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National oil giants risking $400bn on projects that would push emissions ‘beyond Paris targets’

One-fifth of expected investments in the oil & gas sector by state-owned energy companies are economically unviable if global warming is to be kept within 2 degrees Celsius, according to new research from the Natural Resource Governance Institute (NRGI).

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In a report released on 10 February, the institute said it had identified state-owned players— many in developing countries — that are on a “trajectory to spend billions on oil and gas projects that will only break even if the world fails to meet the Paris goals”.

National oil companies account for half of global oil and gas production and are responsible for 40% of the capital invested in the industry worldwide, it said.

Using market data, NRGI’s report, Risky Bet: National Oil Companies in the Energy Transition, estimates that national oil companies could collectively invest about $1.9 trillion in the next decade.

Of this, about one-fifth — or $400 billion — would not result in a profit if the energy transition proceeds in line with current climate commitments. If widespread carbon capture and storage technologies are not deployed, this figure would be even higher, claims the NRGI.

“A huge amount of state investments in oil projects will likely only yield returns if global oil consumption is so high that the world exceeds its carbon emission targets,” said Patrick Heller, an NRGI advisor and one of the report’s co-authors.

“This risky spending has major implications for the economic futures of national oil companies’ home countries.

“State-owned oil companies in developing and emerging countries including Algeria, Mexico and Nigeria might collectively invest more than $365 billion in such high-cost projects — expenditures that could instead help alleviate poverty or diversify their oil-dependent economies,” he said.

Similarly, the NRGI said Colombia’s Ecopetrol could invest the equivalent of 20% of its government’s total expenditure into oil and gas projects that will break even only if the world fails to meet its climate commitments.

“Authorities in many producing countries risk pushing ahead with new investment regardless of what is economically and ecologically feasible and the outcomes could be dire,’ added Heller.

“If international oil companies and private investors make good on their stated ambitions to move away from hydrocarbons, state actors may be even more tempted to step in and fill the gap in oil production.”

Countries and their national oil companies in Africa, Eurasia and Latin America are most exposed to the energy transition, the report claimed.

In terms of the next generation of oil and gas investment, national oil companies in the Middle East are the safest from a cost perspective, according to the NRGI report.

“Unfortunately, governments in this region are also the most dependent on oil revenues, so countries there must still contend with the energy transition. South and Southeast Asian countries and their [national oil companies] do not appear to be as exposed as others.”

The report continued: “The potential failures of national oil companies matter most for the governments that are most dependent on their NOCs for revenue.

“To fulfil their ambitions to grow their national oil companies or even to maintain production, some African countries are in a particularly concerning position: Algeria, Angola, Mozambique and Nigeria, and to a lesser extent Ghana and Tunisia.”

The report added that some nations are also weighed down by high levels of debt.

“Mexico’s Pemex is one of the most indebted without having particularly low-cost oil. Other Latin American national oil companies — Ecopetrol and [Suriname’s] Staatsolie — are also exposed in this way.

“By themselves, it is unlikely that national oil companies will manage the risk that the energy transition poses to their economies as currently structured.”

The report added: “It is clear that governments and the public must act now to change their relationship with their national oil companies.”

The NRGI non-profit organisation’s donors include foundations started by Microsoft’s billionaire co-founder Bill Gates and his wife Melinda, by the late Hewlett-Packard cofounder William Hewlett and his wife Flora, and a grant-making network started by billionaire investor George Soros.

It also receives some funding from governments of oil and gas producing countries such as Norway, the UK and the US.