I have just returned from France where I participated in the spring meeting of the Paris Energy Club to brainstorm on the following:
• The future of transportation fuels;
• The changing geopolitics of energy;
• Current energy-related issues.
As usual, the Club’s social evening, which was sponsored by IFP Energy Nouvelles, included a taste of Paris’ cultural and culinary distinctions.
The following three points constitute my personal take of the Club’s full-day discussion, which was conducted under Chatham House rule of non-attribution.
First, the transportation sector – across all transport modes – remains largely dominated by oil with road vehicles continuing to be powered almost exclusively by internal-combustion engines (ICEs) that are fuelled by petroleum products. However, we realized that signs of changes are ubiquitous – from continuing improvement in fleet-wide fuel economy, to alternative fuels, to rapidly evolving technology for electric cars. In the latter field, while long-range electric vehicles and plug-in hybrids remain very much in play, the smart car market is growing rapidly, with the extraordinary emergence of Tesla having the most serious impact on traditional automotive. Progress is expected to be even more spectacular when looking at the way digital technologies will drive mobility in the future. Our attention was invited to the fact that there are already examples of innovation such as the one supported by the so-called GAFA (Google, Apple, Facebook, Amazon) that are making their mark on the way people travel, particularly in urban cities. Despite the huge uncertainties associated with disruptive technologies and innovation industries, the potential threat to oil is real and could be far-reaching.
Second, a new geopolitics of energy has emerged in the wake of the dramatic shift in energy investment and trade of recent years with a consequent reshaping of international politics. We first discussed, but passed over undecided, the question of whether or not OPEC (and Saudi Arabia) can regain their role as global swing producers in face of shale oil’s incremental economics, lean structure and flexible business model. As we shifted focus to the complex dynamics in Eurasia, we noted how, “East of Baku”, China and Russia are calling the shots and wondered what the Western world could do to balance Beijing and Moscow, hopefully through win-win propositions to reduce geopolitical tensions. We further took note of President Xi’s “One Belt One Road” strategy – probably one of China’s most important foreign policy initiatives – and its declared ambition of contributing to the development of China and the rest of the world in the areas of energy, trade and culture. The energy security implications of the initiative (the energy connectivity along both the Silk Road Economic Belt One and the 21 century Maritime Silk Road call for major investments in energy infrastructure), could lead to a more assertive role of China in global energy security.
Third, in discussing current and upcoming issues, we focused on how Big Oil is coping with the price collapse and what is at stake at the Paris December climate summit. In past depressed oil market environments, IOCs bought their way out of trouble through mergers. Until recently this was considered unlikely to happen again on the ground that the last such mergers – at the end of the 1990s and early 2000s – failed to create new opportunities for long-term growth. But Shell’s just-announced acquisition of BG has come as no surprise to the better informed. In any case, this is the most significant response yet to the oil price collapse and could set in motion a series of other mergers as IOCs seek to keep paying dividends they may no longer afford. Indeed, reducing capital investment, embarking on a new round of cost-cutting, and either turn to the debt market or sell assets, are all measures that are no longer sufficient. Finally, as little time was left to discuss what to expect from the upcoming climate summit, we concluded that a lasting agreement will predictably hinge on whatever direction the US and China would have agreed. Therefore, any such an agreement is likely to be weak. We also expected that a no-deal scenario could have serious consequences for investment in renewables and low-carbon energy technologies.