Insufficient upstream investment in the past few years has led to a sharp decline in production capacity, further tightening the supply side, and in the foreseeable future, a new round of oil and gas investment peak has come again.
The latest survey report released by the International Monetary Fund (IMF) recently pointed out that due to the energy supply crisis caused by the COVID-19 pandemic and the conflict between Russia and Ukraine, countries’ public finances have reached a new level of financial support for fossil fuels. Through the setting of energy price caps, the abolition of fuel excise tax and other measures, the oil and gas coal industry boom.
At the same time, upstream exploration and development investment has rebounded, driven by increased returns and demand, amid surging commodity prices such as oil and gas. The industry believes that the lack of upstream investment in the past few years has led to a sharp decline in production capacity, and the supply side has been further tightened, and a new round of oil and gas investment peak has come again in the foreseeable future.
Fossil fuel subsidies are rising, not falling
Globally, fossil fuel subsidies and agricultural subsidies total $12 trillion a year, according to the latest World Bank statistics.
The IMF noted that global fossil fuel subsidies soared to a record $7 trillion last year, equivalent to $13 million flowing into the fossil fuel industry every minute. By region, Asia and the Pacific accounted for nearly half of the global subsidy total. By industry, refined oil subsidies accounted for half of last year’s subsidies, coal accounted for 30%, and natural gas accounted for 20%. Coal is particularly heavily subsidized in the economies with the largest fossil fuel subsidies.
It is worth noting that the total amount of fossil fuel subsidies in Asia, Europe and the United States last year was equivalent to 7.1% of global GDP, more than countries spend on education each year (about 4.3% of global GDP), and less than countries spend on health care each year (about 10.9% of global GDP), but equivalent to two-thirds of health care spending.
As early as the first quarter of this year, the International Energy Agency made clear that global subsidies for gas and electricity consumption more than doubled last year compared with 2021, and oil subsidies increased by about 85 percent, with these subsidies concentrated in emerging market and developing economies, more than half of which come from fossil fuel exporting countries.
Coincidentally, the International Institute for Sustainable Development recently made a similar assessment, last year, the Group of 20 (G20) fossil fuel industry total public funding reached 1.4 trillion US dollars, of which 1 trillion US dollars for various subsidies, G20 carbon emissions accounted for 80% of the world’s total carbon emissions.
While countries have been promising to phase out subsidies to ensure fossil fuel prices reflect their true environmental costs, little has been achieved so far.
Ipak Gensu, subsidy expert at the British think tank Overseas Development Institute, bluntly said: “While the climate change crisis is getting worse, countries are still pouring fuel on the fire and constantly ‘subsidize’ fossil fuels. Countries must show the utmost sincerity if the tragic and irreversible consequences of the climate crisis are to be avoided.”
Reforming oil and gas subsidies is tricky
Ian Parry, the IMF’s chief environmental fiscal policy expert, said cutting fossil fuel subsidies needed to be at the heart of efforts in the coming years. “Ideally, this could be done through carbon pricing, and this revenue should be used to compensate poor and vulnerable households.”
However, with a slow economic recovery and high inflation, removing fossil fuel subsidies remains a bit tricky for most countries. Last year, Guyana abolished excise taxes on diesel and gasoline; Peru has included some transport fuels in the national Fuel Price Stabilization Fund to curb price increases; Thailand has capped diesel prices at 30 baht per liter (about $0.85 per liter).
In Europe, where the energy crisis is most acute, the European Union has capped gas prices. Belgium also handed out €57 million in subsidies to households struggling to pay gas and electricity bills, while Germany introduced a one-off €300 energy tax break and a three-month fuel tax break.
In Asia, India’s subsidies are worth exploring. India’s subsidies for coal, gas and oil have fallen by 74 per cent, according to the International Institute for Sustainable Development, but in absolute terms fiscal funding remains heavily skewed towards fossil fuels, with subsidies more than four times larger than those for renewables and electric vehicles combined.
The Guardian pointed out that ending fossil fuel subsidies is one of the core of climate action.
The IMF survey found that fossil fuel subsidies in 170 economies around the world are mainly divided into explicit and implicit subsidies, of which explicit subsidies have tripled in the past two years, from $0.5 trillion in 2020 to $1.5 trillion in 2022, while implicit subsidies, accounting for 80% of the total subsidies, are the main force supporting the development of fossil fuel industry. Implicit subsidies are expected to continue to grow significantly in emerging economies and developing countries for some time to come.
The IMF estimates that eliminating fossil fuel subsidies would raise $4.4tn a year in revenue, some of which could be used to compensate vulnerable households affected by higher energy prices, while the rest could be used to cut taxes on work and investment and fund public goods such as education, healthcare and clean energy.
Ian Parry stressed the need for countries to clearly and carefully design, communicate and implement subsidy reforms as a key component of a comprehensive energy policy package. “Although there are difficulties, it still needs to move forward as soon as possible, suggesting that big emitters coordinate and cooperate on carbon pricing or similar policies.”
The rebound in upstream development investment accelerated
Reflecting the upswing of the fossil fuel industry, in addition to the subsidy mechanism, there is a significant increase in the scale of investment. The oil and gas industry is rapidly rebounding after nearly a decade of underinvestment, with the number of large oil and gas projects increasing by 25% since 2020 and there are now 70 large projects under development globally, Goldman notes.
The decline in investment has led to a sharp decline in the availability of future energy resources and the life of developed oil and gas fields, putting the security of energy supply at risk in the context of soaring energy prices and widening supply gaps caused by the COVID-19 pandemic and geopolitical conflicts. Goldman Sachs forecasts that oil and gas capex will grow by an average of about 10 per cent a year over the next five years, a fairly healthy growth rate that indirectly reflects a significant imbalance between energy supply and demand.
“Since 2014, the availability of energy resources has fallen by nearly half as producers have invested less in exploration. The less exploration is invested, the less future supply is locked in.” Said Michelle de la Vigna, head of natural resources research for the Middle East and Africa at Goldman Sachs.
According to the latest forecast of the energy consulting firm, oil and gas exploration investment this year is expected to hit a new high since 2019, reaching $50 billion. However, while investment has rebounded, the amount of resources discovered is not promising. The company’s survey found that 2.6 billion barrels of oil equivalent were discovered worldwide in the first half of this year, down 42 percent from 4.5 billion barrels in the same period last year.
“The Energy transition target will not be enough to stop the recovery of oil and gas investment, and unless such investment is banned, the oil and gas industry will continue to strive for high returns and security of energy supply.” Carol Nahler, CEO of Energy consulting firm Crystol Energy, said.