Insight Conversation: Carole Nakhle, Crystol Energy

Carole Nakhle, CEO of independent consultancy Crystol Energy and founder of Access for Women in Energy, spoke to Paul Hickin about energy transitions and shifting oil and gas politics.

How do you see the energy mix changing in the next decade?

The global energy mix is unlikely to look much different from today. The lion’s share will continue to be provided by fossil fuels – that is coal, oil and natural gas, accounting for more than 85%. The rest will come from energy that does not emit CO2, with an increasing contribution from modern renewable energy – solar and wind.

Often, we hear about the impressive double-digit growth rates of renewable energy, suggesting – wrongly, in my view – that the world’s energy mix will change drastically in the next few years. This is surely a noble aspiration, but a degree of realism will have to prevail once the numbers are put into perspective.

Renewable energy is starting from a very low base. The current share stands at just under 12%, according to the IEA. However, in this account the majority comes from the oldest forms of renewable energy, such as biomass and hydropower.

Biomass is usually poor people burning wood or dung. It is neither new nor green nor healthy. And hydropower’s contribution alone is more than 7%, but its growth is constrained by nature, meaning the availability of rivers, and many doubt the wisdom of expanding it further, given the often detrimental impact on the ecosystem.

History and experience show how transitioning from the dominance of one fuel to another is a complicated and lengthy process. Coal, for instance, replaced traditional biofuels, fueled the Industrial Revolution and dominated the world energy mix for decades. It took oil more than half a century to crowd out coal.

Next, gas came into the picture along with other energy sources. However, despite coal’s bad reputation – it is the largest emitter of CO2 from of all the fossil fuels – today it still contributes nearly 28% of the world energy mix.

In the developing world, where the use of widely available and cheap coal is considered essential to support economic growth and lift billions of people out of poverty, its share is even higher, at 36%. Clearly, economic priorities continue to take precedence over environmental concerns.

So, if we are to see notable changes in our energy mix, we need to look beyond the next couple of decades.

Where do you stand on the question of peak oil and electric vehicles, and the longevity of fossil fuels?

Within a decade we have moved from discussing peak oil supply to talking about peak oil demand. The former was proven wrong, the latter is yet to happen. Eventually, it will happen, but the big question is when – this is anyone’s guess. Just look at the divergence in forecasts between various agencies.

Even if and when peak oil demand finally happens, it doesn’t mean a sudden collapse in the demand for oil. The example of coal is a good illustration – the share of coal in the global energy mix peaked around the early decades of last century, yet coal remains ingrained in modern economies.

Of course, the deployment of electric vehicles will dent demand for oil. After all, oil’s dominance in the transport sector remains unchallenged. Despite suffering a long-term decline in total energy market share since its peak in 1973, oil has expanded its share in the transport market. How significant that dent will be, however, remains doubtful.

Although sales of EVs have boomed in the last few years, they remain very small compared to the conventional car fleet: we are literally comparing a few millions with billions. Also, the transport sector is not just cars: it also covers air, water and other means of land transport.

Improvements in the efficiency of the conventional internal combustion engine are likely to cause a bigger dent in oil demand than EVs. And, of course, there is an additional dimension that is not that often discussed: government finances. One of the attractions of the petrol-based internal combustion engine is the fuel tax, a long-established tradition, especially in the developed world. In the UK, fuel duties alone represent about 4% of total government tax receipts.

Also, think of the revenues generated for host governments from oil and gas companies operating in their countries. Annual taxes collected in some countries run into multiple billions of US dollars. Almost no other commodity, industrial or service sector component can offer sustained tax revenues on this scale. Ending the oil and gas age will leave a sizable hole in many governments’ budgets, in consumer and producer countries. Greener alternatives are unlikely to fill the gap.

What does the US’ dominant role in oil and gas mean for oil and gas markets?

The US has long been a major oil and gas producer. This is where, more than a century ago, business started for some of the oil and gas companies which are still the largest today. However, from the mid 1970s up until the end of the last decade, oil production seemed to be in relentless decline.

With the US being the largest oil consumer in the world, this translated into an increasing dependence on imports, often from countries perceived to be hostile to the US. That created a feeling of vulnerability, and achieving self-sufficiency became a top priority for every American president for decades. The shale revolution made that aspiration a reality. Not only did it reverse the declining trend of oil and gas production – but the trend reversed for production to reach record levels.

More importantly, the US has gradually moved from an importer to an oil and gas exporter. Today, the US is challenging major producers, the likes of Saudi Arabia and Russia, for global market share. It has created strong competition in key large and growing markets like Asia, once considered a “safe haven” for the traditional exporters.

Then there is the impact on prices, be this in natural gas markets, mainly for LNG, with clear repercussions for the bargaining power of producers and consumers, or be it in oil markets.

As an example for the impact on natural gas markets, think of the relationship between Russia and Europe. It is true that Russian gas imports to Europe increased last year but this came at the expense of discounted prices that Russian companies offered to European customers.

In the global oil market, the price collapse in the summer of 2014 is a major manifestation – US tight oil production has successfully placed a lid on the global price of oil, despite the relentless efforts of the biggest producer alliance in the history of the oil industry, the so-called OPEC+, to counter the effect and to put upward pressure on prices.

And of course, there are wider repercussions on the geopolitical front, with the US clearly feeling more empowered now than as an energy importer.

How do you see the OPEC-Russia pact evolving longer term? Will OPEC stay relevant?

The OPEC+ alliance, formed in 2016 and led by Saudi Arabia and Russia, came to existence out of common interest: the challenge that US tight oil imposed was so big that OPEC on its own could not achieve much.

For many traditional OPEC members, their dependence on oil revenues was such that they could not sustain the lower oil prices resulting from the new market conditions, for any prolonged period. For many non-OPEC producers, in particular for Russia, the benefit from an alliance with OPEC became clear in 2014, when Russia was hit by a double whammy – first, sanctions imposed by Western governments in retaliation for Russia’s annexation of Crimea; second, the oil price collapse. Russia’s economy is more diversified than that of Saudi Arabia, but it still relies on oil revenues.

The stated aim of OPEC+ is to “rebalance” the market in a way that benefits its countries. In other words, the alliance wanted to achieve a market balance at a higher oil price than what the system would have generated by itself, if left to market forces and prices. In this respect, they have successfully managed to put a floor on the oil price.

However, US tight oil is a difficult adversary. Whenever, in the recent past, prices went above a certain threshold, more production came out of the US, putting downward pressure on prices. Unlike conventional oil, tight oil responds fast to changes in prices, thereby limiting the influence of traditional powers like OPEC over the market. A conventional oil project might take seven to 10 years to convert investment into production. For tight oil projects, the timeframe has now shrunk to months, making it more sensitive to price changes.

As a result, despite daily volatility, oil prices currently tend to remain in a well-defined corridor, averaging between $60-80 per barrel – whereby the upper limit is set by tight oil and the lower by OPEC+.

The challenge of plentiful and flexible oil supplies has been so large that OPEC+ has held together for longer than many expected. In the immediate future, it is unlikely that the alliance will dissolve, especially as long as it makes sense for its main architects – Saudi Arabia and Russia – despite growing frustration among the smaller OPEC producers with respect to those two big players’ dominance of the alliance’s strategy.

How do you see the dynamic between the big three in oil markets – Saudi Arabia, Russia and the US – playing out in the next couple of years? Could this come at a cost to OPEC itself?

We are talking here about the three biggest producers, two of them in an alliance of convenience. Competition between the three producers for global oil market share will intensify. The US, for instance, though not the lowest cost producer, has been expanding its global market share while that of Saudi Arabia has not changed much since 2014, given production constraints imposed by OPEC+.

On a more regional level, competition is mostly visible in Asia, which is expected to be the world’s main growth center for oil demand, at least in the coming two decades, given its population and economic growth.

That said, oil is a fungible commodity traded in a global market, therefore looking at regional market shares may not be good enough. For instance, US refineries have a historical legacy – they are configured to take relatively heavy crude from the Middle East while lighter tight oil is often sent to refineries outside the US.

In Russia, many oil and gas companies have been rather frustrated by the OPEC+ alliance, as it has restricted them from freely expanding their potential. Russia’s tax code benefits volume over price increase for exported crude oil, and consequently Russian oil exporting companies tend to favor high volumes to speed up payback for investments carried out in the past. So far, their discontent has not resulted in a significant impact, but this may well change.

With respect to OPEC’s longevity, two things are worth mentioning. In the short term, in addition to various market risks and economic challenges, OPEC is facing the risk of the No Oil Producing and Exporting Cartels, or NOPEC, bill which is being pushed by US Senator Chuck Grassley. If passed, the legislation would allow the US attorney general to sue OPEC for price manipulation under the Sherman Antitrust Act.

Note that this is not the first time that such a bill has been introduced in the US Congress but it never passed – both Presidents George W. Bush and Barack Obama threatened to veto it. This time, however, OPEC seems to be more concerned, especially given President Donald Trump’s hostile tweets toward the organization, which he has called a monopoly. Whether he will endorse the NOPEC bill remains to be seen.

In the longer term, however, OPEC’s influence may well increase just when it loses its appeal. After all, in such a scenario, the oil price is likely to be low, and the low-cost producers will be the last to leave the market. As a low cost producer, it is easier to defend the oil price from going from, say, $30 to $5 per barrel, than from $100 to $50, especially if competition in the higher price range is substantial, because of shale oil. But this is subject to them maintaining their commitment to the longevity of the organization and their ability to diversify their economies.

Since you set up Access for Women in Energy in 2007, how has the energy industry changed for female participation? What needs to change and is it happening?

At AccessWIE, we offer an equal platform for female and male energy experts and we focus on showcasing women’s expertise in timely energy matters.

Over the last 10 years, there has been an increasing trend towards women’s empowerment and promoting their participation in the labor force and across various sectors of the economy. Initiatives are mushrooming around the world, within the private and public sector alike, supported by dedicated international organizations and governments passing legislation to support women’s participation and achieve a healthy and balanced society.

The list of benefits from such an essential aim is non-exhaustive. But a lot remains to be done in this area given that we are starting from a very low base, particularly in the energy sector where women’s participation is meagre, especially at the senior level. The oil and gas industry remains a big boys’ club. Just think of OPEC and its male-dominated gatherings! Among the oil majors, probably no more than two companies have had a female CEO, although some of these companies are more than 100 years old. The presence of females on these companies’ boards is equally scanty.

The oil field service providers and national oil companies are not any different. Very few oil and gas producing countries have ever had a female energy or oil minister, or a female head of the national oil company. When questioned, several reasons are given but none of them are convincing.

Practices among companies and governments are gradually changing but at a varying speed. International oil companies and national oil companies have started programs to support the development of women in their organizations. This is a move in the right direction. However, no matter how noble women’s empowerment initiatives are, it is important to promote systems that are based on merit and not on gender alone.

 

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