- The participating nations in COP28 have managed to come up with a final agreement that calls for the ‘orderly’ transition away from fossil fuels.
- What many of the proponents of a fast phase-out of fossil fuels appear to have realized is that another course of action is impossible for oil-producing countries.
- Oil and gas demand is going nowhere anytime soon unless, of course, governments bite the bullet and mandate lower energy consumption.
This year's COP28 on Tuesday ran into overtime as participating countries sought to clinch a last-minute agreement on a draft document detailing a global commitment to phase out hydrocarbons.
The reason for the overtime was the strong opposition to such a text by oil-producing countries. Some placed the blame singularly on Saudi Arabia as the leader of OPEC, and others blamed the whole cartel plus other oil producers.
What none of the blame-layers appear to have realized is that another course of action is impossible for oil-producing countries. Just as it is impossible for Big Oil to turn into Big Energy, at least not without a fight.
Earlier in the week, when OPEC's head warned member states about possible phaseout language in the final COP28 declaration, several European government officials expressed their utter shock at such behavior. They reacted as though it made perfect sense for a dozen countries to agree to the end of their main export commodity to make some people in Europe happy. It does not make perfect sense, however. It makes no sense whatsoever.
The situation is the same with various transition advocates calling on international oil companies to do more about the transition, essentially by reducing their oil and gas production. Because the IPCC said we need to do something about rising global temperatures.
As with OPEC, this is not happening. Exxon and Chevron, two of the world's biggest oil companies, recently announced higher capital spending plans for 2024, with most of the additional spending going into upstream activities, which usually translates as higher production.
Shell, BP, and Total have also signaled they have pretty ambitious plans for their core business, even as they invest increasingly in alternative energy such as wind and solar.
This has not made transition advocates happy. One of the most prominent of these, the International Energy Agency's head, Fatih Birol, has called repeatedly on the industry to go all in on the transition and start making plans to wind down oil and gas. This is happening as the IEA estimates that oil demand is going to hit a record this year and continue growing over the next few years as well. It then expects a peak around 2027, but many disagree.
One of them is Bloomberg's columnist Javier Blas who wrote in a recent piece that it was essentially silly to call on Big Oil to embrace the transition at the expense of its usual business. Citing Birol's calls for a change, Blas pointed out two areas that Big Oil was being targeted in and the fact that in only one of these areas did it make sense for Big Oil to work harder: reducing methane emissions. Blas suggests a stick-and-carrot approach by governments in that respect to motivate more investments.
It would be easy to extend the approach to investments in wind and solar, and EV charging, but, according to Blas, this is a different case because "Where to invest depends on the profit." It seems a lot of transition advocates have consistently failed to grasp this fact, hence the calls for Big Oil to stop being Big Oil and for oil-producing nations to embrace the shift that would alter their economies and quite likely damage them significantly.
Several Big Oil majors went down that road a few years ago. The most notable case was BP under Bernard Looney, which made massive low-carbon energy commitments and even started working on them. Just a couple of years in, a bit before his ousting, Looney admitted that the attempt at diversifying into low-carbon energy had fallen short of expectations in the return department. As a result, BP was refocusing on its core business, with a special emphasis on gas.
Right now, delegates at COP28 have scrambled to get everyone to agree to a text that might include the words "reducing both consumption and production of fossil fuels, in a just, orderly and equitable manner so as to achieve net zero by, before, or around 2050".
Many want to make the text as obligatory as possible for every country that signs it. Others didn't even want the words "fossil fuels" in there. The former appears to ignore the fact that committing to a reduction in the consumption of oil and gas is all very well on paper, but in reality, things stand very differently.
One look at Germany is enough evidence. Europe's most ambitious wind and solar builder has boosted coal power generation because it needs energy and no longer has nuclear power plants to generate it from. Despite wind and solar. Similar examples abound all over the world, with China being also notable for its "All of the above" approach towards energy sources.
Whatever COP28 delegates come up with in the end, oil and gas demand is going nowhere anytime soon unless, of course, governments bite the bullet and mandate lower energy consumption. It might sound far-fetched and risky today, but it is not out of the question.
If reducing emissions from oil and gas consumption is your priority number-one, then all measures, including mandating consumption cuts are allowed. Or perhaps there may come a time when priorities get rearranged, as they did last year in Europe.