geopolitics of energy markets

« Masters 2 Energy, Finance, Carbon Geopolitics of Energy Markets 2021/2022 The future evolution of the oil markets in a carbon neutral world Guillaume Lorentz Masters 2 EFC - 2022 – Geopolitics of Energy Markets – Marie-Claire Aoun– Sylvia Beyer - Research Paper Introduction The last reports of the IPCC (sixth assessment report, working group I and II, 2022, summaries for policy makers), of the IEA (2021 World Energy Outlook), of the COP 26 (2022 NDC synthesis report), of RTE (2022, Energy pathways to 2050) are all pointed out the critical level of Greenhouse Gases (GHG) emissions and the need to put in place a low carbon transition. The world is facing a major issue: how to generate growth without increasing the stock of GHG ? Growth finds its stance on energy consumption.

Energy consumption is mainly based on fossils fuels.

Fossil fuels, i.e.

coal, gas and oil, create major GHG emissions when used as energy sources.

To make a long story short, what is the future of fossil fuels in a neutral carbon world ? This research paper is dedicated to the case of oil and its role in the low carbon transition. The first section introduces the close links between growth, energy and GHG emissions.

The key benefit of growth is highlighted in a first subsection.

It makes sense to clarify why growth is sought.

A second subsection explores the close relationship between growth and energy consumption.

The nature of this correlation is extended to oil, the energy source we are focusing on.

A third subsection closes the loop with the integration of GHG and the connexions to growth and oil consumption.

The three elements, growth, energy and oil can thus be interpreted as three components defining a dangerous triangle.

As a navigation through the Bermuda triangle, we are facing the heaviest challenge or a potential tragedy of the horizons (Mark Carney’s perspective). To tackle the issue of the oil sector transition in a low carbon economy, it is necessary to present the characteristics of the key actors of this sector.

A second section is thus providing details about the metrics.

A first subsection indicates the nature of the different members and their associated levels in terms of production, reserves and investments.

As reserves and investments are reaching a critical point, the attached dynamics are studied in a second subsection.

This second section is shaping the hunch that the permanence of the oil sector is at stake.

The breakeven issue is debated.

This topic introduces the third section covering the uncertainty regarding the future of the oil sector. 1 Masters 2 EFC - 2022 – Geopolitics of Energy Markets – Marie-Claire Aoun– Sylvia Beyer - Research Paper As the oil sector is facing major risks, a third section is proposed to outline the specific uncertainties.

A first subsection deals with the expected write downs on fossil fuels.

In a light of the economic literature, the geopolitical, legal and spatial features will be introduced.

The second subsection reveals the weakness of the oil sector with its lack of diversification. Reports, academic studies and organisations recommendations will help us to review the diversification under the light of the economy, the geopolitics and the physical angles. The issue of the transition of the oil sector in a neutral carbon world is complex.

Many actors do not share the same point of view.

The fourth and last section draws an overview of expectations or recommendations of the key actors.

The strategy of the OPEC will be described in a first subsection.

The last lecture of the general secretary will be analysed.

Personal thought will illustrate the major issue of volatility.

The IEA plays one of the first role in the energy analysis.

A second subsection will thus introduce the associated proposals.

A last subsection will examine the analyses of recognized energy research or consultancy (Deloitte, McKinsey and Rusted Energy). A conclusion will be focused on the heavy task to have a clear view about the transition.

The combined concepts of transparency and volatility will be discussed under the spectrum of the confidence required to build a future. 1.

Growth, Energy Supply and the 2 Degrees global warming target: one of the most difficult constraint optimization This section intends to highlight the close links between growth, oil consumption and GHG emissions.

We understand that energy is key to generate growth and that oil consumption produces GHG emissions.

The idea is to clearly understand why we seek growth and define the correlations between the 3 elements: growth, oil consumption and CO2 emissions. If the correlations appear to be very high over the past five decades, the idea to create a world with growth and an associated low impact on the climate change may be seen as a serious challenge. 2 Masters 2 EFC - 2022 – Geopolitics of Energy Markets – Marie-Claire Aoun– Sylvia Beyer - Research Paper 1.1 Growth a global society goal This first subsection proposes graphs to understand that high level of growth is a recent concept in human history.

A large panel of economists are in favour of growth.

GDP has been multiplied by 1001 between 1820 and 2020. Growth is sought because it reduces inequalities.

Among many improvements, key results on the period 1820-2020: - Average life expectancy from 29 to 72 years. - Average years at school from less than 1 to 8.4. To support growth, we need energy. 1.2 Growth is closely linked to energy Our world generates growth with the industrialization of processes.

Energy is a quantitative 1 World GDP in 2011 Int.

$ (OWID based on World Bank & Maddison (2017) combined with https://data.worldbank.org/indicator/NY.GDP.MKTP.KD?end=2020&start=2015.

Own calculations in excel. 3 Masters 2 EFC - 2022 – Geopolitics of Energy Markets – Marie-Claire Aoun– Sylvia Beyer - Research Paper property to perform work or heat.

Fossil fuels (coal, gas and oil) allow a high efficiency in these performances compared to isolated human forces.

The following graph shows how we aggregate the energy sources.

So far, there is no substitution between primary energy sources. We may raise the following question.

What is the correlation between level of GDP and energy consumption? Based on above data (World bank data and our World in data figures), we obtain the following correlation (between 1940 and 2020): - 97% between GDP (in USD) and total energy used (in Tw) - 89% between GDP (in USD) and oil used (in Twh) We understand that oil is key in the generation of growth. 1.3 Growth is closely linked to energy and GHG emissions The COP 21 appears to be the pivot in terms of target.

The world has to limit the global warming below 2 degrees in 2100 compared to pre-industrial levels.

The 1.5 degrees should remain a target. CO2 emissions are closely linked to growth: 99% correlation between 1970 and 2020 (computed in excel with data from World in Data). 4 Masters 2 EFC - 2022 – Geopolitics of Energy Markets – Marie-Claire Aoun– Sylvia Beyer - Research Paper 6 GDP - CO2 emissions - Oil Consumption (base 100 in 1970) 5 4 3 2 1 0 1960 1970 1980 Energy 1990 Oil E 2000 GDP 2010 CO2 2020 2030 The previous graph focuses only on CO2 emissions.

It should take into account the methane part in the GHG.

We know that oil is concerned (sources of methane emissions, 2021 IEA source): The research on estimated methods of GHG emissions in China for oil and gas fields, provided by Chen and al.

in 2017, shows that the results differ a lot according to the method used.

They have found for 2013 a total emission amounts ten times lower compared to the IPCC figures (in CO2 equivalent: 1559.36 × 104 tonnes, compared with the results 16,393.48 × 104 tonnes of CO2 equivalent).

We have to keep in mind that methane's GWP is about 28 x CO2.

But it only persists in the atmosphere for a decade (climate change connection 2020 bases on IPCC reports). Another issue about emissions related to the oil sector is the expected dynamic of emissions. With the concept of dynamic, we understand that levels of emissions per barrel are not stable over time.

The study realized by Maroni and al.

in 2021 shows that emissions per barrel are expected to increase (by 6% to 26%) in 40 years.

Aging fields and unconventional production 5 Masters 2 EFC - 2022 – Geopolitics of Energy Markets – Marie-Claire Aoun– Sylvia Beyer - Research Paper explain this trend.

This research is based on 70 oil fields around the world representing 25% of the global production. With or without the CH4 input, the problem remains the same and we now understand the major issue: what is the future evolution of the oil markets in a carbon neutral world? 2.

What are the actors of the oil sectors and why reserves levels are crucial 2.1 Four key actors in the oil sector It is interesting to describe.... »