The dramatic fall in oil prices to less than 30 US dollars a barrel for Brent oil is “unsustainable.”
Not just for the hydrocarbon industry, but for the entire world economy.
This was one of the key ideas shared at the 13th Energy Industry Meeting, which was organized at the IESE Madrid campus in conjunction with Deloitte recently.
The debate ranged over economic and geopolitical uncertainty – fruit of the fall in oil prices – and universal access to energy; as well as the challenge of reducing emissions, focus of December’s Paris Climate Conference (COP21).
“We will only be able to cover 12 percent of the predicted production if oil prices continue at less than 30 dollars a barrel,” warned Mariano Marzo, who is Professor of Stratigraphy and Petroleum Geology and Energy Resources at the Faculty of Geology of the University of Barcelona.
“We need to see prices rise to 60 – 70 dollars a barrel if we are to make the necessary investments.”
Marzo cites OPEC policy changes, together with the oversupply of oil at a time of economic weakness, as the root causes of the current situation.
We have seen more than 600 days without a significant price recovery, and eight consecutive trimesters where there has been oversupply, says Marzo. The mid-term outlook points to little change, with oil price recovery looking “slow.”
Marzo also cited the International Energy Agency report which forecasts that a price increase to 60 dollars won’t happen in the next 10 years. He calls for structural changes to create a new system of economic price analysis.
And he’s not alone.
“It’s time for the industry to stop and take stock of how we got into this situation,” said Pedro Miró, CEO and senior vice president of technical operations at CEPSA.
He described the loss of 300,000 jobs as deplorable – and the situation facing the industry a “trilemma” with the need to maintain dividend, credit rating and its reserve basis.
He also predicts that the oversupply of all types of oil products will continue into the foreseeable future – a situation which could generate “serious short and medium term problems” in corporate balance sheets.
Juan Sancho Rof, vice chair of Tecnicas Reunidas’ board, believes that low prices could lead to a tax on consumption, which in turn could be used to finance research on climate change. “Part of the funding for this initiative will come from oil itself,” he said.
Research and innovation are the only way to reach targets in carbon emissions reduction, and keep global temperature increases below 2 degrees by the end of the 21st century, as agreed at COP21 in December.
But achieving these goals won’t be easy, says Luis Aires, executive president of BP Spain and Portugal.
“We began with a very intensive mix of combustible fossil fuels. Today some 86 percent of primary demand is met using these types of combustibles – with only 14 percent using hydroelectric, nuclear and renewables.”
Aires believes that the improving energy efficiency is imperative – citing the International Energy Agency’s estimates that improved efficiency could yield a reduction in emissions of as much as 50 percent.
Another way to reduce contamination is to replace carbon with natural gas, says Aires. “A good 35 percent of emissions come from the carbon-intensive production of electricity.” Natural gas, on the other hand, produces 50 percent less carbon than coal and produces the same amount of energy, he maintains.
Jorge Sanz, associate director of Nera Economic Consulting, points to recent studies from the European Environment Agency which put the price of CO2 at between 20 and 30 US dollars per ton. “In the current system, though, we’re looking at 7 dollars.”
He puts this down to the current design of the emissions market; a market he describes as “extremely sensitive to the economic cycle and to price, which is set by the people making decisions about quantity.”
Sanz calls for a move towards a policy on imposing taxes on emissions.
“We could start with a tax on electricity production and the use of hydrocarbons and gas, which emit CO2, SOX, NOX – gases that damage the environment and which can be quantified,” he says.
This would mean that consumers decide which type of energy to use, knowing that if they opt for energy with higher levels of contamination, they will be liable to pay tax on their energy bill.
“At present, the financial contribution from countries signed up to the new climate governance agreed in Paris are such that the 2 degrees goal is looking unattainable,” says Valvanera Ulargui, general manager of the Spanish Office for Climate Change.
“The cost of a 40 percent emission reduction by 2030, fixed by the E.U., is very high – which is why it’s essential to adopt measures now.”
In its last General Assembly, the U.N. stressed the need to “guarantee access to attainable, safe, sustainable and modern energy for all.”
However, the reality is that today one in five people do not have access to electricity and that 3.000 million people rely on traditional biomass for cooking and heating.
Carmen Becerril, board member at Acciona, calls for public authorities to recognize universal access to energy as a top priority.
She also insists on the need to create adequate conditions so that private initiatives can “develop business models that allow for a sustainable supply of electricity to those most in need.”