How the energy transition will hit petrostate economies

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Good morning, and welcome back to Energy Source, coming to you from New York.

Oil prices have risen this morning to the highest level in three weeks after indications that Saudi Arabia has won provisional backing for advance oil production cuts by the Opec+ group. The alliance meets virtually today, five days later than planned, after the scheduled in person meeting in Vienna on Sunday was postponed in a sign of a rift between members over who should cut output.

Meanwhile, tens of thousands of people are gathering in Dubai today as the UN climate summit COP28 officially kicks off. The conference comes as the world contends with the hottest year on record, and multiple reports show countries are nowhere close to keeping global warming below 1.5C. This means disruption in the energy sector is only set to grow as industry players balance the need for energy security with demands to phase down (or out — depending on who you talk to) fossil fuel usage.

The UN climate talks happen every year, but this year’s meeting will deduce with the first-ever stocktake on global progress towards the goals of the 2015 Paris agreement. The next stocktake won’t be until 2028, making this year’s assessment crucial to directing global action in a decisive decade for climate. My colleague Aime Williams has written a helpful explainer on critical themes to watch over the next couple of weeks. 

Today’s newsletter looks at the budget hit petrostates could feel as the energy transition gathers pace. A new report from Carbon Tracker details the economic vulnerabilities of fossil fuel producers as the world moves swiftly towards renewables. 

Thanks for reading,

— Amanda

Petrostate fossil fuel revenues set to halve by 2040, Carbon Tracker says

Economies reliant on oil and gas risk losing trillions of dollars in revenue as the acceleration of the energy transition hits fossil fuel demand, according to a new research by financial think-tank Carbon Tracker.

Saudi Arabia and the United Arab Emirates, the latter of which is this year’s UN COP host, are among the 28 economies that are set to see their expected income from fossil fuels more than halve by 2040 under current climate pledges. The two producers rely on fossil fuels for at least 40 per cent of their revenue, Carbon Tracker found. 

“As these revenues weaken, and there is a clear risk of greater instability in some of these nations, of course, that will potentially have knock-on impacts globally,” said Mike Coffin, one of the co-authors of the research. Venezuela is among the countries at highest risk: the country’s economy relies almost entirely on hydrocarbons, but 80 per cent of its fossil fuel revenues are at risk of being lost, according to the research. 

Carbon Tracker looked at 40 economies that are highly dependent on oil and gas and projected that revenues would fall from an expected $17tn to just $9tn by 2040 if the world met its climate pledges.

Its findings come as delegates from almost 200 countries kick off COP28 negotiations, where they will spend two weeks negotiating the future of fossil fuels and measures to tackle climate change.

A crucial question at this year’s climate conference will be whether countries can agree to phase out or phase down fossil fuels. The International Energy Agency has said no new long-term oil and gas projects are needed due to steep declines in demand on the path to 1.5C and expects fossil fuel demand to peak before 2030.

The Carbon Tracker report found that petrostates in Africa will be among the hardest hit in the global shift towards renewables. Nigeria, the Democratic Republic of Congo and Gabon are at risk of losing 60 per cent of their total fiscal budget by 2040.

Additional stressors such as rising national debt and rapid population growth also risk worsening the impact of declining revenue. IMF data found that on average, central government debt nearly doubled from 2010 to 2018 for 33 of the sampled countries, according to the think-tank.

The report’s authors urged petrostates to rapidly diversify and called for international preserve for transition finance, warning that declines in oil and gas revenue could weaken creditworthiness. 

The vulnerability of established fossil fuel economies should serve as a warning to emerging producers such as Guyana and Uganda of the risks of betting too much on oil, the report’s authors warned.

“There are countries now which are looking to the oil and gas industry as a future for growth for that country, and we really got to question is that the right path forward?” Coffin said.

Job moves

• ProPetro, a Texas oilfields services company, appointed Shelby Fietz as chief commercial officer and Celina Davila as chief accounting officer on Tuesday.

• Gregory Wetstone, president and chief executive of the American Council on Renewable Energy, stepped down as chief executive on Monday after eight years at the non-profit. He will be succeeded by Ray Long, who joins from Clearway Energy Group.

• Climate Investment Funds appointed Tariye Gbadegesin as chief executive on Monday, replacing Mafalda Duarte who left to guide the Green Climate Fund. Luis Tineo will continue to serve as interim chief until March 2024.

• Freyr Battery, a Norwegian energy storage developer, announced numerous leadership changes on Monday, including Andreas Bentzen as chief technology officer, Ryuta Kawaguchi as chief strategy officer and technical fellow, and Jessica Wirth Strine to board of directors.

Power Points

Energy Source is written and edited by Jamie Smyth, Myles McCormick, Amanda Chu, Tom Wilson and David Sheppard, with preserve from the FT’s global team of reporters. reach us at energy.source@ft.com and follow us on Twitter at @FTEnergy. Catch up on past editions of the newsletter here.