NRGI: State oil firms could waste $400 billion as energy shift accelerates

State-owned oil companies could waste around $400 billion on investments in the next decade on new oil projects that will struggle to turn a profit as the world shifts away from fossil fuels, NRGI said in its latest research.

The Natural Resource Governance Institute (NRGI) said on Tuesday that one-fifth of anticipated investments in the oil and gas sector by state-owned oil companies was economically unviable if global warming is to be kept within 2 degrees Celsius. 

NRGI added that, with the United States rejoining the global coalition to meet the objectives of the Paris climate agreement, oil producers face a moment of reckoning.

Research published today by the Institute claims that state-owned national oil companies—many in developing countries—are on a trajectory to spend billions on oil and gas projects that will only break even if the world fails to meet the Paris goals.

While the climate approaches of multinational oil firms like BP and ExxonMobil are routinely scrutinized, this is the first report quantifying the incompatibility of NOCs’ investment plans with the Paris agreement.

NOCs produce half of the world’s oil and gas and are responsible for 40 per cent of the capital invested in the industry worldwide. Using market data, NRGI’s report, Risky Bet: National Oil Companies in the Energy Transition, estimates that NOCs could invest about $1.9 trillion in the next ten years.

Of this, about one fifth, or $400 billion, would not result in a profit if the energy transition proceeds in line with current climate commitments. NRGI believes that this figure would climb even higher if widespread carbon capture and storage technologies are not deployed.

Patrick Heller, an NRGI advisor and one of the report’s co-authors, said: “A huge amount of state investments in oil projects will likely only yield returns if global oil consumption is so high that the world exceeds its carbon emission targets.

“This risky spending has major implications for the economic futures of national oil companies’ home countries. State-owned oil companies in developing and emerging countries including Algeria, Mexico, and Nigeria might collectively invest more than $365 billion in such high-cost projects—expenditures that could instead help alleviate poverty or diversify their oil-dependent economies”.

As an example, the researchers highlight the Nigeria National Petroleum Corporation. Almost half of the Nigerian NOC’s upcoming oil project spending—an amount that exceeds the government’s expenditures on education and health care—may fail to break even if the world makes rapid progress toward climate goals.

Similarly, Colombia’s Ecopetrol could invest the equivalent of a fifth of its government’s total expenditures into oil and gas projects that will break even only if the world fails to meet its climate commitments.

David Manley, NRGI senior economic analyst and report co-author, added: “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”.

NRGI’s report also notes that the governments of countries including Algeria, Angola, and Azerbaijan are making particularly risky bets with public money.

“National oil companies will have a major influence on the success of the push for a managed decline in fossil fuel production worldwide. Authorities in many producing countries risk pushing ahead with new investment regardless of what is economically and ecologically feasible, and the outcomes could be dire. If international oil companies and private investors make good on their stated ambitions to move away from hydrocarbons, state actors may be even more tempted to step in and fill the gap in oil production”, Heller stated.

The Risky Bet report is accompanied by a briefing that details the specific challenges facing NOCs in the Middle East and North Africa – also known as the MENA region.

Researchers found that while some MENA NOCs have access to large, cheaply developed reserves that will help them withstand a long-term decline, others face uncertainty in maintaining the production on which their economies have come to depend.

NRGI suggests in the briefing that NOCs and their governments across the region should adapt their strategies, become more efficient and accountable to citizens, and adopt fiscal practices that lead to economic resilience in a low-carbon future.