By Bhamy Shenoy*

The world has already warmed by 1.1^oC over the last 150 years. It will certainly exceed the critical limit of 1.5^oC in the next few years. As a result, the goal set by the nations to achieve net zero by 2050 is highly unlikely.

The agreement of recently held COP28 summit calls on countries to contribute to a transition "away from fossil fuels in energy systems in a just, orderly and equitable manner, accelerating action in this critical decade, so as to achieve net zero by 2050 in keeping with the science".

This will put tremendous pressure on oil industry to reduce the production of oil and gas in coming years. Under these circumstances, what should industry leaders/decision makers do as responsible citizens of the world to promote sustainable development and avoid the existential climate change crisis?

As global temperature rises, there will be intensification of heat waves, downpours, drought and rising seas. But 1.5 C is not a tipping point. With great effort and trillions of dollars it can be reversed. Still there will be irreparable loss of eco systems.

BP had predicted in 2019 that the world oil demand has already peaked. It turned out to be a wrong prediction. IEA's projection in the latest World Energy Outlook is 54.8 mmbd (for Announced Pledges case) in 2050 versus 103 mmbd in 2023 and oil to peak by 2030. In their Stated Policy Case Oil Demand is 97.4 mmbd! and for Net Zero it is 24 mmbd. Can there be greater uncertainty?

It should not come as a surprise that OPEC's oil demand projection for 2045 is 116 mmbd, diametrically different. Oil peak is in the distant for OPEC.

Also, when one looks at mega mergers and investors lapping up oil company stocks, it is as though one should not concern about peak oil. The consulting company Rapidan Energy Group has predicted that it will be a surprise when oil demand fails to peak even by 2030. It further adds that non-OPEC oil production will increase by 700,000 BD each year till 2030.

The announced US mega merger deals in 2023 have exceeded $100 billions - ExxonMobil's deal of $59.5 billion for Pioneer Natural Resources, Chevron's $53 billion takeover of Hess, Permian Resources' $4.5 deal for Earthstone Energy, Occidental purchase of CrownRock for $12 billion, etc.

Two years back, ConocoPhillips bought Shell's West Texas properties for $9.3 billion and Concho Resources for $13.3 billion. Both BP and Shell after announcing their strategy of transiting away from fossil fuels to renewables seem to have second thoughts. However ConocoPhyliips, EXXON, and Chevron never doubted the attractiveness of looking for oil and gas reserves.

It must have baffled the investing community why a shrewd investor like Warren Buffet despite the considerable uncertainty in oil industry is continuing to take interest in Oil companies. His company Berkshire Hathaway owns about $19 billion worth Chevron and about $16 billions of Occidental (28%) which it started buying in the last two years.

With all these uncertainties of how future oil supply/demand will unfold, planning in oil industry has become extremely difficult. Since the beginning of oil era, oil industry has never faced this kind of uncertainty.

IEA has been urging not to invest in any new project to look for oil. On the other hand, if oil demand does not fall the way it is expected to fall to reach net zero by 2050, there is bound to be oil shortage. Under investment in oil sector driven by Net Zero goal, can indeed create chaos if other sources are not ready to fill the energy gap.

Both OPEC+ and several international oil companies do not believe oil demand will fall as discussed earlier. In India where we are far from achieving "minimum" standard of living for all ( not aiming for wasteful consumption of the developed countries, specially of the US), oil demand is bound to increase. This is likely to be the case even after achieving maximum contribution from renewables, and energy efficiency.

Like India, there will be many developing countries whose oil demand is likely grow. In developed countries and China because of faster penetration (unlikely to be fast enough to achieve net zero) of EVs, oil demand may fall. These countries will still face uncertainties in both upstream (production) and downstream (refining and marketing) investments.

Let us take the example of India. Should Indian Oil companies spend money looking for petroleum in India or buy reserves abroad? When developed countries are likely to close down their refineries, should India try to buy such refineries paying very little and transfer them to India? With changing demand for refinery products, what types of refineries are needed?

As electric vehicles replace internal combustion engines, demand for petrol will be reduced or eliminated. But how soon? There will be uncertainty in LPG sector also. Will piped gas replace it? And will piped gas itself be replaced as we transit to non fossil era?

In short, the list of uncertainties in energy sector in general and petroleum in particular is simply mind boggling. Highly unlikely that Artificial Intelligence will be able to come up with the ultimate answer as some pundits may claim. What India needs is a group of experts with expertise in different energy sectors to brainstorm using AI models to do scenario planning. Such an expert group may succeed in developing dynamic investment plans at the earliest to meet India's net zero goal by 2070.

*US-based Energy Expert