The possible risk of State-owned oil companies across the globe wasting over $400 billion investments in the oil and gas sector as countries around the world transition to much cleaner sources of energy in a bid to combat climate change, could pay way for economic crises particularly across emerging and developing countries.
According to the Natural Resource Governance Institute (NRGI) in its Risky Bet: National Oil Companies in the Energy Transition report, the occurrence of economic crises in emerging and developing countries would necessitate future bailouts that will cost governments of such nations.
NRGI posits that, oil-dependent governments in Africa, Latin America and Eurasia are making risky bets with public funds in investing in expensive oil and gas projects that will only break even and fail to make substantial returns due to commitments by member countries of the Paris Agreement to limit global warming to well below 2 degrees Celsius, preferably to 1.5 degrees Celsius in a bid to combat climate change.
“State oil companies’ expenditures are a highly uncertain gamble, they could pay off, or they could pave the way for economic crises across the emerging and developing world and necessitate future bailouts that cost the public dearly,” says David Manley, NRGI senior economic analyst and report co-author.
State oil companies over the next decade, according to the report are projected to invest more than $400 billion (in 2021 prices) in oil and gas projects that will only break even if the world exceeds the global carbon budget. Most of this— more than $365 billion—is from developing and emerging economies, of which more than $80 billion is from low and low-middle income countries that receive international aid.
The amount – $365 billion – to be invested in the sector by emerging and developing countries in view of not making substantial returns and breaking even, NRGI argues could be invested in other sectors of the economy that could generate jobs, economic growth and development.
“A key concept in our analysis is the idea of opportunity costs. If State oil companies investments return too little, their government owners might have been able to earn more by investing their money elsewhere, particularly where government spending generates not just financial returns but jobs and other benefits.”
“State oil companies investments in high cost projects therefore may have high opportunity costs for their countries. By investing in these risky projects, their governments and their public will have lost the opportunities to invest in areas of the economy that could generate jobs, economic growth and development,” noted the report.
Global fossil fuel divestment campaigns have focused on international oil companies (IOCs). Some of these companies have published plans to rebalance their activities away from oil extraction. But there has been relatively little attention paid to State oil companies and few of them have published detailed plans to navigate the energy transition.
Countries with State oil companies must adapt to a changing global energy system to develop their economies and maintain stability. Failing to adapt to the unpredictable shift away from fossil fuels could bring economic trouble for both these countries and the global financiers who invest in them.
State-owned oil companies or national oil companies (NOCs) according to NRGI, produce half of the world’s oil and gas and are responsible for 40 per cent of the total capital invested in the industry worldwide.
NRGI estimates that NOCs could invest about $1.9 trillion in the next ten years, one-fifth – $400 billion – of which would not result in a profit if energy transitions by countries fall in line with the current climate commitments in the Paris agreement.
