By Jeph Ajobaju, Chief Copy Editor
Oil prices returned to pre-pandemic levels of $60 per barrel on February 8, raising hopes for producers such as Saudi Arabia, which runs its budget 60 per cent on oil receipts; and Nigerian, which depends 90 per cent on the liquid gold.
However, a new report warns that oil and gas producing countries face a hole in their revenue as wide as $13 trillion by 2040.
The report by Carbon Tracker, quoted by the BBC, looks at the financial impact as the world cuts back on fossil fuels.
Another report by PriceWaterhouseCoopers (PwC) in January had warned that African oil producers alone may suffer a combined estimated loss of $1 trillion export revenue by 2040 due to likely low oil prices and the shifting away from fossil fuel to green energy across the world.
Carbon Tracker adds that some countries could lose at least 40 per cent of total government revenue, and estimates the cumulative total revenue loss for all oil-producing countries by 2040 will be $13 trillion (in 2020 dollars).
That is as efforts to contain the rise in global temperatures drive the decarbonisation of energy supplies.
Carbon Tracker describes its report as a wake-up call to oil producing countries and international policymakers. It says they have planned on the basis that demand for oil will increase until 2040.
But the agency warns that demand will have to fall to meet climate targets, and oil prices will be lower than oil producers and the industry currently expect.
The report looks at what would happen to government revenues if the increase in global temperature is limited to 1.65C.
The $13 trillion figure for lost revenue is compared with what it calls “business as usual” expectations of continued growth. It includes countries whose economies are not dominated by oil – such as the UK, the US, India and China.
Impact on 40 petrostates
The main focus of the report, however, is a group for which the loss of oil income will be much more challenging, 40 countries it calls “petrostates”.
The predicted damage to government finances in these nations is stark; an average loss of 46 per cent of oil and gas revenue.
The dependence on oil and gas revenue is very marked for some countries – more than 80 per cent for Iraq and Equatorial Guinea. For another seven including Saudi Arabia the figure is more than 60per cent.
Some countries face very large losses of total revenue. For seven countries, including Angola and Azerbaijan the predicted loss is at least 40per cent. For another 12, including Saudi Arabia, Nigeria and Algeria it is in the range of 20per cent to 40per cent.
For some in the Middle East and North Africa, the effect is moderated somewhat because their low production costs would give them a more prominent role in global oil and gas supply.
There is also a concern about what the report calls emerging petrostates. What they have to confront is a loss of potential revenue from oilfields where development is planned in the coming years. Ghana, Uganda and Guyana are among the countries facing this risk.
Diversification urgent
Some of the countries facing severe losses – from existing or potential oil and gas production – are among the poorest.
The report says diversification – of government revenue and national economies – is an urgent task. That will need to be tailored to the needs of each individual country but there are some steps it suggests will be of widespread use.
These include investing in education and improving the quality of government and the climate for business. Capital that is not invested in oil and gas can instead be used to invest in industries that are more resilient to the energy transition.
The report also says there is a strong case for the rest of the world to support this transition. It says there are moral reasons to do so as many of the countries concerned are so poor.
It would help get better climate outcomes. It could also help address the risk of petrostates becoming less stable. They could see social unrest as spending is cut or underfunded security services struggling to contain existing threats.
African oil producers may lose $1tr revenue by 2040
The prediction from PriceWaterhouseCoopers (PwC) came in its Africa Oil and Gas Review 2020, themed energising a new tomorrow.
Coronavirus hugely impacted the oil market in Africa, the review says, and many countries that depend oil and gas revenues on the continent have had to divert fiscal resources to support healthcare and welfare responses to the pandemic, leading to greater economic distress.
Highlights of the review
· Oil production in Africa saw a slight increase of 0.5 per cent from 2019 amounting to 8.3 mmbbl/d. This accounts for 8.82 per cent of global production.
· In 2020, production saw a decline of 10 per cent relative to the previous year driven by the Covid-19 demand slowdown for exports.
· Africa’s proven oil reserves have remained static at 125.7 Bbo from the end of 2019 to 2020. Some 41 per cent of these reserves are located offshore, 59 per cent onshore.
· Exports remained static at 7.1 mmbbl/d between 2018 and 2019. However, due to Covid-19 in 2020, exports saw a decline of more than 10 per cent.
· Consumption at 4 mmbbl/d remained unchanged from 2018 to 2019. Consumption fell by less than 10 per cent in 2020. Africa’s domestic market consumes around 50 per cent of its total oil production.
· Africa has very limited refinery capacity and imports circa 48 per cent of its finished product fuel demand.
· Proven gas reserves on the continent have remained at 527 tcf between 2019 and 2020, with 34 per cent of these reserves situated offshore.
· Gas production saw a slight increase of 0.36 per cent from 2018 to 238 bcm in 2019. However, production declined by 9 per cent in 2020 due to COVID-19.
· Gas consumption slightly increased by 0.4 per cent from 2018 to 150 bcm in 2019 while it declined by more than 10 per cent in 2020 relative to the previous year.
· Africa consumes 63 per cent of its total gas production, predominantly for power generation.
· African gas exporting countries saw a total decline of more than 6 per cent in 2020 from 39.7 mtpa in 2019 to 37.3 mtpa in 2020.
According to PwC, oil demand globally shows a curbed recovery over the next few years following the Covid-19 induced demand slump, with prices predicted to reach a ceiling of around $54 per barrel, compared to a pre-Covid-19 estimate of long-term pricing ranging between $60 and $70 per barrel.
“It is estimated that this lower price forecast will cost Africa a potential $1 trillion in export revenues from oil over the next 20 years,” the review said.
Energy transition
Energy transition refers to the global shift from fossil-based systems of energy production and consumption – oil, natural gas, and coal – to renewable energy sources like wind and solar, as well as lithium-ion batteries.
Increasing penetration of renewable energy into the energy supply mix, electrification and improvements in energy storage are all key drivers of energy transition.
PwC advised the adoption of energy transition to provide a ‘lifeline’ in light of declining oil demand.
It suggested that energy transition does in fact create significant positive economic impact and opportunities, and Africa can benefit tremendously from the technology foundations and learning curves largely paid for by the developed world.
One can infer from the African energy policy environment whether countries are creating a dynamic or static policy environment in relation to capturing the benefits and economic growth that can be leveraged from the energy transition.
The review stressed that as export revenues and domestic demand change, energy transition readiness will be an important sustainability factor for many countries that have relied on oil and gas endowments.