share of renewables in global power should more than double by 2030 to advance the global energy transformation, achieve sustainable development goals and a pathway to climate safety, according to the International Renewable Energy Agency (IRENA). Renewable electricity should supply 57 per cent of global power by the end of the decade, up from 26 per cent today.
A new booklet 10 Years: Progress to Action, published for the 10th annual Assembly of IRENA, charts recent global advances and outlines the measures still needed to scale up renewables. The Agency’s data shows that annual renewable energy investment needs to double from around USD 330 billion today, to close to USD 750 billion to deploy renewable energy at the speed required. Much of the needed investment can be met by redirecting planned fossil fuel investment. Close to USD 10 trillion of non-renewables related energy investments are planned to 2030, risking stranded assets and increasing the likelihood of exceeding the world’s 1.5 degree carbon budget this decade.
“We have entered the decade of renewable energy action, a period in which the energy system will transform at unparalleled speed,” said IRENA Director-General Francesco La Camera. “To ensure this happens, we must urgently address the need for stronger enabling policies and a significant increase in investment over the next 10 years. Renewables hold the key to sustainable development and should be central to energy and economic planning all over the world.”
“Renewable energy solutions are affordable, readily available and deployable at scale,” continued Mr La Camera. “To advance a low-carbon future, IRENA will further promote knowledge exchange, strengthen partnerships and work with all stakeholders, from private sector leaders to policymakers, to catalyse action on the ground. We know it is possible,” he concluded, “but we must all move faster.”
Additional investments bring significant external cost savings, including minimising significant losses caused by climate change as a result of inaction. Savings could amount to between USD 1.6 trillion and USD 3.7 trillion annually by 2030, three to seven times higher than investment costs for the energy transformation.
Falling technology costs continue to strengthen the case for renewable energy. IRENA points out that solar PV costs have fallen by almost 90 per cent over the last 10 years and onshore wind turbine prices have fallen by up half in that period. By the end of this decade, solar PV and wind costs may consistently outcompete traditional energy. The two technologies could cover over a third of global power needs.
Renewables can become a vital tool in closing the energy access gap, a key sustainable development goal. Off-grid renewables have emerged as a key solution to expand energy access and now deliver access to around 150 million people. IRENA data shows that 60 per cent of new electricity access can be met by renewables in the next decade with stand-alone and mini-grid systems providing the means for almost half of new access.
Despite regional turmoil, there are two critical areas of focus to work on simultaneously.
Despite 2020 looking to be a year of volatility, the President and CEO of the Atlantic Council expressed his optimism at the “remarkable” human potential of the MENA region.
In statements ahead of the fourth annual Global Energy Forum in Abu Dhabi, Frederick Kempe noted that despite regional turmoil, there are two critical areas of focus to work on simultaneously.
“One of them is to reduce conflict, to wind down the tensions of the region. But at the same time, you have to unlock the remarkable human potential of the Middle East and the GCC,” he said.
He told the Emirates News Agency (WAM), his predictions for 2020, noting that it would be a volatile year, particularly in the energy industry.
“Geopolitical uncertainty will play a larger role on energy prices this year,” Kempe added.
Reflecting on 2019 events, he noted, “It’s remarkable that energy prices have remained so low through everything we’ve gone through – Iranian sanctions, Libyan turmoil, Iraqi uncertainty.”
However, he added, “despite all that and partly because of the glut of oil we’ve had on the market, and the US oil and gas production, we’ve kept prices remarkably stable for a long period of time.”
“I think the big question is can that hold out in 2020,” he continued.
“You see prices rise by four percent when you get into a crisis, suddenly it seems as we’re in a de-escalatory phase if prices drop by five percent, and I think that’s what we’re going to see.”
Commenting on recent US-Iran tensions, and their impact on clean energy transitions, Kempe said, “A lot of people are focusing on the wrong lessons from the last few days. No doubt, there’s been a lot of tension.
“No doubt there was, for a period of time, increased risk of violent conflict. On the other hand, both parties stood back from that,” he added.
“No one in the region wants an escalation of the current tensions,” he stressed, adding, “Everyone that participated in de-escalating came to that. I think that’s promising.”
“I think all parties see no gain in war. The US doesn’t see any gain, Iran doesn’t see any gain; certainly, the Arab and GCC countries don’t see any gain,” the Atlantic Council President emphasised.
When asked to comment on how GCC countries, like the UAE, can play a role in the 2020 energy agenda, Kempe said, “If you look at the GDP of this region, and if you took the size of the Middle East population and put it anywhere in the world, you would have three times the GDP.”
World Bank figures indicate the GDP figures for the Middle East and North Africa reached $3.611 trillion in 2018.
“So imagine how much low-hanging fruit there is here and how much opportunity there is,” he said.
According to the International Renewable Energy Agency, IRENA, figures, the adoption of renewable energy technologies created 11 million new jobs at the end of 2018.
When asked to comment on how countries and international bodies can partner further to see effective climate action, Kempe revealed that through the Council’s Adrienne Arsht Centre for Resilience, the MidEast Centre, and the Rockefeller Foundation, a new initiative will see one billion individuals become resilient to climate change, tensions and crises.
More details on the announcement will be made as part of Abu Dhabi Sustainability Week 2020 next week.
The Atlantic Council Global Energy Forum is an international gathering of government, industry, and thought leaders to set the energy agenda for the year.
Taking place in the UAE capital from January 10-12, the 2020 iteration of the forum will focus on three key themes: the role of the oil and gas industry in the energy transition, financing the future of energy and interconnections in a new era of geopolitics.
Today, 8 January 2020, it appears that the US is more relaxed about oil spike than Europe – which helps explain differences over Iran, according to Mueid Al Raee, of United Nations University.
Oil prices shot up following the US assassination of Iranian general Qassem Soleimani, rising more than US$5 per barrel to more than US$71 (£54) on January 6, its highest level since the Saudi oil refinery attack last September. Brent crude has since eased to around US$69 at the time of writing, though there is much discussion that it could climb a lot higher if the current crisis leads to an all-out war.
In keeping with many recent developments in US-Iranian relations, the Europeans have taken a dim view of America’s decision to take out the military commander. When trying to make sense of the very different approaches Iran on either side of the Atlantic, one factor that is often overlooked is that the US and Europe are affected in different ways by a rising oil price.
People tend to see more expensive oil as bad news for the global economy, but the reality is that it’s not necessarily bad for America. It may be that, in continuing to provoke Iran, driving up the oil price is almost seen by the Americans as an added incentive.
The complex oil effect
Oil pricing and its associated effects are often more complex than portrayed. As citizens, we are most often concerned with the price of fuel for our cars and the cost of heating our homes. This is the first way that oil prices affect the broader economy: if consumers have to spend more on fuel and associated taxes, they have less to spend elsewhere – and this can lead to a global slowdown.
Like all countries, the US is affected by this. Yet on previous occasions where US actions on the geopolitical stage drove up oil prices, there were also benefits to the country’s economy. Take the 2003 invasion of Iraq, which ushered in a period that would see the price of Brent nearly triple by the end of the decade. This led to a wave of investment into the US shale oil sector, which would eventually account for approaching two-thirds of the country’s total oil production.
Brent crude price, 1940s to present day
The trouble with shale oil is that it is expensive to produce, with average break-even of fields not far below US$50 per barrel. Shale oil wells also produce most of their oil in the first year of production, which means that producers have to continually drill new wells.
Due to the lower prices of the last few years, a large number of oil-related companies in the US have filed for bankruptcy, including both producers and services businesses. And while US production of shale oil managed to continue rising impressively throughout this period, mainly thanks to the bigger producers, it has been slowing down markedly in recent months.
If the oil price now trends higher, it could well mean that shale oil production in the US can resume its upward march. It also raises the prospect of US oil services companies earning more both locally but, most importantly, from foreign oil-production ventures, since there is a well-established correlation between their stock price and higher oil prices.
At the same time, six of the last eight recessions in the US were followed by high oil prices. One reason why this was not a hindrance for the economy is that, in the longer term, stable higher prices promoted the development of more energy-efficient technologies within the country.
The Americans can also argue that there are some longer-term economic benefits to higher oil prices that can help everyone. Oil-producing countries with surplus cash from oil profits invest in foreign technology and foreign assets. At the same time, oil-importing countries innovate to mitigate the profit-reducing effects of higher oil prices. These are both ultimately good for economic vibrancy and growth.
On the other hand, there are advantages to cheaper oil that are particularly important to countries in Europe – including the UK – because, unlike America, they are not oil self-reliant. Lower oil prices are shown to be beneficial for Europe’s highly energy-intensive economies and are expected to help with job creation. During the oil price drops of 1986 and the early 1990s, for instance, energy-intensive industries in Europe increased their earnings. Consumer product businesses and European airlines benefit from lower oil prices, too.
What happens next
Whether or not the Americans actually want higher oil prices, there are certainly good economic reasons why they probably won’t mind them. Deepening the chaos that started with the US withdrawing from the West’s nuclear deal with Iran is an “easy” way to achieve higher oil prices while meeting other strategic objectives.
Yet how the Europeans, China and Russia respond will also determine the global flow of oil from Iran and Iraq. Whatever the ultimate pros and cons of a higher oil price from an economic point of view, the Europeans clearly have more reasons to be unenthusiastic than the US. If the new exchange and payment instruments that have been developed by Europe to circumvent US sanctions are effective, and the US does not escalate the conflict, it may yet mean that oil prices remain stable at current levels.
Gas investments in the Middle East and North African (MENA) region are declining, according to a report from Saudi Arabia-based Arab Petroleum Investments Corp. (APICORP).
The report highlighted worries about the challenge of meeting domestic demand given this slowdown. Private investors are taking a wait-and-see approach, driven by low gas prices, potentially putting more strain on governments.
The Gas Investment Outlook 2019-23 charts a reduction of $70 billion in gas spending from the previous report, 2018-22, but the outlook for petrochemicals has increased by 50%. Of the nine countries covered, investments are set to fall in seven. Petrochemicals are on the rise as countries focus on extracting the most amount of value from oil production.
The most notable fall in gas plans was in Kuwait, down nearly 80%, while Saudi Arabia was down 60%, with Algeria and Iran down around 50% each. Driving the $70bn reduction were Saudi and Iran. This is not necessarily a question of cutting investments, it can also be driven by major projects being completed. Saudi, for instance, commissioned its Wasit gas plant.
While the MENA region has moved towards the consumption of gas, for power generation and industry, continued access to supplies is driven by the government’s willingness and ability to pay for these supplies. This willingness will have a direct impact on meeting future supplies, APICORP said. Saudi is planning an additional 12 GW of greenfield power, while Egypt has 9 GW of projects, which “will require additional gas supplies”.
LNG supplies in the area are playing a part in meeting increased demand. Regasification terminals are on track in Kuwait and the United Arab Emirates, while Qatar is working on expanding its export capacity to 126 million tonnes per year by 2027. Around the world, for the first time, investment commitments in new LNG capacity this year passed the $50bn mark. Global demand for gas is increasing, it noted, but supply may outpace this until 2023, although a number of factors – trade wars and geopolitical tensions – are complicating such calculations.
While Qatar is working to cement its dominance of the liquefaction sector, Saudi Aramco is taking steps to become a player, having signed a deal this year for a potential interest in the Port Arthur LNG plan, in the US. Construction of Qatari trains are expected to carry a price tag of around $15bn.
Iran is leading the charge in gas and petrochemical investments, followed by Egypt, despite the countries’ share of spending to 2023 declining by $11bn and $5bn respectively from the previous APICORP report.
Saudi has made progress on its energy intensity of GDP and is increasing gas production, with the target of increasing sales gas volumes to 164 bcm per year by 2026. There are challenges to gas in the kingdom, including alternative fuel stocks, while shale production has gained some attention but carries a high cost, at $6-10 per mmBtu.
Abu Dhabi is also pursuing unconventional gas resources such as shale, in addition to offshore sour gas. The state imports gas via the Dolphin link, with LNG coming via two regas terminals. Abu Dhabi also began
Algeria must tackle the problem of low upstream spending and access to technology around maturing fields, in particular its Hassi R’mel field. Just over $8bn is expected to be invested in the country during the next five years, APICORP said. Companies working in the country’s energy sector have struggled with bureaucracy, with the report citing the recent cancellation of the $100 million debottlenecking project at the Rhourde Oulad Djemma field.
Production and exports have declined in 2019, with new fields coming onstream in the southwest providing only a “short-term fix”. Gas flaring accounts for the equivalent of 20% of Algeria’s domestic consumption, suggesting this might be one area for improvement.
The APICORP report described Egypt as “touting itself as a gas hub”, based on regional supplies, from states such as Israel, and existing infrastructure “but key elements are still amiss”. The country expects to consume 72 bcm of gas in 2020 and 92 bcm in 2021, APICORP said, citing Egypt’s plans. The North African state could run into a net deficit in 2025, on high domestic consumption and increased LNG exports.
The central problem which the world faces in its attempts to avoid catastrophic climate change is a contrast of time scales. In order to save human civilization and the biosphere from the most catastrophic effects of climate change we need to act immediately. Fossil fuels must be left in the ground. Forests must be saved from destruction by beef or palm oil production.
These vitally necessary actions are opposed by powerful economic interests, by powerful fossil fuel corporations desperate to monetize their underground “assets”, and by corrupt politicians receiving money from the beef or palm oil industries.
However, although some disastrous effects of climate change are already visible, the worst of these calamities lie in the distant future. Therefore it is difficult to mobilize the political will for quick action. We need to act immediately, because of the danger of passing tipping points beyond which climate change will become irreversible despite human efforts to control it.
Tipping points are associated with feedback loops, such as the albedo effect and the methane hydrate feedback loop. The albedo effect is important in connection with whether the sunlight falling on polar seas is reflected or absorbed. While ice remains, most of the sunlight is reflected, but as areas of sea surface become ice-free, more sunlight is absorbed, leading to rising temperatures and further melting of sea ice, and so on, in a loop.
The methane hydrate feedback loop involves vast quantities of the powerful greenhouse gas methane, frozen in a crystalline form surrounded by water molecules. 10,000 gigatons of methane hydrates are at present locked in Arctic tundra or the continental shelves of the world’s oceans. Although oceans warm very slowly because of thermal inertia, the long-term dangers from the initiation of a methane-hydrate feedback loop are very great. There is a danger that a very large-scale anthropogenic extinction event could be initiated unless immediate steps are taken to drastically reduce the release of greenhouse cases.
The World Is on Fire!
“The world is on fire!” says Swedish climate activist Greta Thunberg. She is right. California is burning. The Amazon is burning. Indonesia is burning. Alaska is burning. Siberia is burning. These fires have been produced partly by the degree of climate warming that has already occurred, and partly by human greed for profits, for example from beef production or palm oil.
Speaking at the opening ceremony of the UN climate conference COP24, the universally loved and respected naturalist, Sir David Attenborough, said:
“If we don’t take action, the collapse of our civilizations and the extinction of much of the natural world are on the horizon.”
Sir David’s two-part program, “Climate Change: The Facts” is currently being broadcast by BBC Earth. Hopefully, this important documentary film, like Leonardo DiCaprio’s excellent film “Before the Flood”, can do much to mobilize public opinion behind the immediate action that is needed to save the long-term future of human civilization and the biosphere.
Recently more than 7 million young people in 150 countries took part in strikes aimed at focusing public opinion on the need for rapid climate action. The Extinction Rebellion movement, which started in the UK, has now spread to many countries, and is also doing important work. In the United States, popular political figures such as Bernie Sanders and Alexandria Ocasio-Cortez are doing much to mobilize public opinion behind the Green New Deal and much to counteract Donald Trump’s climate change denial.
The Remarkable Properties of Exponential Growth
Positive feedback loops occur when the presence of something leads to the generation of more of the same thing. For example in the presence of an unlimited food supply, the growth of a population will lead to more individuals reaching reproductive age, and hence an accelerated growth of the population. This type of relationship leads to the mathematical relationship known as exponential growth.
Exponential growth of any quantity with time has some remarkable characteristics, which we ought to try to understand better, since this understanding will help us to predict the future. The knowledge will also show us the tasks which history has given to our generation. We must perform these tasks with urgency in order to create a future in which our descendants will be able to survive.
If any quantity, for example population, industrial production or indebtedness, is growing at the rate of 3% per year, it will double in 23.1 years; if it is growing at the rate of 4$\%$ per year, the doubling time is 17.3 years. For a 5% growth rate, the doubling time is 13.9 years, if the growth rate is 7% (the rate of economic growth that China’s leaders hope to maintain), the doubling time is only 9.9 years. If you want to find out the doubling time for any exponentially growing quantity, just divide 69.3 years by the growth rate in percent.
Looking at the long-term future, we can calculate that any quantity increasing at the modest rate of 3% per year will grow by a factor of 20.1 in a century. This implies that in four centuries, whatever is growing at 3% will have increased by a factor of 163,000. These facts make it completely clear that long-continued economic growth on a finite planet is a logical absurdity. Yet economists and governments have an almost religious belief in perpetual economic growth. They can only maintain this belief by refusing to look more than a short distance into the future.
Exponential decay of any quantity follows similar but inverse rules. For example, if the chance of a thermonuclear war will be initiated by accident or miscalculation or malice is 3% in any given year, the chance that the human race will survive for more than four centuries under these conditions is only1 in 163,000, i.e. 0.000625 percent. Clearly, in the long run, if we do not completely rid ourselves of nuclear weapons, our species will have no hope of survival.
Besides nuclear war, the other great threat to the survival of the human species and the biosphere is catastrophic climate change. The transition to 100% renewable energy must take place within about a century because fossil fuels will become too rare and expensive to burn. But scientists warn that if the transition does not happen much faster than that, there is a danger that we may reach a tipping point beyond which feedback loops, such as the albedo effect and the methane hydrate feedback loop, could take over and produce an out-of-control and fatal increase in global temperature.
In 2012, the World Bank issued a report warning that without quick action to curb CO2 emissions, global warming is likely to reach 4 degrees C during the 21st century. This is dangerously close to the temperature which initiated the Permian-Triassic extinction event: 6 degrees C above normal. During the Permian-Triassic extinction event, this occurred 252 million years ago. In this event, 96 percent of all marine species were wiped out, as well as 70 percent of all terrestrial vertebrates.
Is a quick transition to 100% renewable energy technically possible? The technology is available, remarkable characteristics of exponential growth can give us hope that it can indeed be done, provided that we make the necessary effort. Governments currently give enormous subsidies to fossil fuel industries. These must be stopped, or better yet, shifted to subsidize renewable energy. If this is done, economic forces alone will drive the shift to renewable energy. The remarkable properties of exponential growth can give us hope that the transition will take place rapidly enough to save the future of our planet from the worst effects of climate change.
Feedback Loops and Ethics
All of the major religions of the world contain some version of the Golden Rule,
“Do unto others as you would have them do unto you”.
In Christianity, there is a striking passage from the Sermon on the Mount:
“Ye have heard that it hath been said, Thou shalt love thy neighbour, and hate thine enemy. But I say unto you, Love your enemies, bless them that curse you, do good to them that hate you, and pray for them which despitefully use you, and persecute you.”
This seemingly impractical advice, that we should love our enemies and do good to them, is in fact extremely practical. It prevents the feedback loops of revenge and counter-revenge that we see so often in today’s conflicts. In fact, if nations that claim to be Christian really followed this commandment, their participation in war would be impossible. Conflicts can be prevented by unilateral acts of kindness.
Feedback Loops and the Information Explosion
In 1965, the computer scientist Gordon E. Moore predicted that the number of components per integrated circuit would increase exponentially for the next ten years. In 1975, he revised his growth rate to correspond to a doubling time of every two years. Astonishingly, Moore’s Law, as this relationship has come to be called, has proved to be valid for much longer than he or anyone else believed would be possible.
Moore’s Law is an example of the fact that the growth of knowledge feeds on itself. The number of scientific papers published each year is also increasing exponentially. This would be all to the good, if our social and political institutions matched our technology, but because of institutional and cultural inertia, the exponentially accelerating rate of technical innovation is threatening to shake human society to pieces. We need new global institutions of governance and new global ethics to match our new technology.
John Scales Avery, Ph.D., who was part of a group that shared the 1995Nobel Peace Prize for their work in organizing the Pugwash Conferences on Science and World Affairs, is a member of the TRANSCEND Network and Associate Professor Emeritus at the H.C. Ørsted Institute, University of Copenhagen, Denmark. He is chairman of both the Danish National Pugwash Group and the Danish Peace Academy andreceived his training in theoretical physics and theoretical chemistry at M.I.T., the University of Chicago and the University of London. He is the author of numerous books and articles both on scientific topics and on broader social questions. His most recent books are Information Theory and Evolution and Civilization’s Crisis in the 21st Century (pdf).
Sukru Cildir of Lancaster University wonders how Saudi-Iranian oil rivalry has been shaped by American power. It has not historically been going for a long time and the recent decarbonisation wave sweeping the world does not seem to affect either party.
The relationship between Saudi Arabia and Iran, both oil-rich states in the Middle East, has oscillated from co-operation to conflict throughout history. Alongside a range of factors that shape their rivalry including sectarianism and nationalism has been the politics of oil.
Oil is a strategic international commodity, and its use as a political tool is widespread. Its role in the Saudi-Iranian rivalry can’t be understood without unpicking the international context, and the power structures that govern the way countries interact with each other. At the heart of this is the dominance of the US over this international system.
The dynamics between the US, Iran and Saudi Arabia over oil were laid bare in September 2019, after a series of drone attacks on Saudi oil facilities. The attacks caused the suspension of 5.7m barrels per day (mbpd) of crude oil production, nearly half the Saudi output.
The Houthis, a Yemeni faction, claimed responsibility. However, American and Saudi government officials accused Iran of committing these attacks. In return, the Iranians blamed foreign forces in the region for the insecurity and told the US to leave the area.
While the Saudi-Iranian oil rivalry is ostensibly the business of these two countries, it has always had an international dimension, overshadowed by the US.
The 1979 Iranian revolution marked a turning point for the place oil played within the Saudi-Iranian relationship. Before then, both countries were important allies of the US, a position which brought with it political and economic benefits, particularly to their oil industries. But the 1979 Islamic revolution in Iran paved the way for a separation of paths.
As a result, ever since 1979, the Iranian oil industry has been subject to American pressure, through a range of economic sanctions and embargoes, which has crippled Iranian oil production. Iran has been unable to reach the level of oil production of over six mbpd that it had in the pre-revolution years. Meanwhile, Saudi oil production reached over 12 mbpd in 2018.
This led to the Iranian oil industry being deprived of necessary foreign investment and technology transfer, and it has fallen behind Saudi Aramco, the kingdom’s state-owned oil company, and other regional competitors. Saudi Arabia has largely backed the US policy of isolating and sanctioning Iran, particularly the Iranian oil industry, which has, as I’ve argued elsewhere, contributed to the ongoing tensions in the Saudi-Iranian relationship.
As Saudi Aramco prepares for an IPO in December that could make it the world’s biggest publicly listed company, Iran is desperate to revitalise its own outmoded oil industry. As Iranian oil minister Bijan Zanganeh admitted in early 2019, many of Iran’s ageing oil facilities are in fact “operating museums”.
The US continues to have such an influence on Middle Eastern oil politics because of the way it has successfully pushed its own international agenda since 1945. After World War II, the US cemented its dominance over an international system built on the basis of liberal and capitalist principles. While the US rewards its allies with economic and political benefits, it punishes its challengers through a range of political and economic measures, not least economic sanctions.
Oil became a strategic international commodity in the post-World War II period, and began to play a pivotal role in the way the US maintained its global dominance. To do this, the US aimed to open up and transnationalise oil-rich economies in the Global South such as Saudi Arabia and Iran, to both promote its national interests and solidify its privileged position within the current system.
Accordingly, the supply of Middle Eastern oil into international markets without disruption – and at a reasonable price – became an essential instrument for maintaining American dominance, even though the US didn’t need to import oil from the Middle East.
A world of US dominance
The political economist Susan Strange provided a theoretical framework back in 1987 to explain the structure of US dominance over the international system through four main dimensions: production, finance, security and knowledge. This is also a useful way to understand how the US shapes the international oil market – and the Saudi-Iranian rivalry.
By 2018, in the wake of a shale boom, the US became the largest oil-producing country in the world by reaching production of 15 mbpd. Financially, oil has been priced and traded in US dollars, in particular since the early 1970s when a series of negotiations and agreements linking the sale of oil to the US dollar were made between Saudi Arabia and the US. This has increased global demand for US dollars, and helped the US deal with its trade deficit and keep its interest rates low. It has also helped the US to monitor the petroleum trade by controlling global bank transfers.
The US also stands as a main security provider to oil-rich Gulf monarchies, with publicly acknowledged military bases in over 12 countries in the Middle East. Additionally, it has a supremacy over global knowledge, most obviously through its continued domination and control of the sector’s technological needs. By leading global innovation and technological development in the shale revolution, for example, and having the highest budget for research and development, the US largely controls global technology transfer. This has also deprived Iran of necessary technology, capital and know-how to modernise its ageing oil industry, constraining production.
Therefore, despite the fact that the Saudi-Iranian oil rivalry seems like a regional issue, the role of American power in a globalised world has been key to shaping this regional political competition over oil.
The largest oil and gas producer, Saudi Aramco, is due to become the world’s most valuable publicly listed company. The Saudi government is planning to sell a small fraction of the firm’s shares on the Riyadh stock exchange before seeking a listing for 5% of the firm on an international market.
The company is so big that this would be the largest ever initial public offering (IPO) and could value the whole company at around US$1.5 trillion. This is less than the government’s hoped-for valuation of US$2 trillion, but would still make Aramco 50% larger than Microsoft, Apple or Amazon (which are all valued at about US$1 trillion).
And yet the future doesn’t look good for oil. The threat of climate change means most countries are looking for ways to reduce their use of fossil fuels and many investors are trying to reduce the number of oil company stocks they hold. So why is the company considered so valuable? A closer look at the data suggests the market sees Aramco as a short-term money maker but with much worse long-term prospects.
While this sounds like the company is in a strong position, the numbers actually reveal a more complicated situation. Other large public oil companies such as Shell typically pay shareholders a dividend of 6% on their investment value. If Aramco pays a similar percentage and its total dividends reach around US$75 billion, then the actual value of the company could be closer to US$1.25 trillion.
Of course, that would still make the company the most valuable in the world. But there’s another problem. A 6% return on investment from buying shares in the company represents the success of the company now. But the return from the company’s long-term bond represents what the market expects the company’s future prospects to be, and right now the bond yield is about 4% a year. When the bond yield is less than the yield from shares, it implies that prospects for capital growth are lower than in other sectors and that investors view oil as a declining industry.
The problem for Aramco and other oil firms is that climate change and falling demand has turned their oil reserves into “stranded assets”. This means they could be worth much less than investors expected and perhaps even become worthless. Global investors are not looking to increase the proportion of their portfolios devoted to oil and gas firms. Many, particularly sovereign wealth funds such as Norway’s, are decarbonising their investments.
Aramco’s difficult flotation comes in the middle of this process. With its high prospective yield, Aramco may well be attractive to “sin stock” investors who are happy to benefit from large short-term gains in socially unacceptable companies. But investors that buy in for financial or strategic reasons risk being left with stocks that become increasingly unmarketable. Who wants to be the last fund holding oil?
What’s more, the Saudi government will have to keep selling further shares in Aramco to fund its ambitions to transform its economy away from dependence on oil. This will depress Aramco’s share price, causing future valuations to occur on even worse terms. If it has proved difficult for the company to get the first valuation it wanted, what will happen later if the first sale doesn’t go well?
At the beginning of the 18th century, Wall Street was one of the locations in the US that traded slaves. Soon we may look back and find it just as alien that markets were trading investments related to oil combustion at the beginning of the 21st century.
DUBAI/RIYADH (Reuters) – Saudi Aramco aims to announce the start of its initial public offering (IPO) on Nov. 3, three people with direct knowledge of the matter told Reuters, after delaying the deal earlier this month to give advisers time to secure cornerstone investors.
The people also said Aramco’s chief executive officer, Amin Nasser, was not present at the conference on Tuesday as he was meeting investors abroad ahead of the offering.
Aramco is looking to float a 1% to 2% stake on the kingdom’s Tadawul market, in what would be one of the largest ever public offerings, worth upwards of $20 billion.
Aramco, in response to queries by Reuters, said on Tuesday the oil company “does not comment on rumour or speculation. The company continues to engage with the shareholders on IPO readiness activities. The company is ready and timing will depend on market conditions and be at a time of the shareholders’ choosing.”
The people declined to be identified due to commercial sensitivities.
The company will soon have more shareholders from institutions, the head of the kingdom’s sovereign wealth fund, Yassir al-Rumayyan, said.
Al-Rumayyan, governor of the Public Investment Fund (PIF) and chairman of Aramco’s board of directors, was speaking at a panel at the conference in Riyadh.
Aramco will start subscription for investors in its initial public offering on Dec. 4, Saudi-owned news channel Al-Arabiya said in a news flash on Tuesday citing sources.
The oil giant plans to announce the transaction’s price on Nov. 17, it added. The company will begin trading on the local stock market, the Tadawul, on Dec. 11, the broadcaster reported.
The prospect of Aramco selling a piece of itself has had Wall Street on tenterhooks since Crown Prince Mohammed bin Salman first flagged it three years ago.
However, his desired $2 trillion valuation has always been questioned by some financiers and industry experts, who note that countries have been accelerating efforts to shift away from fossil fuels to curb global warming, putting oil prices under pressure and undermining producers’ equity value.
Russia’s sovereign wealth fund, the Russian Direct Investment Fund (RDIF), is working on a consortium of investors for Aramco’s IPO, its chief executive said.
“There are several Russian pensions funds who are interested to invest in the Aramco IPO and we have also received indications from our Russia-China fund of some Chinese major institutions also interested in Aramco IPO,” Russian Direct Investment Fund (RDIF) head Kirill Dmitriev told reporters on Tuesday.
Separately, Aramco has not approached the Kuwait Investment Authority (KIA) to invest in the IPO, the sovereign wealth fund’s managing director Farouk Bastaki said on Tuesday.
“KIA has not been approached by Aramco or its advisers for the IPO, and KIA will look at the IPO like any other investment,” Bastaki told reporters on the sidelines of an investment conference in Riyadh.
Reporting by Hadeel Al Sayegh in Dubai, Davide Barbuscia and Saeed Azhar in Riyadh; Additional reporting by Rania El Gamal and Marwa Rashad in Riyadh, and Asma AlSharif in Dubai; editing by Giles Elgood and Jason Neely
The political impasse in which Algeria has been mired for more than seven months would result in a sharp economic slowdown in the short term. This Algeria’s Political deadlock and economic breakdown that the World Bank forecasters have reached is by any means comprehensive but could be read as some sort of alert.
The institution expects non-hydrocarbon sectors, as well as all oil and gas-related activity, to run through an air hole this year; which should have some unavoidable consequences on the country’s GDP growth. In effect, in similar way to other developing countries, it is expected to come down to 1.3% in 2019 from 1.5% the previous year.
“Uncertainty policy is expected to lead to a slowdown in the non-hydrocarbon sector in 2019,” reads a World Bank report released last Thursday. The Bretton Woods institution has not failed to highlight the impact of the arrests of business leaders on investment morality grounds or lack of these, and more generally, on the economy. “Business leaders from various sectors were arrested in connection with corruption investigations, which has disrupted the economy due to sudden changes in the direction and supervision of these companies, as well as uncertainty over investment,” the same report said. Since the beginning of the crisis, a wave of arrests affected the business community, public institutions, banks and social bodies alike. This blocking situation had worsened over the weeks; appropriation sets did not meet, officials at the level of economic administration were careful not to take the slightest risk. That is to say how violent the shock wave was. The impact on the economy could be disastrous as the situation continues to worsen by the day. As such, the World Bank (WB) estimates that “the pre-election period also risks further delaying the fiscal consolidation process scheduled for 2019, increasing the budget deficit to 12.1% of GDP and increasing the risk of a more abrupt adjustment in the future.” For the WB, widening budget and current account deficits is almost inevitable. While the fiscal deficit would be unlikely to be reduced internally, “on the external front, the current account deficit is expected to widen to 8.1% of GDP, mainly due to a significantly larger trade deficit.”
Investment is being impacted
“As the course of political events is expected to have an impact on economic activity, it is also expected that more resources will be allocated to social measures, to the detriment of public investment spending,” the Bank predicts. The report, stating that “private sector activity and investment will be affected by political disruptions and an unfavourable business climate, as well as disruptions caused by delays in payment of workers in several industries.” This is the case, since the draft Finance Bill 2020 foresees a sharp decline in capital expenditure, to the tune of 20.1%, while operating expenses and social transfers are maintained as they are. WB experts are merely saying out loud what Algerian economists and operators are thinking, warning of a situation that could go along if solutions to the political impasse run out. “The delays at the end of the political impasse and political uncertainty could further damage the country’s economy, leading to increased imports and further dwindling foreign exchange reserves,” concludes the WB report. Moreover, macroeconomic indicators are unlikely to improve at any time under current political conditions.
Economic growth to only 1.9% in 2020
Moreover, against a background of falling capital spending and low morale among investors, the growth of the Algerian economy would be only 1.9% in the year 2020. A stagnation is due in particular to the “slow” growth of the hydrocarbons sector, combined with the contraction in economic activity, which has limited growth in non-hydrocarbon sectors, according to the WB’s economic monitoring report released on Thursday. “Growth in the hydrocarbon sector has been slow, with economic activity contracting by 6.5% and 7.7% in 2018 and the first quarter of 2019, respectively, partially off-sparing the effects of the slight increase in non-core growth 3.4% and 3.9% in 2018 and the first quarter of 2019, respectively,” the WB noted. The tiny increase in investment in the first half of the year (4.9%) was driven by public investment in construction, public works and hydraulics, as a result of the expansion of social housing programmes, the WB said. Furthermore, the institution believes that “the recent discovery of a new gas field suggests a rebound in gas production and exports, but only in the medium term, and if and only if the framework for investment in hydrocarbons lends it to it.” The World Bank is merely bringing water to the government’s mill, which has called the enactment of the new hydrocarbon law urgent.
The key factors of all energy policies across the MENA are about reducing carbon emissions and conserving hydrocarbons reserves per this article, dated September 30, 2019, of Power Technology reporting (see below) on the latest World Energy Council’s congress of Abu Dhabi, early this month.
With an estimated $100bn-worth of renewables projects under study, design and in execution across the region, the policy momentum behind energy transformation is now being converted into new, potentially lucrative business opportunities across the Middle East and Africa.
Reducing carbon dioxide emissions and conserving hydrocarbons reserves are key factors shaping energy policy in the Middle East and North Africa (MENA).
But it is the more immediate combination of lower oil prices and the fall in the cost of renewable energy technologies that have seen every country in the region announce ambitious clean energy targets.
Clean energy, which includes renewables such as solar and wind power, as well as alternative fuels including waste-to-energy and nuclear, accounts for only a small proportion of electricity generation in the MENA region today.
Change is coming
According to the International Renewable Energy Agency (Irena), installed solar and wind capacity across the MENA region reached respectively 2,350MW and 434MW in 2017, up from just 91MW and 104MW in 2010.
And with an estimated $100bn-worth of renewables projects under study, design and in-execution across the region, the policy momentum behind energy transformation is now being converted into new, potentially lucrative business opportunities in the region.
The significance of the region’s energy transition was clear to see at the latest edition of the World Energy Congress, which was hosted in Abu Dhabi in September.
Unsurprisingly, Saudi Arabia’s pavilion was the most-buzzing hive at the congress.
In addition to its broad programme of structural economic reforms and the recent appointment of a new energy minister, the region’s biggest economy has by far the most ambitious clean energy programme planned in the Middle East.
As Riyadh’s Renewable Energy Project Development Office (Repdo) outlined plans to launch tenders for its third round of its ambitious National Renewable Energy Programme (NREP) before the end of 2019, representatives from Saudi Arabia’s sovereign investment wealth fund, the Public Investment Fund (PIF), were meeting technology providers on the sidelines of the event to discuss the opportunities for building large-scale solar manufacturing facilities in the kingdom.
While solar and wind power are the main focus of the region’s energy diversification plans, some of the world’s largest energy companies were keen to showcase the potential for emerging technologies including waste-to-energy.
Another glimpse into the future was provided by discussions about the potential to store energy from peak-power sources such as solar and wind.
With the race to achieve cost-effective battery-storage solutions already underway, other technologies using hydrogen are being piloted in the region to offer another method to mitigate the intermittency issues of solar and wind power.
The challenge facing the region’s utilities is to convert their ambitious clean energy ambitions into actual investment projects.
This article is sourced from Power Technology sister publication http://www.meed.com, a leading source of high-value business intelligence and economic analysis about the Middle East and North Africa. To access more MEED content register for the 30-day Free Guest User Programme.
Privacy & Cookies Policy
Necessary cookies are absolutely essential for the website to function properly. This category only includes cookies that ensures basic functionalities and security features of the website. These cookies do not store any personal information.
Any cookies that may not be particularly necessary for the website to function and is used specifically to collect user personal data via analytics, ads, other embedded contents are termed as non-necessary cookies. It is mandatory to procure user consent prior to running these cookies on your website.