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The Global Energy Industry: A Divide Between Fossil Fuels and Renewable Energy
The Rise Of Energy Trading
Fossil Fuels and Renewable Energy Divided
The global energy industry is facing a divide between those who believe in the need for more investment in fossil fuels and those who advocate for a shift towards renewable energy. The International Energy Agency (IEA) is pushing for a global energy transition, while OPEC believes that more oil will be needed. The CEO of Saudi Arabia's oil giant, Saudi Aramco, has warned about the severe underinvestment in oil and gas being seen at present. Although the demand for oil and gas is still strong, investment has fallen significantly in recent years. Upstream spending has decreased from around $700 billion in 2014 to between $370 to $400 billion today. Upstream spending would fund the locating, extracting, and bringing oil reserves to the surface. Much of today's production is coming from mature oil fields that will begin to dry up over the coming decades.
On the other hand, groups such as the IEA and IRENA suggest that much less funding is required for oil and gas than OPEC and several oil majors are suggesting. They are calling for much of the investment destined for oil and gas to be used for renewable energy projects to speed up the green transition and reduce the global reliance on fossil fuels. Many energy companies are shifting their attention to renewable energy to ensure their relevance in a green economy, meaning that several are avoiding investments in the exploration of new regions. Stronger climate policies, as well as fiscal incentives for green energy projects, are supporting this decision.
OPEC Oil Cost Investments
The ongoing conflict between major oil buyers, mostly allied with the U.S., and major oil sellers in the OPEC group has been brought to attention by a recent statement from OPEC's Secretary General, Haitham Al Ghais. He cautioned the International Energy Agency (IEA) to be careful about further undermining investments in the oil industry. However, his later comments suggesting that oil prices must be above US$80 per barrel (pb) of Brent for such investments to be feasible are incorrect. The cost of extracting a barrel of oil in many leading OPEC countries, like Saudi Arabia, Iraq, and Iran, is only around one or two dollars. The additional amount beyond this actual cost is mostly used in the government budgets of OPEC countries. It is not invested in energy infrastructure to secure future supplies but rather directed towards other state-led projects unrelated to the energy sector.
Russia is fighting to take market share from OPEC producers by helping to push prices higher while selling its oil at a significant discount. Russia's strategy has been very straightforward but very effective: persuade Saudi Arabia (the de facto leader of OPEC) to increase the group's oil prices as much as possible while at the same time selling its own oil at a discount to this price. There are plenty of willing buyers for discounted Russian oil whether it is at or above the US$60 pb barrel price cap. China is the main one, but India is a huge buyer too, and the higher OPEC puts up its oil prices, the more attractive discounted Russian oil looks. The U.S. itself does not seem too bothered about such sales at discounted prices to the OPEC levels because this has the net effect of subduing oil prices generally within the wider global oil market. Russia's success in duping Saudi Arabia and OPEC into pricing themselves out of key buying markets and allowing Russia to exploit that gap can be seen in the latest figures for India's oil buying.
The Rise of Energy Trading
According to estimates by Bernstein Research, Shell, BP, and TotalEnergies, 3 major European energy companies, made more money from buying and selling oil, gas, and power than the four largest private energy traders. These three companies' commodity trading divisions contributed approximately $16.6bn, $11.5bn, and $8.4bn in EBITA (earnings before interest, taxes, and amortization), respectively. In contrast, the combined energy trading earnings of the four largest private energy traders - Vitol, Trafigura, Mercuria, and Gunvor - amounted to around $34bn last year. The significant profits were largely due to the disruption caused by Russia's war on Ukraine, which greatly impacted energy markets and caused prices for oil and gas products to rise sharply.
In 2022, the trading divisions of energy majors such as Shell and BP had a significant impact on their overall financial performance. Shell's trading business contributed 20% to their group's EBITDA, while BP's trading activities accounted for 14% of their group's EBITDA. These companies believe that their expertise in commodity trading is essential for transitioning from oil and gas producers to integrated energy providers in the coming decades. Outside of Europe, oil and gas producers without trading capabilities are looking to establish or acquire them, as seen with ExxonMobil's plan to create a global trading division and discussions between the Abu Dhabi National Oil Company and Gunvor. Given the uncertain energy market prices, these companies are increasingly interested in capitalizing on the profits generated through trading activities.
The global energy industry is divided between proponents of increased investment in fossil fuels and advocates for a transition to renewable energy.
OPEC warns against discouraging oil investments, while groups like the IEA and IRENA suggest less funding is needed for oil and gas than OPEC and some oil majors propose.
Many energy companies are prioritizing renewable energy to stay relevant in a green economy, resulting in reduced investments in exploring new regions.
The trading divisions of European oil majors have significantly contributed to their earnings, generating increased interest in trading and its potential profits.
The future of energy investments and oil pricing remains uncertain, with both approaches seen as crucial for global energy security.
For more analysis on these topics, check out these articles:
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