In November, world leaders will have a two-week dialogue in Egypt’s most scenic Red Sea coastal resort city of Sharm Elsheikh, as the world’s top climate gathering known as the United Nations’ Conference of the Parties (COP) will come to Egypt. After a vague outcome of last year’s COP-26 in Glasgow, global observers are counting on this year’s COP 27 to yield game-changing outcomes that would help in saving the planet by reducing Earth’s temperature by two degrees Celsius.
Let’s admit that taking considerable action in Glasgow was tough. However, looking at the current global circumstances, governments are finding out that now it is even tougher. One of the most significant outcomes of COP 26 for the oil and gas industry was the “new alliance commitment” to ending oil and gas extraction. Several countries including Denmark, France, Sweden and Ireland promised to end oil and gas production within their borders. It’s true that other countries are still hesitant, nevertheless, they are also dedicated to taking “significant concrete steps” including legislation to limit oil and gas production. Italy, European Union’s second biggest oil producer, for instance, made a less motivated promise, saying it would align its future oil and gas extraction with the 2015 Paris Agreement, a decision that may also require the Italian government to pass the necessary legislation to make this possible.
Looking at the current global circumstances, shall we question whether the world is really ready at the moment to stop oil and gas production? The conflict in Ukraine has changed the game during the past three months not only for the oil and gas industry but also for the global rebound procedures. This was following the COVID-19 pandemic fallout, which included supply chain crises, inflation, as well as food and energy scarcity in different locations worldwide. In other words, despite the decisions that were made at COP 26, concerns over European political and economic instability helped drive oil and gas prices upwards, boosting the profits of energy majors. This means additional production activities to reap rewards, thanks to OPEC+ decisions to ease production restrictions.
Additionally, due to sanctions imposed on the Russian energy sector, the EU now is prioritizing conventional energy in its race to abandon Russian coal, oil and gas and there are suggestions that they may implement the necessary legislation to do so. EU leaders are signing new contracts to import gas, committing to build new liquefied natural gas (LNG) terminals and prioritizing deliveries of non-Russian crude oil shipments. Europe’s struggle to secure more LNG could turn fuel away from poorer importing countries that as an alternative will turn to coal. Such deals may be beneficial to East Mediterranean, North African and Middle Eastern countries to replace the Russians as the main gas provider for Europe which means more production activities. Here in Egypt, for instance, natural gas and (LNG) export revenues increased by 98% to reach $3.892 billion in only the first four months of 2022, knowing that the country exported natural gas worth $3.959 billion in 2021.
Accordingly, although climate change is relentless, and the world would potentially break 1.5 degrees Celsius of warming in the next five years (Atmospheric carbon dioxide levels measured at Hawaii’s observatory exceeded 420 parts per million last April for the first time in human history), all the mentioned outcomes during 2022 are pushing against adopting any actions or legislation to cut fossil fuel in the near future.
However, the EU is still in a better situation than its western ally as the White House is under mounting political pressure amid soaring energy prices as a consequence of the Russia-Ukraine conflict. This situation has forced the United States to increase its oil and gas capacity as it seeks to increase production to push prices down on one side, and help the EU rapidly end its reliance on Russian oil and gas on the other side. Accordingly, this forced the American administration to change its obligations and end fossil fuel production on public lands as well as approve new policies and legislation for exporting LNG to Europe.
So, as a bonus for the oil & gas industry, will the war on Ukraine delay actions on climate change? Following the war, prices of oil and gas increased abruptly, with the oil benchmark trading above $115. This is not putting governments at ease, particularly in countries relying on imported oil and gas to secure their energy needs. So, energy security and affordability are back at the top of the agenda. OECD countries are releasing 60 million barrels of oil – an equivalent of 12 days of Russian exports – from their strategic reserves to the market. This step is meant to ease the price burden. Yet, as history shows, such actions have a limited impact on prices because what is released today will need to be replaced in the near future and so on.
Subsequently, the crisis has made links between climate change, economy, supply chains, commodity prices, energy needs, policies and legislation clearer. The rising prices of oil and gas may benefit the industry and its major players, but it’s not for the benefit of governments that pursues to provide goods and services to their citizens at affordable prices, while achieving the lowest possible deficits. Hence, the current global economic situation and the need for energy security may facilitate a more rapid energy transition to sustainable and renewable energy sources in the medium term. For instance, in light of the need to transition away from Russian gas, the UK is expanding “both” North Sea oil and gas production and its renewable energy production capacity with the government’s own commitment to reaching net-zero emissions and saving the UK from the volatile global gas market. Moreover, China, the world’s biggest carbon emitter, now accepts more natural gas from Russia- at slightly lower prices- as a substitute market for Europe, which will enhance the Chinese energy mix. However, Chinese energy security concerns could speed up its climate goals this year as its clean energy transition is gathering pace as wind and solar capacity would double between 2020 and 2025, reaching 1,100 gigawatts, three times the amount installed in Europe.
To conclude, despite the ongoing oil and gas industry glow, Ukraine’s critical crisis would not divert the world from the climate’s long-lasting threat and will help energy transition in a different way. Let’s wait for COP 27 to see how world leaders could make the desired balance.