Has IEA Resorted to Political Gimmickry?
(The views and opinions expressed in this article are those of the attributed sources and do not necessarily reflect the position of Rigzone or the author.)
On May 18, the International Energy Agency (IEA) unveiled a report that it claims is the “world’s first comprehensive study” of how to achieve a net-zero emissions energy system by 2050. In a press release the IEA contends its report outlines a plan for reaching that goal while “ensuring stable and affordable energy supplies, providing universal energy access, and enabling robust economic growth.” Moreover, it calls for an immediate end to fossil fuel supply project investments and predicts no sales of passenger cars powered by internal combustion engines by 2035.
One of Rigzone’s regular market-watchers seems unimpressed with IEA’s grand proposal, and another sees it yielding a potentially rosy scenario for oil and gas producers. Read on for these and other insights in this review of the past week’s oil and gas market hits and misses.
Rigzone: What were some market expectations that actually occurred during the past week – and which expectations did not?
Tom McNulty, Houston-based Principal and Energy Practice leader with Valuescope, Inc.: News that there might be a deal in the works with Iran, such that sanctions might be adjusted or lifted, caused oil prices to drop right away. This means an additional 1.5 million barrels per day (bpd) of oil coming on to the market, officially, but I am skeptical because think Iran has been selling volumes close to that to China all along. The condition of Iran’s oil complex is also in question, after years of poor management and investment. Iranian oil should not be viewed as having a substantive price impact for the time being.
Gerrad Heep, Partner-in-Charge, Energy – Audit, Grant Thornton LLP: With a full quarter of relatively stable pricing, there was an expectation that oil and gas property impairments might finally subside for First Quarter 2021. In a random sample of ten public, independent producers (five followed full cost accounting and five followed successful efforts accounting), every company had an impairment in the fourth quarter of 2020. Only two of the ten had an additional impairment in the first quarter of 2021, and the size of those impairments was relatively small.
Rigzone: What were some market surprises?
Mark Le Dain, vice president of strategy with the oil and gas data firm Validere: A lot of talk about the IEA net zero report which basically outlined a scenario where they suggested no new oil and gas developments. One of the interesting responses to this is some funds are describing this type of environment – not practically achievable of course, but the continued pressure – as perhaps the ideal scenario for energy returns over the next decade. Restricted development supports a robust oil price in a world where demand is still growing and higher cost of capital and barriers to entry allows the existing incumbents to capture that profit for shareholders. The industry often returns its cost of capital over longer periods of time, supporting this, and it makes sense that any further barriers to the creation of supply supports additional returns.
Heep: It was surprising that crude oil prices did not react more to recent events. The U.S. Centers for Disease Control announced revised guidance on wearing masks, conflict erupted between Israel and Hamas, and the Colonial Pipeline shutdown crippled the supply of gas to the East Coast. Yet West Texas Intermediate stayed in the $63 to $66 a barrel range. Perhaps it is another sign that crude oil prices have stabilized.
McNulty: The biggest market surprise this week came from the IEA, with its net zero emissions report, stating that oil demand will collapse down to 72 million bpd by 2030. That is less than 10 years from now! And the report goes on to say that demand will fall to 24 million bpd by 2050. As if that is not enough, the IEA states that many of the new liquefied natural gas supply projects being built today are “also not needed”. Why is the IEA making these predictions? Because an electrified transportation fleet worldwide will not need any gasoline. But where will all the power come from, to charge this fleet, if nuclear and natural gas are gone? This report might mark the moment when the IEA has “jumped the shark,” and shifted from an analytical framework to a political one.
WHAT DO YOU THINK?
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