Global oil and gas sector has another 20 years as a safe window of viability

Dear Editor,

In a previous letter, I promised to expose what might be the perceived modus operandi of the Institute for Energy Economics and Financial Analysis (IEEFA). Readers who are following the oil and gas debate in Guyana would recall that Tom Sanzillo would have pronounced without being privy to any facts and an understanding of Guyana’s development contexts altogether – that the project is a recipe for bankruptcy. On January 10, 2021, I prepared a detailed response to Tom’s analysis which was sent to the IEEFA directly inviting Tom to an open debate.

In my response to Tom, the analyses put forward essentially concluded that Tom Sanzillo and the IEEFA seem to have lacked the capacity to conduct any credibly sound and robust analysis on the Guyana case study; and any sort of reasonable comprehension of the ‘country context’ from the many different dimensions – some of which were alluded to herein. Palpably, there are many variables omitted and/or ignored from the analyses with respect to Guyana’s macroeconomic framework, the development trajectory, the political economy, investors’ confidence and Guyana’s capability on these fronts. The analyses by the institute, therefore, are undoubtedly weak.

Now let’s do some digging to find out who really is the IEEFA and who funds them. By doing so, knowing who they are and who funds them will give crucial insight into the Institute’s agenda and whether it has the ability to conduct any objective analysis.

Based on information on the IEEFA’s website, the Institute’s mission is to “examine issues related to energy market trends, and policies. The Institute’s mission is to accelerate the transition to a diverse, sustainable and profitable energy economy.” The IEEFA receives its funding from global philanthropic organizations and individuals such as Rockefeller Family Fund, and KR Foundation, to name a few.

Upon examining the mission of the funding organizations, their mission is essentially driven by advocacy work and campaigns to keep fossils in the ground. The position of the IEEFA, therefore, can be logically and partly explained by the fact that the financiers of the IEEFA are institutions whose missions are to keep fossils in the ground. While nothing is wrong with this, it would appear however, that it doesn’t matter whether the analyses put forward make sense or not or have any substance or not – ignoring context, practicality and realism altogether.

This is not to say that the global movement to transition to alternative sources of energy is a bad thing neither am I denying this phenomenon owing to the global impact of climate change. In fact, Guyana is a signatory to both the United Nations Sustainable Development Goals of which part of that goal is to transition to 100% renewable energy, and the Paris Agreement. Notwithstanding, the practicality is such that it will take some years – another 30 – 50 years to achieve these goals especially in the case of Guyana and not just from the global perspective.

To substantiate this view, let’s put this into context – that is, let’s examine an overview of the global energy transition and its potential impact on the future of the global oil and gas industry. The global transportation sector is one of the main drivers of demand for crude over the next 30 – 50 years, and at least 40% of the world’s energy needs will need to be supplied by oil and gas by 2050. Let’s break this down.

Global commercial aircraft

● Global commercial aircraft fleet as at 2020 stood at 29,000

Estimated to grow by 4% annually to reach 39,000 by 2028

Annual production is 1000 It takes 5-6 years on average to build an aircraft in some cases 10 years

If we have to replace all the aircraft in the world it will take 29,000/1000 = 29 years to build and replace plus 10 years to develop electric planes - total number of years to replace all the aircraft globally to electric will be approximately 39 years

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Global number of cars

● As at 2020, this figure is some 1.2 billion cars globally of which 7.2 million are electric cars (6% of global cars are electric)

Global average rate of production for electric cars is 2.1 million which means it will take 57 years to replace all the cars in the world to electric cars

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Global number of trucks/ commercial vehicles

● As of 2020, there are an estimated 425 million of which 27.2 million or 6.4% are electric commercial vehicles

Annual average production rate of electric commercial vehicles is 6000 at which rate it will take 70,833 years to replace all the commercial vehicles in the world to electric. This means that to replace all the commercial vehicles including trucks in the world to greener vehicles in 50 years’ time, manufacturers will have to produce 8.5 million such vehicles annually which is 142,000% greater than current global annual output for such vehicles. This is obviously impractical.

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Global stock of ships

● As of 2019 total world fleet of ships stood at 95, 402

It takes about 18 months to build a ship

Ship orders per year are about 1,000

Therefore, it will take 95 years to replace the world stock of ships to greener ships

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Global Energy Transformation

2050 (29 years from now)

● Oil and gas are still forecast to meet more than 50% of the world’s energy needs by the end of 2040

Renewable energy needs to be scaled up at least six times faster for the world to achieve the goals set out in the Paris Agreement, according to the International Renewable Energy Agency (IRENA, 2018).

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Contextual Summary

● The global transportation sector is one of the main drivers of global demand for crude oil products.

If the world, therefore, stopped extracting crude oil and left all

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● the fossil in the ground tomorrow – then it will take 39 years to replace the global stock of commercial aircraft to electric aircraft; 57 years to replace all the cars in the world; 70,833 years to replace all commercial vehicles both light and heavy which includes trucks or increase global output by 142,000 % to bring down the number of years to 50; and 95 years to replace all the ships in the world.

By 2050, renewable energy can make up 60% of the world’s final energy consumption, provided that renewable energy investments are scaled up by at least six times (IRENA, 2018). Therefore, if the world economy fails to scale up renewables and other alternative sources of energy by six times, it will take more than 100 years for the world economy to transition to at least 60- 70% alternative sources of energy and over the next 100 years to fully transition to 100% clean/alternative sources of energy.

This means that for the next 30 – 100 years, at least 40% of the world’s energy needs might need to be supplied by oil and gas.

In view of the foregoing, it can be safely concluded that the global oil and gas sector has another 20 years as a safe window where the industry is likely to remain commercially viable. After 20-30 years, the industry can become unsustainable – unless oil companies manage to develop such innovative technologies that can lower the cost to produce one barrel of oil to US$15 - US$20 from a current average of US$35. This is not impracticable within 20 years’ time, which, if achieved can extend the industry life to another 20-30 years before the world economy is fully transitioned into 100% renewables/alternative sources of energy.

Yours faithfully,

JC Bhagwandin

Principal Consultant/ Financial Analyst

JB Consultancy & Associates