Rafiq Latta, Nicosia - Nov 5,2021

Oil exporting countries face a moment of peril now that the COP26 climate talks in Glasgow are under way. They have to do enough to show they are taking their climate responsibilities seriously, while holding at bay a number of key proposed policy threats. Transition tensions have so far not impacted short-term producer supply policy in Opec-plus, but an overly fast-tracked move away from hydrocarbons could challenge Opec-plus’ “no politics” rule.

“This is not a drill. We are living in the beginning of a mass extinction,” warns activist Greta Thunberg. Oil producers have taken her words to heart, albeit with a radically different interpretation. For them, the threat to fossil fuels is existential and a clarion call for action. In a bid to deflect criticism, many have come out with net-zero target announcements ahead of Glasgow.

However, the last thing producers will embrace is any jettisoning of hydrocarbon use. At Glasgow and beyond, they will be working overtime to undermine any acceleration away from hydrocarbons. The problem is the three main producer strategies for extending hydrocarbon use — carbon capture and storage (CCS), hydrogen (above all blue hydrogen from gas with CCS), and negative emissions policies, namely reforestation — are all mistrusted by climate activists.

It would be a fool who would predict policy formulation. Glasgow itself is but a staging post on what will be decades-long journey. Still, it is increasingly clear transition pressures are unlikely to slacken, but also that this is going to be a bumpy ride.

Producer Power Paradox

Transition turbulence goes a long way to explaining why Opec-plus will probably continue to wield considerable power in the global economy, certainly until demand has peaked and probably beyond. No doubt, in a global oil market of 50 million barrels per day, let alone the 24 million b/d projected in the IEA’s Net Zero by 2050 pathway, oil and those who produce it will be less relevant.

But until we get to that point, Opec-plus will matter, and the more unstable the transition journey, the more producer policy will matter for global economic stability. In short, the energy transition may well consign Opec-plus to history, but probably not before it elevates producer power to historic highs.

This producer transition influence is further amplified at times of accelerated economic growth, such as at present. Not only does oil demand surge, but energy prices are one of few levers available to curb inflationary drivers, such as high steel prices. Hence the current US-led calls for more supply from Opec-plus — overhung with the threat of strategic oil stocks releases — in order to protect the global economic recovery.

However, any feelings of smugness over consumer distress could prove very short-lived. The administration of US President Joe Biden over the past week has finally articulated its two-track energy strategy — calling for more oil now to ease prices, but staying the course on plans to aggressively decarbonize.

A Punching Bag, With Friends

For the moment, there is no doubt Opec-plus is operating in a hostile policy environment. And over the long-term energy transition, no doubt producers will largely be on the defensive. But they are not powerless.

For one, producers are not alone, with heavy coal users such as India and powerful vested interests within the OECD also all pushing for a slower transition. India's oil and gas demand profile is robust, and its net-zero emissions target, announced this week, stretches to 2070.

Further, engagement over climate issues and the net-zero announcements over the past year have given producers a voice in climate debates. Saudi Arabia’s fingerprints are all over parts of the final communiqué of the G20 Summit in Rome just ahead of Glasgow. This calls for a dialogue “between producers and consumers to bolster the efficiency, transparency and stability of the energy markets” to be organized by the Riyadh-based International Energy Forum.

Riyadh too was instrumental in watering down G20 action against coal, according to reports.

To be sure, this is an influence that applies purely on a government-to-government level. For activists at Glasgow, producer arguments for transition restraint and more fossil fuel investment are a red rag to a bull. And it is noteworthy that by and large key producers such as Russia and Saudi Arabia, as they carve out common ground, are sending just technocrat-level representation to Glasgow.

A New Producer Policy?

Ever since the 1970s, Opec has assiduously insisted in the primacy of markets in deciding supply policy. Relations with consumers have at times over the past decades been rocky, but never enough for producers to allow politics to determine oil policy. Transition tensions have certainly roiled consumer-producer harmony — witness intensifying US pressure on Opec-plus this week — but as yet have not overturned this central tenet of modern producer theology.

However, such is the challenge posed by climate policies coming out of Glasgow, notably those over carbon pricing and carbon border adjustments, that this "no politics" rule could come under pressure.

Still, the difficulties posed by any such fundamental change in Opec-plus direction mean it is hard to see such a radical response, certainly in any planned and public way, emerging. First there is the difficulty in knowing what sort of producer supply policy would slow the pace of the transition. Then there is the challenge of getting the unanimous backing of all members for such a dangerous course of action, plus the risk that such a course of action triggers consumer retaliation.

The wisest course of action would appear to be to maintain current policy. Of course, producers are responding massively and in myriad ways to the transition.

In the Gulf, the triumvirate of United Arab Emirates, Saudi Arabia and Qatar have led the way, aggressively repositioning themselves as not only low-cost but low-carbon producers. Recent weeks have seen net-zero announcements of 2050 and 2060 come out from the UAE and Saudi Arabia, respectively, and Qatar Petroleum rebrand itself as QatarEnergy.

Russia has issued its own net-zero by 2060 target, and is leveraging the gas crisis to press Europe to back any demands for more gas with new long-term contracts.

While there is an element of greenwashing in these net-zero announcements, there is most definitely substance behind the headlines, with the Gulf in step with recent moves to slash methane levels by 30% by 2030. Change is inevitable and with it a new hydrocarbons-"lite" political economy — and new global energy geopolitics — will emerge.

The original version of this article appeared in Energy Compass. 


Further disruption lies ahead. The 2021 Outlook provides important context and pointers to help you navigate these changes, and understand how sometimes confusing events fit the broader picture.