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Norway is determined to squeeze every last drop of oil from its continental shelf as it attempts to keep up with the growing demand for crude

Despite being a leading player in the renewable energy sector, Norway has made it clear that oil and gas will be vital in driving the energy transition

Equinor has already announced that it will be drilling around 25 exploration wells in Norwegian waters this year and has already announced its first discovery this year.

Norway’s oil majors as well as the country’s government and oil regulator hope to get every last drop of oil out of the North Sea before global demand eventually wanes. Continuing with its plan to run low-carbon oil operations worldwide for decades to come, while also focusing on developing its clean energy sector, Norway is making more oil discoveries and expects to maintain, or even increase, output so long as demand remains high.  In December last year, Equinor announced it would be drilling around 25 exploration wells in Norwegian waters throughout 2022, in a bid to find more oil. The oil major intends to continue drilling for crude in Europe’s biggest oil and gas producing country, as other companies transition away from fossil fuels. 

Jez Averty, Equinor’s senior vice president for subsurface stated of the major’s strategy, “Our plan, basically, is to make sure that the Norwegian continental shelf has the last drops, the last molecules, the last barrels to survive in that competition.”

Despite the potential for Norway to be a leader in the move away from oil and gas, thanks to its existing oil wealth and early adoption of renewable energy technologies, the government continues to back fossil fuels. It is one of the European countries, along with Russia, that has supported the rest of the continent by supplying natural gas during a time of severe shortages. In addition, it sees LNG as the low-carbon fossil fuel needed to meet global energy demand until alternatives are more widely available. 

Equinor believes it can help bridge the gap until enough renewable energy output is available by producing low-carbon oil. It hopes to achieve this by incorporating carbon capture and storage technologies into its projects as well as through the electrification of platforms from onshore hydropower. In addition, Equinor has already moved away from more carbon-intensive ventures, shifting operations to parts of the world where it can create and build new low-carbon markets.

The new Labour Party-led coalition government hopes to decrease net carbon emissions by 55 percent by 2030, from 1990 levels. Yet it has made its stance on oil and gas clear, backing long-term production. This is not surprising considering the petroleum sector continues to contribute around 40 percent of the country’s exports and 14 percent of its GDP. The government does intend to raise carbon taxes on the oil industry in order to counteract emissions, increasing the rate to $230 per tonne.

This January, Equinor announced its first oil discovery of the new year along with partner Wellesley. Preliminary studies suggest a potential 33 million barrels of recoverable oil equivalent in the Troll and Farm area of the Toppand prospect. The firm has made several discoveries in this region in recent years, suggesting that mature areas have the potential to be rejuvenated thanks to modern exploration technologies.

Geir Sortveit, senior vice president for exploration and production west operations at Equinor, stated, “We are pleased to see that our success in the Troll- and Fram area continues. We also regard this discovery to be commercially viable and will consider tying it to the Troll B or Troll C platform.” Further, “Such discoveries close to existing infrastructure are characterized by high profitability, a short payback period and low CO2 emissions,” he explained.

Norway’s oil regulator, the Norwegian Petroleum Directorate (NPD), plans to support the ongoing development of the sector by encouraging the greater use of data across operations.

As a data manager, it believes using data will help add value to the sector. The NPD intends to gain a better understanding of what is most important for oil companies looking forward and then collect the relevant data. Compiling data sets from across the sector could help streamline future energy projects. The regulator is planning to hold a workshop with representatives from across the oil industry on January 21, 2022, including service providers, academia, and related parties, to begin the process.  

May Karin Mannes, the NPD’s Director for shelf analyses and data management explains, “having the right data available at the right time and in the right format can have a huge impact for the future of the Norwegian shelf.” 

Oil firms, the Norwegian government, and the country’s oil regulator appear to be working hand-in-hand in an effort to prolong the shelf-life of Norway’s crude, while at the same time adding greater value to the sector and reducing carbon emissions – the triple whammy. Despite criticism over its long-term oil strategy, if Norway is successful in its aims, it could establish a flourishing green energy sector from its oil revenues and taxes while continuing to meet the global oil demand with low-carbon options. 

Oilprice by Felicity Bradstock, January 18, 2022

The European gas crunch has been hogging headlines for months now, and with good reason – the continent is still struggling to secure enough energy for its winter needs. But there may be a worse crunch looming over the world, and that would be an oil crunch.

The signs are there for everyone to see should they bother to look: OPEC’s spare capacity is dwindling, new discoveries are at historic lows, and banks are growing increasingly reluctant to engage with the oil and gas industry because of the rise of ESG investing.

Meanwhile, supermajors are curbing their output as they focus on growing their low-carbon business.

A capacity crisis?

“Shrinking global spare capacity underscores the need for increased investments to meet demand further down the road,” the International Energy Agency said in its October 2021 Oil Market Report, after noting that as OPEC ramped up production under its return-to-normal deal, its spare production capacity will fall considerably, potentially reaching just 4 million bpd by the fourth quarter of this year. That would be down by more than half from 9 million bpd at the start of 2021.

Spare capacity is an important indicator of production flexibility in the oil world. The IEA defines it as production that can be launched within 90 days and sustained over an extended period of time. The U.S. Department of Energy defines spare capacity as production that can be tapped within 30 days and sustained for 90 days. According to the EIA, OPEC’s spare capacity could fall to 5.11 million bpd by the end of this year.

The IEA does not seem to be sure what it wants – more investments in oil or more investments in renewable energy. It called for both on different occasions last year. But based on oil price developments, it seems the shrinking spare capacity of the world’s oil cartel is indeed a cause for concern despite the planned shift to low-carbon energy.

What fuels this concern even further is that some members of the extended cartel OPEC+ are nearing the limit of their spare capacity, and Russia is among them. One of the world’s top producers, according to reports, is finding it difficult to return production to pre-pandemic levels at a time when other OPEC+ members are dealing with the same problem. This means that even if demand continues to grow at the current solid rate, supply may not be as quick to catch up.

Wanted: new oil discoveries

New oil and gas discoveries may have hit their lowest level in 75 years, Norwegian energy consultancy said in a December report. Total newly discovered resources last year stood at some 4.7 billion barrels of oil equivalent, which was down from 12.5 billion barrels of oil equivalent discovered during the first pandemic year.

At the same time, European supermajors are deliberately reducing their oil production in line with the strategy to move toward renewable energy under pressure from shareholders, activists, and governments. So, on the one hand, we have less money being spent on new supply and on the other, we have a deliberate reduction in existing supply.

The low level of discoveries means that reserve replacement rates have fallen, too, and low reserve replacement rates in the oil and gas industry are bad news for future supply. Saudi Arabia warned last year that underinvestment in new oil production could lead to an energy crisis, but since everyone expects Saudi Arabia to say something like that, not a lot of attention was paid to the warning. And even if it was, boosting the rate of new oil discoveries is not as easy as it once was.

Banks on an ESG rampage

The rise of the ESG investor has made quite a splash in the financial industry. Returns are still a priority, but it is no longer the single ultimate priority. These days, investors want to know that their money is being used in a responsible way, for the good of the planet. And this means that they are increasingly reluctant to see this money going to the oil industry.

Because of this trend, banks and asset managers are rethinking their own business strategies. Asset managers are requiring their clients to make emission reduction commitments, threatening to drop them otherwise. Banks are refusing to lend to the oil industry and also threatening to drop clients that generate a lot of carbon dioxide emissions.

It isn’t just pressure from shareholders that is guiding lenders’ hands. Regulators are also turning up the heat on banks, requiring new risk assessments based on climate change scenarios and tightening capital requirements accordingly. To avoid being hamstrung by regulations, lenders are cutting their exposure to the apocalypse-bringing oil and gas industry.

Meanwhile, demand for oil appears to be as healthy as ever, and oil price forecasts are pointing to a solid upward potential. The thing that oil bears who cite the energy transition as the reason for their bearishness seem to be forgetting is that it will take a lot more than a couple of years.

It will also be tough, as Oil Price Information Service’s Tom Cloza wrote in an opinion piece for CNN. 

“Once we really start moving away from fossil fuels, it will be expensive and painful. To deny that expense is as disingenuous as denying climate change,” Cloza wrote. To argue with this and with the fact that we will continue needing millions upon millions of barrels of oil for the observable future would be a waste of time.

Oilprice by Irina Slav, January 18, 2022

In 2020, as the coronavirus locked down country after country, many energy industry observers and even participants floated the argument that this was the end of the oil era. Demand, these commentators said, had peaked. From now on, it will be a downward spiral for it, they said. These predictions did not age well.

Just a year into the pandemic, economies were reopening, growing, and unsurprisingly for many, consuming more crude oil. Last September, Bloomberg reported that some of the world’s biggest economies had seen a rebound in oil demand to pre-pandemic levels and even further growth on top of these levels.

Now, two years into the pandemic and with hopes it could be the last one for infection waves, oil demand is still going strong despite the fresh scare of the Omicron variant. Analysts are predicting higher oil prices still, citing limited capacity, insufficient investment in new production, and the strength of demand.

The International Energy Agency this week expressed its surprise with this demand strength. The IEA, it seems, had assumed that for some reason or another, oil demand growth would slow down. Perhaps the assumption had something to do with the agency’s own energy forecasts that see massive growth in wind and solar power generation capacity and a strong increase in EV adoption, with the latter directly affecting oil demand. Yet its assumption proved to be quite wrong.

“Demand dynamics are stronger than many of the market observers had thought, mainly due to the milder Omicron expectations,” the IEA’s chief, Fatih Birol, said this week. Translated, this statement means that the IEA expected more national lockdowns to prevent the spread of the new coronavirus variant. Yet more severe lockdowns were quite unlikely this time around—even the wealthiest economies would find it hard to cope with another shutdown of their economies, so they are approaching this Omicron wave more carefully than previous ones.

“We see some of the key producers including Nigeria, Libya and also Ecuador that have serious supply disruptions,” Birol also said, echoing concern by analysts that the supply side of the global oil equation is as problematic as the demand side. Ecuador is already restoring production after it repaired two important pipelines. Libya continues to be a wild card, and Nigeria is struggling but determined to boost its oil production.

This is the present state of oil fundamentals. The future may look different. For one thing, the underinvestment problem is becoming increasingly grave. Both OPEC and the IEA—the latter which has rebranded itself as a champion of the energy transition—have warned that the world needs more new oil discoveries.

The only reason for this could be that demand is not dying as fast as hoped by all the champions of the energy transition. Yet Big Oil is curbing its oil output because of transition pressure, and this would mean not just fewer new discoveries because of lower investment in exploration but also lower output from some of the biggest producers out there. This would swing the burden of supply more to OPEC+ whose spare capacity is shrinking, just like European Big Oil’s output.

The oil demand outlook appears to be so bullish that even U.S. shale drillers have begun boosting their production despite a pandemic-induced rearrangement of priorities that saw them focus on returning cash to shareholders and forego production growth. With oil exports last year hitting record highs, failing to take advantage of the opportunity to supply a higher portion of the oil an energy-hungry world needs would have been a little odd.

“The consumption of oil and gas has to diminish, demand has to decline,” the IEA’s Birol said earlier this month in comments on a Canada-focused report. “There is no way out. But I wanted to make clear that a declining demand doesn’t mean tomorrow they will be zero.”

The statement echoes one made by President Biden when he was criticized for asking OPEC to pump more oil while at the same time pushing a green transition-heavy agenda at home. Biden argued the two were not mutually exclusive because the transition took time.

“On the surface, it seems like an irony,” Biden said earlier this month, referring to his call on OPEC+ to add more oil production while heading for COP26 to discuss the reduction of global emissions. “But the truth of the matter is … everyone knows that idea that we’re going to be able to move to renewable energy overnight … it’s just not rational.”

Indeed, despite calls from some more radical environmentalist groups to do exactly that, oil and gas production cannot be stopped overnight to ensure a clear path towards the 2050 net-zero goals. But even the decline that the IEA’s Birol correctly sees as essential for the achievement of the Paris Agreement goals might prove a tough nut to crack. Unless, of course, governments resort to a series of bans and mandates to point their citizens in the right direction. Come to think of it, some are already doing just that.

Oilprice by Irina Slav, January 18, 2022

The recent talks between Oman’s Assistant to the Chief of Staff for Operations and Planning, Brigadier Abdulaziz Abdullah al-Manthri, and the Chief of Staff of Iranian Armed Forces, Major-General Mohammad Bagheri, may mark a new phase in the already deep and broad relationship between Oman and Iran, and in the Sultanate’s drift into the Iran-China axis.

“The two countries [Iran and Oman] have conducted several joint naval drills in recent years, within the scope of securing the waterway from the Persian Gulf through to the Gulf of Oman from smuggling and other threats, including terrorism, but these [recent] talks were concerned with expanding that cooperation both in terms of the armed services involved beyond just the navy and the scope of their joint activities beyond anti-smuggling and dealing with terrorist threats,” an Iranian source who works closely the Petroleum Ministry told OilPrice.com last week. 

The basic catch-22 for Oman that has expedited its move towards the Iran-China power axis is that it lacks the scale of natural resources to generate the financing required to keep its economy ticking over without any further industry but the industry that it is looking to diversify its economy with – petrochemicals – requires a lot of upfront financing before it pays off.

Consequently, with only around five billion barrels of estimated proved oil reserves (barely the 22nd largest in the world) and minimal natural gas reserves – Oman explored many options to bridge this financing gap but its budget problems were dramatically worsened by the Saudi Arabia-instigated Oil Price Wars of 2014-2016 and 2020. Even before the 2020 attempt by Saudi to severely disable the U.S.’s shale oil sector by using exactly the same strategy that had failed in 2014-2016 and had destroyed the budgets of its OPEC brothers as well, as analyzed in-depth in my new book on the global oil markets, Oman had been facing a budget deficit for that year alone of at least 18 percent of GDP and budget deficits averaging at least 15 percent per year over the next five years. 

In order to give it time to develop its answer to many of its financial problems – the rollout of the perennially-delayed but potentially game-changing Duqm Refinery Project and its corollary projects of a product export terminal in Duqm Port and Duqm refinery-dedicated crude storage tanks in Ras Markaz – Oman tried several options to raise money.

So determined was Oman to keep its fiscal deficit within manageable proportions that not only did it implement measures (including lower expenditure on wages and benefits, subsidies, defense, and capital investment by civil ministries) that reduced expenditure (in 2016 by around 8 percent of GDP) but also moved to rein-in hydrocarbons-related spending as well. In this context, the Sultanate’s Financial Affairs and Energy Resources Council formed a specialized working group to study public spending and the means by which to reduce it.

At the same time, it was made clear that the Omani government would apply zero-based budgeting in the ninth five-year plan of approving allocations for development projects only after all feasibility studies and real cost analysis of each of them had been completed. The Council also underlined that it aimed to avoid having any additional requests for funding from developers after any project had been started. 

However, Oman’s problems relating to the Duqm Refinery Project became worse in 2016 when the UAE’s International Petroleum Investment Company (IPIC) said that the Duqm project no longer fitted its overall investment strategy, in light of the impending merger at the time of IPIC with the Mubadala Development Company, and withdrew from the project.

Although this was followed in November by the signing of a memorandum of understanding between the Oman Oil Company (OOC) and the Kuwait Petroleum Corporation (KPC) for co-operation on the construction of the refinery, OilPrice.com understands that this was not even half of the then-estimated cost of US$6 billion.

Given the negative international credit ratings outlook, and ratings downgrades in previous years, Oman’s options to raise money through conventional bond offerings remained constrained, and so did the appetite of international investors to buy into any part-privatization of any of Oman’s state-owned companies, even the once much-fancied Oman Oil Refineries and Petroleum Industries Company’s (ORPIC).  

It was at this point that China saw its chance to expand its foothold in Oman, which is a key land and maritime hub in Beijing’s multi-generational power-grab project, ‘One Belt, One Road’ (OBOR). Specifically, at around the same time as IPIC withdrew from the project, the refinery operator – the Duqm Refinery & Petrochemical Industries Company (DRPIC) – in tandem with the OOC, appointed a number of global banks, led by regional heavyweight Credit Agricole, to advise on the optimal methods to obtain the funding for the project.

These overtures found particular favor with China, which as part of a broad-based investment into Oman pledged the required funding to cover the completion of the Duqm Refinery. However, it came with the usual Chinese caveats of it being allowed to build massive far-reaching infrastructure projects. 

Already accounting for around 90 percent of Oman’s oil exports and the vast majority of its petrochemicals exports, China was quick to leverage this by further pledging US$10 billion immediately for investment into the Duqm Refinery Project’s adjunct oil refinery – just after the implementation of the nuclear deal with Iran at the beginning of 2016.

At that point, Oman announced that the budget for the Duqm Refinery Project was being increased from the longstanding figure of US$6 billion to a combined US$18 billion for all elements of the Project. This, Oman’s government announced, would enable downstream production to increase from its current 15 million tonnes to 24 million tonnes by 2030, while the commodity sales volumes would nearly double from 21 million tonnes to 40 million tonnes by the same date.

Although further investment from China was geared towards completing the Duqm Refinery – including the export terminal in Duqm Port and the crude storage tanks of the Ras Markaz Oil Storage Park – Chinese money was also funneled towards the construction and building out of an 11.72 square kilometer industrial park in Duqm in three areas – heavy industrial, light industrial, and mixed-use. This has enabled China to secure deeply strategic areas of land in the geopolitically vital Sultanate vitally important Oman, which has long coastlines along the Gulf of Oman and along the Arabian Sea, away from the extremely politically sensitive Strait of Hormuz.

It also offers largely unfettered access to the markets of South Asia, West Asia, and Africa, as well as to those of its neighbors in the Middle East. Following the usual Chinese template of investment, it has also given China the opportunity to populate these areas its own people, from project managers to security personnel.

In line with these developments, the addition of Oman to its Middle East territorial acquisitions means that Beijing can fast-track the transport routes between Iran and Oman.  A long-mooted adjunct to China’s direct plans in this context has been the utilization by Iran of Oman’s unused liquefied natural gas (LNG) capacity.

This plan, long talked about between Tehran and Muscat, is part of Iran’s plans to become an LNG superpower based on its massive South Pars and North Pars non-associated gas fields. Oman for its part would allow Iran to use 25 percent of the Sultanate’s total 1.5 million tons per year LNG production capacity at the Qalhat plant. This could be done as part of a broader plan to build a 192-kilometer section of 36-inch pipeline running along the bed of the Oman Sea at depths of up to 1,340 meters from Mobarak Mount in Iran’s southern Hormuzgan province to Sohar Port in Oman for gas exports.

This, in turn, would re-open the possibilities for further pipeline routes running from Iran to Oman and then into Pakistan and then into China, and the other way around, all under the security protection of China, irrespective of any plans that the U.S. might have in the southern part of the Shia crescent of power in the region, as also analyzed in-depth in my new book.

Oilprice by Simon Watkins, January 11, 2022

The National oil company of Mexico, Pemex, is exporting ~1mb/d of crude oil, with ~60% flowing to the US and gulf-coast refineries, but the current CEO wants to change that.

At a press conference in Mexico City yesterday, CEO Octavio Romero shared plans to cut exports to ~430kb/d in 2022 and eliminate them entirely by 2023, as Pemex refineries ramp up to consume the domestic crude.

The Dos Bocas refinery, a 340kb/d plant currently under construction, will be fully operational in 2023 and account for ~1/3 of increased domestic crude consumption.

The Pemex downstream system processed ~1.2mb/d from 2010-2014 before utilization dropped to as low as 690kb/d in 2020.

Currently processing ~800kb/d, the Pemex system could increase runs ~400kb/d by simply returning existing refineries to historic utilization rates.

Cutting exports by the full 1mb/d appears to be a challenge, as running the legacy system at rates not seen in half a decade, and running the new Dos Bocas refinery at capacity would only reduce exports by ~780kb/d.

Nevertheless, 780kb/d of increase in oil production in Mexico and the Gulf region would cut into share for US Gulf Coast refiners like Valero (NYSE:VLO), Phillips (NYSE:PSX) and Marathon (NYSE:MPC), as well as reducing margins for integrated companies like Exxon (NYSE:XOM) and Chevron (NYSE:CVX).

In addition to cutting into market share, reduced Mexican exports would reduce the supply of heavy crude oil to the Gulf Coast system, leaving US refiners in search of additional heavy barrels from Canada, Venezuela and the Middle East.

Seeking Alpha by Nathan Allen, January 11, 2022

China has long relied on the Middle East to secure much of the oil needed to fuel its rapid economic development. Now Chinese President Xi Jinping wishes to create an “ecological civilization” that relies less on fossil fuels and more on renewable energy.

As the world’s largest oil importer seeks to become greener and more self-reliant, one might expect a shift in its attention and capital. The reality, however, is not that simple. 

A growing interdependence 

Since China became a net importer of oil in 1993, the Middle East has emerged as an increasingly important source of this critical commodity. By the time China surpassed the US as the largest importer of crude oil in 2017, almost half its supply originated from this troubled region.

Despite China’s years-long efforts to ramp up local production and diversify its acquisition, its dependency on the Middle East for crude oil remains intact. In 2020, China imported crude oil that totaled roughly US$176 billion. Almost half (47%) of these official imports came from Middle Eastern countries. 

Notably, Saudi Arabia emerged as China’s largest crude oil supplier and was still maintaining its leading position as of October 2021. The $28.1 billion worth of oil exported from the Kingdom to China in 2020 accounted for 15.9% of China’s total crude oil imports.

Iraq found itself in third place, shipping $19.2 billion (10.9%) worth to the mainland over 2020. Oman, the United Arab Emirates and Kuwait were also among China’s top 10 suppliers, exporting $12,8 billion (7.3%), $9.7billion (5.5%), and $9 billion (5.1%), respectively.

China’s thirst for Middle Eastern oil is perhaps best exemplified by the case of Iran. During 2020 and into early 2021, Iran had reportedly exported almost 17.8 million tonnes (306,000 barrels per day) of crude oil to China in the face of US sanctions on the Islamic Republic. 

Besides oil, the Middle East also provides another vital resource to China – natural gas. As one of the world’s largest exporters of Liquefied Natural Gas (LNG), Qatar records the second-highest export volume of 106.1 billion cubic meters in 2020.

That year, China received 8 million metric tonnes of LNG from Qatar, accounting for 20% of its total LNG imports. With China’s demand for gas set to remain relatively strong over the next several years, Qatar continues to be part of this important equation.

China’s dependence on the Middle East for oil and gas has elevated the region’s strategic significance to Beijing. China has accordingly sought to expand cooperation beyond the energy sector from maritime and railway infrastructure projects within the framework of its Belt and Road Initiative to investments in advanced technologies such as 5G networks, artificial intelligence and nuclear energy.

According to the American Enterprise Institute’s China Global Investment Tracker, more than $123 billion flowed from China into BRI-related investments across the region between 2013 and 2019. The resulting economic entanglement has created an interdependence that has established China as a major player in the region.

Uncomfortable realities 

Geopolitical instability in the Middle East remains a significant energy security concern for Beijing. The attack on Saudi Aramco’s oil facilities by Houthi insurgents in September 2019, which caused oil prices to surge 15%, serves but one telling example.

That crude oil and LNG traveling from the Middle East to China moves through some of the most unstable regions of the world, only compounds the challenge for Beijing. 

Tankers leaving the Middle East and North Africa first transit the Strait of Hormuz or Bab el-Mandeb strait, two maritime chokepoints that straddle regions fraught with conflict. From there, they move south past the port of Gwadar in Pakistan’s troubled Balochistan province and towards Myanmar, where one of the longest-running civil wars is threatening China’s $1.5 billion natural gas and oil pipeline links to the Indian ocean.

Traversing through the narrow Strait of Malacca, ships then move north through the contested waterways of the South China Sea and Taiwan Strait before discharging at Chinese ports.  Chinese oil supply chain network under Belt & Road Initiative Source: Sarker, Md Nazirul Islam, et al (2018)  Adapted by SIGNAL

To secure these waterways and ensure the steady flow of energy to the mainland, China deployed its first modern battle-ready warships to the region as part of a naval task force to conduct escorts and patrols in the pirate-infested Gulf of Aden in 2008.

While pirate activity has primarily shifted to other regions – like the Gulf of Guinea – since 2012, the People’s Liberation Army Navy (PLAN) remains active in the Gulf of Aden. This has led some pundits to raise questions about China’s intentions.

A 2016 report by the French Institute For International Relations posits that China’s anti-piracy missions “have evolved from protecting Chinese shipping interest” into a “strategic forward deployment, contributing to the rise of Chinese sea power in the Indian Ocean.”

The authors’ assessment seems congruent with China’s 2015 military strategy, which states “the security of overseas interests concerning energy and resources, strategic sea lines of communication, as well as institutions, personnel and assets abroad, has become an imminent issue.” 

Beijing has sought to bolster the capacity of its deployment of military assets by establishing forward operating bases – such as the opening of the first Chinese overseas naval base in Djibouti in 2017.

Notably, on December 14 at the Sixth Annual Conference on Israel’s China Policy, Israel’s former Mossad Chief Efraim Halevy pointed out that China had recently constructed a pier large enough to accommodate an aircraft carrier at the naval base in the eastern African nation.

More recently, an attempt by China to construct a secret military facility in Abu Dhabi’s Khalifa port that was halted due to US pressure serves as another example of China’s determination to enhance its power projection capabilities in the region.

While the true intent of the project remains unclear at present, China’s development of commercial ports in outposts around the world has been described by US officials as a “clear effort to develop footholds for military access.” 

From the Chinese perspective, Beijing needs this power. Besides threats stemming from piracy and political instability along its energy supply chain, the narrow straits through which most of China’s oil and gas transits pose another geopolitical conundrum for Beijing: the US Navy and its allies could interdict shipments of energy supplies and hence threaten China’s energy security.

Considering China’s dependence on foreign suppliers for oil remains in excess of 70%, Chinese fears of such disruptions to the energy supply chain will only grow. 

While many analysts have called into question the viability and sustainability of executing such a blockade, there is no doubt that the possibility occupies an important place in Chinese strategic thinking.

As Richard Ghiasy, Fei Su, and Lora Saalman explain in a 2018 report on the 21st Century Maritime Silk Road, “the CPC mindset [is] to prepare for the worst and to alleviate sources of vulnerability, rather than hope for the best.” 

Evidence of this can be found in China’s efforts to develop the China-Myanmar oil and gas pipelines that run from Kyaukpyu port to Kunming, the China-Central Asia pipeline, and its plans to construct a China-Pakistan-Iran-Turkey (CPIT) energy corridor – to transport oil and natural gas primarily from Iran overland through Pakistan to China.

These projects are all designed to reduce the country’s heavy reliance on critical maritime chokepoints, through which roughly 83% of China’s oil imports transit. 

In addition to the construction of new overland routes, China has developed a significant strategic reserve of oil, which according to the Oxford Energy Institute, is “estimated to contain 40 days’ supply.”

Meanwhile, Chinese national oil companies – CNPC, CNOOC and Sinopec – are planning to boost spending and are expected to drill 118,000 wells over the next five years at a projected cost of $123 billion. However, considering that only 2.4% of global proven oil reserves are located in China, the scope for increasing domestic production remains limited.

Energy in transition 

China’s 14th five-year plan, the blueprint that will guide China’s development through 2025, places a significant emphasis on energy security and climate change. The Five-Year Plan commits the government in very broad terms to “formulate an action plan for peaking carbon emissions before 2030” and to “anchor efforts to achieve carbon neutrality by 2060.” 

The world’s second-largest economy had already embraced green energy production prior to this plan, including wind, solar, hydro and nuclear, as well as the electrification of the energy and transportation systems.

China has come to dominate many of the vital global renewable energy supply chains of the 21st century and is the biggest producer of batteries, electric vehicles, solar panels, power control systems and wind turbines.

China today controls roughly 60% of the solar market and has maintained its position as the top investor in renewable energy for 10 years in a row. In 2019 alone, China invested a staggering $83.4 billion in the clean energy sector.    Investment in clean energy globally in 2019, by select country (in billion US dollars) 

Over the last decade, China added 36% of the world’s total new renewable generation capacity. By 2060 China aims to transform its power generation mix from roughly 70% from fossil fuels today to 90% from renewable sources.

As international energy expert Edward C Chow explains: “China does this partly but not solely because it recognizes its overdependence on oil and gas imports and the security vulnerability this causes.” 

Not so fast; and not so simple 

However, the transition towards a greener, more sustainable world will take time and is likely to be both a messy and costly process. According to Zang Xiaohui, dean of economics at Tsinghua University’s PBC School of Finance, China will need to invest as much as $46.6 trillion by 2060 to meet this goal. 

Deputy Secretary-General of the National Development and Reform Commission, Su Wei, has emphasized that despite the country’s ambitious plans to go green, economic growth remains a top priority.

Considering the stability that traditional power sources have provided China’s industrialization efforts compared to the “intermittent and unstable” renewable sources, Su Wei points out that China has little choice but to rely on energy sources such as oil, gas and coal power while “transiting.”  

The power cuts and blackouts that recently rippled across China, causing factories to slow production or close entirely, illustrated the extent to which the country relies on non-renewable sources to maintain economic growth. 

Despite its ideals to transit towards green and clean energy, China’s dependence on oil and gas imports is projected to grow to 80% by 2030. According to a parametric review of data from the US Energy Information Administration (EIA) by Emeritus Chair in Strategy at Center for Strategic and International Studies Anthony H Cordesman: “China and Asia will have a sharply growing dependence on MENA and Gulf petroleum exports that may well extend through 2050.”

Cordesman points out that “China will depend – as will the rest of Asia – on energy exporters like Algeria, Libya, Egypt and Syria, as well as the states of the Arab/Persian Gulf – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, the UAE, and Yemen.” 

Against the backdrop of escalating tensions between China and the US, such reliance only lends further impetus for China to expand its influence and secure its interests in the region.

Through 2060, China will need to protect the sea lines of communication to ensure the integrity of its oil and gas supply chains. This reality increases the possibility that Beijing will seek to establish more military outposts to enhance its naval power projection capabilities. 

Meanwhile, Middle Eastern countries are not standing by idly as the world transitions to a greener future and are increasingly looking to Beijing to assist them in constructing their very own clean energy ecosystems.

As these ecosystems mature and the world begins to rely less on the region’s oil, Beijing’s dominance of the renewable energy supply chain promises to turn the geopolitical status quo on its head and may leave the Middle East uncomfortably dependent on China in the green economy. 

ASIA TIMES by Dale Aluf, January 11, 2022

Nigeria is likely to contend with a gale of divestments by international oil companies to reduce operating, security challenges and the huge costs of battling with the COVID-19 pandemic, industry officials and analysts told S&P Global Platts.

According to the global provider of energy information, 2022 poses to be a very challenging year for Nigeria, Africa’s largest oil producer, with the country facing a race against time to implement reforms needed to bolster exploration and check declining oil production as it fights a wave of divestments from IOCs.

It reported that the signing into law of the long-delayed Petroleum Industry Act, previously known as the Petroleum Industry Bill, in August this year is not expected to bring the much-needed succour to the oil sector.

The landmark PIA was signed into law on August 16 and was expected to turn the Nigerian National Petroleum Corporation to a private company within six months in order to make it easier for the struggling company to raise funds for oil exploration and production. But the impact of this bill has so far been barely felt.

The PIA could be hugely beneficial, but government officials have lacked professionalism in putting it into place, S&P Global Platts quoted the Chief Executive Officer, Degeconek, Abiodun Adesanya, as saying.

He said, “The fact is that this Petroleum Industry Act is coming a little too late as it has been delayed for too long.

“Those who were rightly placed to pioneer the implementation are not the people in government now. So, I expect to see more divestment by oil majors from selected assets because things are not working as they should be.”

Many oil majors are starting to divest legacy oil and gas assets in Africa as they target net-zero carbon emissions while hanging onto their most efficient and often largest oil projects.

According to the report, Nigeria could be the worst hit as Shell, Chevron, and ExxonMobil are close to selling their onshore assets in the West African country.

Nigeria is under pressure to implement the PIA as soon as possible, according to Mike Sangster, managing director of TotalEnergies in Nigeria.

“The window for investments into fossil fuels is narrowing. Very few years would remain for access to urgent funds to develop the Nigerian petroleum industry,” he said at a recent industry event.

This all comes at a time when Nigerian is struggling to produce at even two-thirds of its total capabilities.

Nigeria has the capacity to pump around 2.2 million barrels per day of crude and condensate, but in 2021 output has been languishing near 1.55 million bpd due to a slew of operational and technical issues.

The Nigerian government is aiming to attract much-needed investment to bolster oil exploration and production and increase reserves and output to 40 billion barrels and 3 million bpd, respectively, by the mid-2020s, but these targets are starting to look unattainable.

The pandemic and the acceleration of the energy transition away from fossils fuels does not bode well for Nigeria, which is desperate to kick-start its exploration and production programs.

Projects like Shell’s Bonga Southwest/Aparo, TotalEnergies’ Preowei and Exxon’s Bosi are all at risk of never being developed. These fields have the potential to add a total of around 400,000 bpd to Nigerian oil production.

“Investment decisions are billed to be taken on these landmark projects around next year to arrest Nigeria’s sagging oil production volumes,” an official from the Nigerian Upstream Petroleum Regulatory Commission told S&P Global Platts. “But there are dark clouds hovering around sanctioning these projects now due to the emergence of the new COVID-19 variant.”

Ongoing field and pipeline issues, fiscal stress and insecurity in the Niger Delta are likely to continue to threaten the growth outlook for Nigerian oil output, according to S&P Global Platts Analytics.

Bonny Light, Escravos and Forcados have all faced production issues in 2021, while the output of other key grades, such as Qua Iboe, Brass River, Agbami, Akpo, and Egina, has also remained consistently low this year.

Nigerian oil supply will grow to 1.7 million bpd by April 2022, down from levels of 1.9 million bpd in April 2020, Platts Analytics said in its recent forecast.

By PUNCH, January 6, 2022