Oxford Energy Policy Club brainstorming results
Helima Croft posted this article to LinkedIn this morning.
FYI – this is my 4,000th posting to this blog.
Policy-oriented Energy Economist & Researcher
Just back from Oxford…
Nov 9 2014
I have just returned from England where I participated in the autumn meeting of the Oxford Energy Policy Club to brainstorm on the following issues:
- The Demise of Big Oils: Falling Returns and Free Cash Flow;
- Middle East Turmoil: Impacts on the Energy Sector;
- EU Energy Security and Climate Change Policy in Disarray.
The energy landscape is so rapidly changing that no sooner is an agenda set than it runs the risk of becoming obsolete. To be sure, however, falling oil prices have combined to aggravate IOCs’ predicament, to sap investors’ confidence in the Middle East, and to create a lazy policy environment of wait-and-see.
The following three points constitute my selected take of the Club’s full-day discussion, which as usual was conducted under Chatham House rule of non-attribution.
- First, to keep growing and generating decent shareholders’ returns IOCs face a set of common challenges, the most critical of which is access to resources (even access to unconventionals remains daunting due to their higher costs and the completely different business model involved). Other challenges include attracting and retaining key talents, anticipating the research and innovation most suited to their resources in the future and finding ways to redefine their roles and their relationships to the NOCs and the international oil service companies. In considering how falling oil prices might add to their conditions, some Club members noted that, already in a $100-plus-per-barrel environment most of these companies were faced with large capital deficits as cash flows were hardly sufficient to cover investment requirements and dividend payments. Looking ahead, to keep paying dividends they may no longer afford, the major IOCs are likely to reduce capital investment, embark on a new round of cost-cutting, and either turn to the debt market or sell assets. In similar past circumstances they bought their way out of trouble through mergers. Nowadays, that doesn’t seem likely to happen again. Indeed the last such mergers – at the end of the 1990s and early 2000s – failed to create new opportunities for long-term growth.
- Second, the Middle East and North Africa region is facing the most threatening challenges in years, in terms of both political stability and its role as a major supplier of oil and gas to the rest of the world. Since the oil price spike of June, which was triggered by Da’esh (aka ISIL, ISIS or lately IS) blitzing through from Syria back into Iraq, market perceptions of geopolitical risks seem to have receded. But, the fact that such risks have faded into the background noise does not mean that they are not there. Serious adverse risk events may develop at any time to disrupt the market once again. Meanwhile, the region’s fragmented and bifurcated political and economic environment will remain very challenging for investors. On the one hand are the GCC countries, which have so far been largely spared from the turmoil, but cannot take their own security for granted. On the other hand are most other countries, either struggling with an uncertain political and economic transition, enmeshed in ideological pseudo-religious and geopolitical struggles, or still facing international sanctions. In considering the adverse effect of the current turmoil on the energy investment climate, members of the Club took a rather pessimistic view on Iraq and Iran, the major potential sources of capacity growth. Other factors likely to affect the investment outlook include continuing increase in project costs and the daunting challenge of securing internal financing in a context of falling oil prices.
- Third, energy security and climate change have been brought back at the top of the EU agenda. The Russian-Ukrainian crisis on the one hand and the forthcoming UN Climate Summit (Paris, December 2015) have provided the backdrop and impetus for renewed focus on a more comprehensive strategic approach to that nexus. However, some Club members noted the gap and inconsistency between policy actions and political discourse, and between extensive policying (the case of the EU) and no-policy willingness but effectiveness (the case of the US). Certainly, at their 23-24 October summit, the EU leaders managed to adopt a new Framework for Climate and Energy Policies to 2030, committing to reduce greenhouse gas emissions by at least 40%, and increase energy efficiency and renewables by at least 27% each. However these targets are either too flexible or too complicated to implement since crucial details have been left for future debate and legislation. In addition, the approach to one key issue has remained ambiguous: will the EU emissions trading system (ETS) – their main policy instrument – be radically reformed (beyond a ‘market stability reserve’ designed to bolster carbon prices after 2020) and, if so, how the new system be implemented? Finally, as far as energy security is concerned, the Club concluded its discussion on two issues of major concern in Europe: the existential threats faced by the European utilities (and the likelihood of blackouts occurring this winter in some countries) and the intractable dependence on Russian gas. As far as the latter is concerned, members realized how severely limited is the scope for any significant reduction in such reliance in the medium term. Looking beyond the Russian-Ukrainian geopolitical crisis, it was found that in implementing its European energy security strategy, the EU needed to clearly define the future role of natural gas in its energy balances by factoring in its ambitious emissions reduction targets and to develop new ways of handling situations and relationships issues with its major gas suppliers.