The International Energy Agency issued a report yesterday on how the world might get to Net Zero Emissions (NZE) by 2050. It may have significant consequences for the development of the Guyana Basin.
Here are three scenarios as part of a potential roadmap which are of direct concern for Guyana’s energy sector:
1)”Oil demand never returns to its 2019 peak and it declines from 88 million barrels per day (mb/d) in 2020 to 72 mb/d in 2030 and to 24 mb/d in 2050, a fall of almost 75% between 2020 and 2050.”
2)”The trajectory of oil demand in the NZE means that no exploration for new resources is required and, other than fields already approved for development, no new oil fields are necessary. However, continued investment in existing sources of oil production are needed.”
3)“These dynamics are reflected in the oil price in the NZE, which drops to around USD 35/barrel in 2030 and USD 25/barrel in 2050. This price trajectory is largely determined by the operating costs for fields currently in operation, and only a very small volume of existing production would need to be shut in. However, income from oil production in all countries is much lower in the NZE than in recent years, and the NZE projects significant stranded capital and stranded value.”
The IEA is a highly influential body having been created in 1974 to ensure the security of oil at a time when, as it website states, “industrialised countries found they were not adequately equipped to deal with the oil embargo imposed by major producers that pushed prices to historically high levels.” Based in Paris it is funded by major countries and stakeholders. Its reports are highly influential and guide major, long term investments in the energy sector. As Andrew Logan, senior director of oil and gas at sustainability advocacy group Ceres told Energy Intelligence yesterday: "The IEA scenarios tend to create their own momentum because so many companies use them as the basis for their own internal planning." That is why yesterday’s report is so significant as it represents a U-Turn for the IEA which had always seen its primary role as oil security. Energy Analyst Anas Alhajji noted in a tweet that the IEA even as recently as 2020 had stated: "it would be wrong to cut investment in oil and gas because it will still be needed for years to come" and he quoted its executive director Fatih Birol as saying: “Our message to the oil industry here in Houston is invest, invest, invest.”
First off context is important here. As Energy Intelligence reported the IEA “met a request by the UK government ahead of Glasgow climate talks later this year to flesh out a single scenario that achieves net zero without any use of carbon offsets and with limited reliance on negative emissions technologies….The report, released on Tuesday, does not predict that the world will achieve net zero by 2050, nor does it advocate that this specific path is taken.”
And within the report there are considerable uncertainties. For example the IEA states that “Almost 50% of the emissions reductions needed in 2050 in the NZE depend on technologies that are at the prototype or demonstration stage.: i.e. are not yet available on the market.” For many observers this last part is of genuine concern. Were the world to move too fast to limit fossil fuel production, the renewable technology might not be there to fill the gap. That could result in a prolonged spike in oil prices.
It was also noted by climate activist Greta Thunberg that under the IEA scenario, “the total land area devoted to bioenergy production would need to increase by 25% to reach 410 million hectares in 2050, an area the size of India and Pakistan combined.”
What might also interest some is how behavioural changes, “particularly in advanced economies such as replacing car trips with walking, cycling or public transport, or foregoing a long‐haul flight” – only provide around 4% of the cumulative emissions reductions.
So what about Guyana?
Guyana might be seen to be very much in a precarious position here. Production is already locked in to rise to 560 B/D by 2024 and by another 250 B/D by 2025 assuming quick approval of the Yellowtail development. CEO John Hess, whose company is part of the Stabroek Block consortium, has talked about one FPSO a year for ten years up to 2030. But this is where the IEA report may end up putting a damper on such plans especially if one considers the scenario of $35 per barrel in 2030 - around the overall breakeven for the basin. Conversely Energy Intelligence’s Noah Brenner told us he “can see an argument to accelerating it to get it out of the ground.” This is certainly the view of Guyana’s Vice President Bharrat Jagdeo who has been talking of the narrow window to monetise the country’s resources. In October he warned, “The renewables are yapping at people’s feet. And there may be technology one day that may cause oil opportunities to (dry up), assuming there is new breakthrough technology….Secondly, a lot of these companies are losing value in stock exchanges etcetera and they are cutting back on their investment. Because if they lose value, they also have to be willing to raise money, etcetera. If the outlook for the market is not that great, the lenders won’t want to lend into the sector and it becomes riskier.” Some at the time accused Jagdeo of exaggerating the threat but in light of the IEA report his words may now seem prescient.
Brenner also sees a situation where the energy transition “puts pressure on the later vessels and you see more backfilling of existing infrastructure rather than newbuilds. (backfilling is where a new field is connected to existing infrastructure such as an FPSO rather than a new one built) This could slow things….”
Perhaps what will be directly affected are the remaining offshore blocks that the government has talked about auctioning off at some point. These are the near shore and also the ultra deep Block C. (Suriname’s recent bid round was poorly received) One also has to wonder if blocks held by CGX and Occidental will now ever be developed.
Brenner also points to upcoming events in Houston: “For Guyana I think the question is what do investors do with it as it regards Exxon's strategy. So the AGM next Wednesday is the thing to watch. If the IEA report gets used to hammer Exxon's board to adopt stricter emissions targets or start investing in renewables then that might be the big impact on Guyana.” That is in reference to climate activist investor Engine No 1’s bid to get four seats on Exxon’s board. It has the backing of several pension funds. This could alter the company’s long term strategy which is based on continued development of high quality, low cost reservoirs coupled with, among other initiatives, Carbon Capture and Storage projects such as the one it is proposing for the Houston Ship Channel that would reduce overall US emissions by 1-2%.
The IEA report is a game changer but as it states the Net Zero “pathway remains narrow and extremely challenging, requiring all stakeholders – governments, businesses, investors and citizens – to take action this year and every year
after so that the goal does not slip out of reach.”
Whether Guyana’s nascent energy sector is trampled along the way remains to be seen but it would be a cruel irony after centuries of being buffeted by external events.