The reentry of the United States into the Paris Agreement on climate change and announcements from China and Japan on net-zero emissions goals have restored hope in efforts to limit global temperature rise to less than 2 degrees Celsius above pre-industrial levels. This, along with the rapid fall in the cost of renewable energy, suggests lower prices and lower profits for the oil and gas industry over the next few decades.
After many years of recalcitrance, some oil companies may be getting the message, increasing their focus on renewable energy sources and writing off assets that won’t produce profits if the world really does stop burning so much oil and gas. Much has been said about the decisions by BP, Total, and Shell—the names that dominate pension funds and roadside service stations—to write down portions of their oil and gas portfolios and increase their investment in renewable technologies.
By contrast, state-owned national oil companies (NOCs)—from Algeria to Angola and Azerbaijan—have received little attention. Most NOCs have shared few—if any—details on adapting their strategies, and many are planning to spend big on new upstream oil and gas projects.
NOCs produce the half of the world’s oil and gas. Over the next decade, they will produce more than 300 billion barrels of oil. At this rate, NOCs alone will account for most of the amount the oil industry as a whole could pump out if the world is to keep emissions under the limits set in Paris. Climate experts contend that global oil production needs to decline by 4 percent over the next decade to get on a Paris-consistent pathway. But NOCs are instead planning to further increase their production, including by about 6 percent next year if demand recovers after the pandemic.
NOCs are also set to contribute 40 percent of capital expenditure in oil and gas—about $1.9 trillion. Such investment represents a major flow of public money—a lot of it from developing and emerging countries—into the oil and gas sector. NOCs’ investment decisions are therefore a critical factor in limiting greenhouse gas emissions and steadying the economic progress of many of the world’s poorest and most volatile countries.
To understand how, we considered two possible futures in our recent research. In one future, the global transition from fossil fuels to renewable energy is slow, and there is sufficient demand for fossil fuels to maintain high prices. In this scenario, most or all of the $1.9 trillion of anticipated NOC investments breaks even. But in this future, the world fails to keep emissions with the global carbon budget and thus fails to meet the climate change targets set out in the Paris Agreement. Global temperatures rise to catastrophic levels.
In the other future, the transition in energy use is rapid. Countries accelerate the development of renewable energy and grow their fleets of electric vehicles. The amount of oil and gas people consume declines significantly, allowing the world stay within the global carbon budget. But for this future to happen, the demand for (and in turn the prices of) oil and gas must fall substantially. NOCs and the countries that rely on such revenues suffer.
In such a future, of the $1.9 trillion in expected investments by national oil companies, one-fifth—more than $400 billion—would be in high-cost projects that won’t break even. This number would swell further if carbon capture and storage technologies are not deployed, in which case fossil fuel demand would need to fall even more dramatically than in our base case in order to meet the Paris Agreement.
This future will affect various NOCs differently. Some—notably Saudi Aramco and some of its neighbors in the Middle East—are in a relatively good position to be the last ones standing amid a global decline due to their access to plentiful, cheaply exploited reserves.
Other petrostates are in worse positions. NOCs in Angola, Colombia, and Mexico have high project costs, and a larger share of their new potential projects couldn’t survive a dramatic shift away from fossil fuels. Worse, the amounts these NOCs are investing are huge relative to their governments’ finances.
In countries like Nigeria, Russia, and Turkmenistan, the amounts that NOCs are risking in high-cost projects surpass their governments’ annual health budgets. The Mozambican state oil company ENH might spend the equivalent of almost 180 percent of its government’s entire annual expenditure on a gas project that would almost certainly lose money in a rapid energy transition.
When authorities invest public funds in potentially unprofitable hydrocarbon projects, they divert money from the development and adoption of green technologies, adaptation to the changing climate, and development of industries that can thrive in a low-carbon future. Algeria’s Sonatrach plans to invest the equivalent of a third of its government’s total annual spending, partly to ensure sufficient oil and gas exports to Europe and partly for the country’s own energy needs. But Algeria, along with much of North Africa, has plentiful sun to power solar panels to meet its own needs and sits close enough to Europe to export some of this power to Spain, Italy, and beyond. The government could ramp up its embryonic solar industry by shifting billions of dollars away from upstream hydrocarbon spending by its NOC.
No one knows the future price of oil or how quickly the energy transition will proceed. ExxonMobil’s remaining shareholders may be comfortable taking this kind of gamble, but the people who effectively finance many NOCs—citizens in less affluent countries—are not as diversified as the average stock market player. Their governments typically depend on oil and gas for revenue.
Compounding this risk, the financial strain on NOCs may suck even more public money into oil in the form of government bailouts. Mexico is a good example; there, the government has already spent $5 billion bailing out troubled Pemex. Moody’s estimates that the government’s subsidies to the company could reach as much as 2.3 percent of the country’s GDP annually.
The huge amounts of money NOCs are investing (relative to the size of their countries’ economies), coupled with the substantial debts that some NOCs already hold, risk economic catastrophe and a sovereign debt crisis in emerging economies. Along with Pemex, Azerbaijan’s SOCAR and Angola’s Sonangol hold debt in amounts equal to more than 60 percent of their governments’ annual revenue.
Unlike international oil companies such as Shell, ExxonMobil, and Total, most national oil companies face relatively little public scrutiny from shareholders and analysts. Despite the drumbeat portending a hastened transition away from fossil fuels, many NOC leaders will seek to maintain their market positions or even aim at lofty goals of becoming world-class operators. For people outside the small cliques that often dominate NOC decision-making, it can be difficult to assess state oil companies’ finances. The Resource Governance Index has shown that while some state companies—including Argentina’s YPF and Norway’s Equinor—have begun to disclose more information, these companies remain largely opaque.
Climate activists must ensure that capital divested from international oil companies does not end up back in the oil industry via state operators. The finance community must understand how national oil company failures could affect the viability of governments and the sovereign debt market. And in economies dependent on fossil fuels, governments and citizens must decide how comfortable they are with national oil companies gambling with their future.
