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December 1, 2023

Petrostates set to lose over half their oil revenues from energy transition

Oil exploration platform rig
The Carbon Tracker report argues that the international community will have to step up in order to financially assist some petrostates with the energy transition (Photo: Ding Jianzhou/Imaginechina via Bloomberg News)

Petrostates whose revenue is dependent on oil and gas must diversify their economies, Carbon Tracker warns, as leaders at COP28 are being urged by certain countries, progressive businesses and civil society to agree a phase-out of fossil fuels

Environmental think-tank Carbon Tracker has identified 40 petrostates, 28 of which are set to lose more than half of their projected revenue streams from oil and gas following a moderately paced energy transition. 

In its “Petrostates of decline” report, Carbon Tracker found that of these 40 states, 17 are set to lose more than 40 per cent of their total government income. These countries, many of which are developing, must diversify their economies away from fossil fuels, the report warns.

“One of the trends we noticed was that several African countries have moved into high vulnerability tiers compared with our last report. And this is particularly concerning, given that many of these are facing developmental challenges,” report author Guy Prince told Sustainable Views.

Researchers identified nine highly vulnerable petrostates with more than 60 per cent of their total fiscal budget at risk from a decline in hydrocarbon demand, this includes Nigeria, the Republic of the Congo and Gabon. In the International Energy Agency’s “Net zero by 2050” scenario, fossil fuels must fall from almost four-fifths of total energy supply today to slightly above one-fifth by 2050.

Russia’s war with Ukraine and its impact on energy security accelerated the adoption of renewables in the EU and G7, Carbon Tracker says. According to the IEA’s “World energy outlook”, global oil and gas demand will peak ahead of 2030, while coal demand peaked in 2007. “No producer is safe from declining demand for oil and gas,” Carbon Tracker argues.

“Under a net zero scenario where oil demand steeply drops and prices reduce to cover the marginal cost of production, oil-exporting regions, and those with high oil rents, are likely to face declining revenues,” Bloomberg New Energy Finance oil analyst Claudio Lubis told Sustainable Views.

International transition support

Prince said the international community will have to step up in order to financially assist certain countries with the transition. “I’m sure it will be discussed at COP28, and it definitely should because access to capital is one of the main hurdles,” he said.

Fossil fuel phase-out will be a key point of contention at this month’s climate conference being hosted by the United Arab Emirates, which was identified as a petrostate in Carbon Tracker’s report. The conference is being led by the chief executive of the state-run Abu Dhabi National Oil Company, Sultan al-Jaber, whose potential conflicts of interest has been under scrutiny ahead of the talks. 

His suitability was further disputed in November, when the BBC and the Centre for Climate Reporting published a joint investigation alleging that Jaber had been using private meetings about the conference to discuss oil and gas deals with foreign government officials. Speaking at a press conference on November 29, Jaber said the accusations, which are based on leaked briefing documents, “are false, not true, incorrect, and not accurate”.

The UN’s “Production gap report”, published in November, found that fossil fuel producers are planning expansions that would result in 460 per cent more coal production, 83 per cent more gas, and 29 per cent more oil production in 2030 than needed to keep the global temperature rise to 1.5C. 

“Governments are literally doubling down on fossil fuel production; that spells double trouble for people and planet,” said UN secretary-general António Guterres in a statement on the report. “COP28 must send a clear signal that the fossil fuel age is out of gas — that its end is inevitable.”

Indebtedness increases

Carbon Tracker said petrostates are not only becoming increasingly fiscally reliant on oil and gas, they are also seeing rising national debt. “Petrostates have tended to borrow both when the oil price is high because their credit ratings rise and hence make cheaper finance available, and when it is low, in order to fill their resulting fiscal gaps,” the report states.

“High levels of debt mean that transitioning away from oil and gas is going to be more of a challenge because they have less capacity to diversify their economy,” said Prince, emphasising the role of richer nations in assisting with the challenge.

Not only do rich nations have a responsibility to assist developing countries due to their wealth, a report published in November by Carbon Brief suggests that former colonising countries have a historical responsibility for these developing nations’ emissions. Researchers found that when colonial rule is taken into account, the historical emissions responsibility of the EU and the UK rises by nearly a third.

As well as diversifying their economies more broadly, petrostates must, and can, also scale up renewable energy, said Prince. Many of the African countries identified by Carbon Tracker received sunlight 60 per cent above global averages, the report states.

“With the right investments and based on their renewable energy potential, these countries could also become key producers of new green commodities like hydrogen and new generation biofuels,” said Lubis.

Research published by the World Bank in October found that the Republic of the Congo could reduce poverty in rural areas by 40 per cent and in urban areas by 20 per cent by 2050 if more ambitious steps are taken to diversify the country’s economy and promote climate resilience. Economic losses could reach 17 per cent of GDP if the economy is not diversified, according to the World Bank.

“The imperative to diversify away from fossil fuels is widely accepted … The costs of not doing so … have been painfully clear for a while,” World Bank practice manager Sandeep Mahajan told Sustainable Views.

“Our engagement across West Africa … is complemented by support for reforms that seek to strengthen macroeconomic management, improve the regulatory conditions for private investment, and boost trade integration,” he said.

A service from the Financial Times