Energy Transition Brings New Challenges for New Petroleum Producers

At last week’s annual meeting of the New Petroleum Producers Discussion Group in Uganda, participants buzzed with the kind of enthusiasm that has come to typify the project. The event – co-organized by Chatham House, NRGI and the Commonwealth Secretariat and hosted this year by the
Ugandan government – gathered officials from 23 countries to share approaches to developing regulatory capacity, managing relationships with oil companies, communicating with citizens, and many other challenges they face in their emerging oil sectors.
 
This year’s discussions, however, brought a heightened focus on an emerging issue facing new producers: the impact of the global energy transition on their pursuit of long-term economic benefits from oil and gas production. The uncertainties surrounding transition permeated the week-long series of events, including a dedicated training session on navigating emerging risks in the sector, a plenary discussion examining various market scenarios and a discussion of the intersection between Uganda’s oil ambitions and climate commitments as part of a “national seminar” organized by the host government.
 

Photo by Matt Grace for NRGI

For years, the governments and citizens of prospective petroleum producers have placed huge expectations on the sector’s potential to transform their economies through a range of mechanisms: fiscal revenues to the treasury, a proliferation of local jobs, the provision of energy to fuel industrialization. These expectations have often been exaggerated, and strategies for managing them and for prioritizing amidst scarce resources has been a recurring theme of the discussion group.
 
The energy transition introduces a new dynamic. Expert opinion varies widely on how quickly the world will transition away from fossil fuels to the kinds of cleaner energy sources necessary to meet global climate goals. The prospect of a sustained long-term decline in fossil fuel demand carries with it the possibility that some oil and gas projects that would have otherwise been viable may become “stranded.” For prospective producer countries, this possibility puts further strain on what were in some cases already over-burdened expectations for the sector’s impact.
 
Of course, the transition may not happen rapidly, or systematically, and most of the representatives at the meeting exhibited confidence that the projects already on their horizons would proceed. Still, the sheer uncertainty around the trajectory of transition prompted various reflections over the course of the week about how their policies may evolve to manage risk:
 

• Managing the cost curve. Several speakers pointed to the likelihood that the projects most likely to be stranded as energy transition proceeds are the most expensive ones. New producer countries face a natural disadvantage in this regard, in that oil and gas deposits in frontier areas are more costly to develop than projects in countries with a long history of production. The ability of governments to influence where they sit on the cost curve is therefore limited by geology. Nonetheless, these governments can take steps to reduce the costs of production – including by increasing regulatory efficiency and reducing the tax burden on production. New producer governments are seeking to develop attractive fiscal and licensing approaches that would attract investors in a more constrained investment environment. Assessing where these steps are justified by opportunity – versus where they represent a harmful “race to the bottom” that risks depriving citizens of meaningful benefits – is one of the looming challenges for governments.
• Investment decisions for national oil companies. Many new producer governments have in the past expressed broad ambitions for their national oil companies (NOCs) to grow into major players with a wide range of commercial interests, including in exploration and production. As the uncertainties around energy transition grow, participants discussed whether a shorter time horizon for generating returns in oil and gas should impact decisions about NOCs’ exploration spending or aspirations to dramatically expand operational capabilities. In line with the diverse nature of countries represented in the group, there was no consensus among participants on this issue. Some contended that their governments should still prioritize growing NOC control of the sector, while others suggested that NOCs’ analyses of investment risks should perhaps evolve to account for changing market dynamics.
• An evolving approach to local content. Previous new producers discussion group meetings have focused heavily on “local content” – the development of jobs, technology transfer and opportunities for local companies associated with the sector. And local content remained a very salient topic at this year’s meetings, but the energy transition is beginning to impact the way that some participants are thinking about their local content priorities. Conversations emphasized the need to adapt a local content strategy to the evolving energy sector, both domestically and globally, to avoid the risk of a country building capacity in jobs or business models that quickly become outmoded. This is easier said than done, of course, and future discussions will turn with more specifics on how to tailor strategies to markets that are evolving so unpredictably.

 
The challenges facing new producers have always been complex, and the uncertain future of the global oil and gas market further complicates things. No participants at the meeting proposed scrapping their plans or dramatically altering their approach to the oil and gas sector. But the discussion provided an opportunity for a nuanced and detailed sharing of perspectives as governments seek to manage risk.
 
 
Patrick Heller is an advisor at the Natural Resource Governance Institute.