COP26 is providing the opportunity to redefine how we get to net zero without drama

At a meeting last week at the European Commission’s (EC) EAAS I was asked for my views on the future of drilling for hydrocarbons offshore Cyprus. Are we heading for another crisis? This is a question I was also asked recently in Cyprus. My response follows.

First, Cyprus must act according to its contractual obligations to the oil companies (IOCs) and vice-versa.
But I believe that IOC interests have now changed and are even less likely to proceed with development of East Med gas unless the global markets undergo a major change and prices stay high for the longer-term – not likely. Completion of appraisal drilling by ExxonMobil end of year, and other contractual obligations, may be followed by a long period of inactivity.

Cyprus must review its strategy, plans and policies for exploration and development of hydrocarbons in its EEZ, taking into account the latest developments, including the inexorable and rapid shift from fossil fuels to clean energy, especially given the outcome of COP26. The future is renewables, with natural gas discovered in Cyprus’ EEZ to be used as a back-up to expanding renewables in Cyprus and the region.

The incumbent IOCs are unlikely to be interested in this. It is not their immediate priority.
One approach would be that once the IOCs complete their immediate contractual obligations, Cyprus refrains from further drilling and further licensing, on the basis of a new strategy as I indicated above.

Following elections in 2023, the new government must develop a long-term strategy and policies, with a pro-active response to the shift from fossil fuels to clean energy, in line with the outcome of COP26 and the EU’s Fit-for-55 and net-zero by 2050.

What are the messages from COP26?
Despite challenges posed by the absence of China and Russia so far there has been progress on deforestation, curbing methane emissions, and over 130 countries, including the biggest emitters, have pledged a net-zero target. And almost every country has embarked on tree planting as a cheap way of reducing carbon in the atmosphere.

In addition, the Glasgow Financial Alliance for Net-Zero (GFANZ), that unites the global financial sector in transitioning to net-zero portfolios by 2050, now represents more than $130trillion in assets under management.

More than 40 countries, including the UK, the US, India, China and the EU, signed up to a new declaration aiming to deliver clean and affordable technology and solutions globally by 2030, thus assisting efforts to halve emissions by 2030 and keep the 1.5C target alive.

The International Energy Authority (IEA) estimates that the result of all pledges made so far at COP26 – if met – will be to curb emissions to a level that can limit global warming to 1.8C – still a major achievement.
Despite the current energy crisis, calls for faster energy transition during COP26, including calls for more drastic action, are now intensifying. This translates into increasing pressure on the oil&gas sector to hasten greening-up its activities.

IOCs will not come to the rescue
High oil&gas prices during the second half of 2021 have bolstered IOC coffers but do not expect them to spend much on bringing new supplies to the markets. Priority is on share buybacks and paying dividends to their shareholders, who are both weary of poor returns over the last decade and are concerned about the IOCs’ significant exposure to climate risk.

With institutional investors and pension funds increasingly divesting from IOCs due to activist pressure and ESG (environmental, social and governance) factors, their place is being taken by hedge-funds and dividend investors whose interest is immediate returns – not long-term performance.

Energy transition is unstoppable, particularly in Europe. Even though the current energy crisis is causing many questions to be asked, such as the speed of transition being faster than reliable and continuous clean energy coming on-stream, security and affordability of energy supplies, and so on, it will not derail the transition to net-zero by 2050. COP26 is providing the opportunity to redefine how we get there without drama.

In addition, the EC reaffirmed last month its commitment to the Green Deal, clean energy and renewables.
Even though energy transition may end up being slower, nevertheless such calls are putting enormous and increasing pressure on the IOCs. And, at various speeds, they are responding by investing more and more of their reduced capital spending on low-carbon projects. This year capital investment is down by 60-70 per cent compared to the highs of 2014 – with no expectations for any significant increases in the foreseeable future.

Furthermore, IOC spending on low-carbon technology and projects is rising fast, with the catch that it comes out of their reduced capital spending, leaving even less for oil&gas projects. As a result, they focus such investments on projects with high and quick returns.

And this is happening at a time when Qatar and Russia are building huge new gas liquefaction facilities that can provide some of the cheapest LNG in the world, and soak-up any new demand.
This does not bode well for the East Med. IOCs will not come to the rescue.

The state of the global gas industry
This was the subject of FLAME, the largest European gas/LNG conference, this week in Amsterdam – where I participated – that sent out a number of strong messages.
Politicians need to be honest about the cost implications of dealing with climate change. Their actions are making energy transition a costly and volatile process. Nevertheless, the expectation is that high gas prices will drop down to normal levels by spring.

COP26 and the growing climate change pressure by activists, financial institutions, courts and governments are introducing uncertainty and short-termism, affecting longer-term investments in oil&gas. Industry needs clarity, stability and assured high profitability to invest.
COP26 is accelerating decarbonisation. Industry must reduce the carbon and methane footprint of gas/LNG if it is to retain its transition fuel status.

There is a lot of pressure on IOCs to curtail investment in new oil&gas, coming from investors, environmental and climate activists and governments. Even IEA says oil&gas investment is now broadly in line with net-zero requirements.

Available oil&gas reserves are sufficient to cater for future demand as this adjusts in response to pledges made at COP26 – the world does not need more oil&gas. The IEA agrees and does not expect the level of investment to change significantly.

Natural gas has a role in energy transition, particularly in Asia, displacing coal and enabling renewables. But competition is fierce and price volatility and carbon/methane emissions do not help.
East Med must heed these messages.

Dr Charles Ellinas, @CharlesEllinas, is Senior Fellow, Global Energy Center, Atlantic Council