Frankly Speaking | S1 E8 | Secretary General of International Energy Forum Joseph McMonigle
Hello, I’m Frank Kane and this is ‘Frankly Speaking,’ the show where we dig deep into the insights of some of the leading policymakers in the region and the world. Today I’m joined via Zoom from Riyadh by Joseph McMonigle, secretary-general of the International Energy Forum, the biggest global organization of energy ministers and a key part of the international dialogue in the vital energy business. Mr. McMonigle, welcome to ‘Frankly Speaking.’ Thanks, Frank, it’s great to be with you. It’s a pleasure to have you.
Let me go straight to the heart of the matter — you are in Saudi Arabia, we’re all in the Middle East; this is the center of the global hydrocarbon industry, but recently and increasingly oil and gas have fallen out of favor with a number of people in the world — with environmentalists, with investors with governments. Some governments are looking to impose restrictions on the use of petrol engines and other environmental emissions. Tell me, frankly speaking, are we in the wrong business? Well, thanks for that. You noted the IEF is in the global energy dialogue business and our agenda covers all the energy sources. Certainly big changes and the energy transition are inevitable, but for me it’s an exciting and fascinating time to be involved in this sector because really new technologies and innovation are what will drive the energy future and help us to achieve our climate goals. But I take the point of your question, and let me just say that we just experienced the worst demand shock in history, losing 10 million barrels a day after the pandemic, but it’s still important to recognize that 90 percent of demand remained intact during the pandemic, which just demonstrates the resiliency of oil and its necessity for the global economy.
And the consensus is that mid and long-term — long-term meaning out to 2040 in the different scenarios — is that hydrocarbons will continue to grow and are still a dominant energy source. So, for example, in 2025, oil demand will be about 104 to 106 million barrels a day. Now, in 2019, as you know and a lot of your viewers know, oil demand was about 100 million barrels a day.
We lost 10 million during the pandemic. In 2021, we think we’ll get it back about 5 to 6 million barrels a day. But in 2040, which is the end of these long-term forecasts, both OPEC and the IEA and others, the consensus is that oil demand will be between 109 and 111 million barrels a day.
Now, as you probably know and many of your listeners and viewers know, the IEA has this sustainable development scenario model that basically models in all of the climate goals and, essentially, that puts 2040 oil demand at 76 million barrels a day. So the gap between sort of current policies and the stated goals is about 35 million barrels a day. So 2040, I think, is even when OPEC admits that oil growth begins to lessen due to the energy transition. But, really, I think the point here is that oil is going to be a dominant energy source for the foreseeable future. So, the IEF doesn’t have a view on peak oil, then, or do you pull together all the other views on peak oil and reach your own kind of independent assessment? What’s your take on when we hit tjemand? Yeah, to tell you the truth, we think there are probably peak investment issues that could lead to a supply problem.
So, in December, we put out a report on what we viewed as the investment crisis with Boston Consulting Group, and essentially what we said was that capex cuts by companies — but also last year by sovereign, you know, state-owned companies — capex cuts last year amounted to 35 percent, and this year they are forecast to be between 20 and 30 percent. Although I will note that the state-owned companies have now started reinvesting in new upstream development and continuing some projects that they had canceled in the middle of the pandemic. But going back to the energy company capex cuts, it’s a big problem. You know, since producing oil and gas, while declining over time, slashing investment in new production locks in this lower total supply.
So it won’t be long before lower supply collides with surging demand and, of course, the result, you know, is higher prices and more volatility, and that’s not good for consumers, the global economy, for governments and even for the energy transition. And so our report estimated that industry needs investment to rise by about 25 percent from 2020 levels for the next three years in order to stave off these higher prices and volatility. I was going to ask you this question later, but I’ll ask it now as it seems appropriate here. Some analysts are talking about the forthcoming ‘super cycle’ in oil prices primarily because of this lack of investment that you describe, and some have suggested an oil price of $100 per barrel. What do you see? What does the IEF think will be the oil price on Dec. 31 at the end of this year? Well, I’m not in the oil price forecasting business.
I will say that I think prices where they are currently are not really ahead of fundamentals. I mean, maybe there is some reflation trade, you know, certainly there is some optimism about the vaccine rollout and some generating demand that might happen. But I’ll just say this, in terms of prices and demand, if we’re in a full recovery at the end of the year from the pandemic, I think you’re going to see demand be stronger and faster than even forecasted, and so if you combine that with what I just said about the investment crisis, I think the outlook for higher oil prices is quite good. Now I don’t think that OPEC and the producers here in the region are necessarily thrilled with ‘super cycle type’ prices.
I mean, I think they recognize from the last time this happened that it wasn’t good for the global economy, and I think they realize now that healthy customers and a healthy global economy are best for their industry and best for the energy market. But, you know, we have to solve this. There is not much we are going to be able to do about demand returning faster and stronger than estimated, but we can do something on the supply side and that’s really going to take this investment that we talked about.
Let me ask you about the US oil industry because you are an American, but also because you advised the George W. Bush White House on energy, too. So some people say that this is all the fault in the US shale industry — that they have oversupplied for years in a very financially nonviable way. We saw the oversupply that was there last year and now it has collapsed. In the US, they are 3 million barrels a day down.
So, tell me, can you make a sensible defense of America’s profligacy in oil? Well, obviously, I represent 70 member countries now, but I get this question a lot because of my citizenship and my previous life, of course, in the US government. I would say that, you know, the crisis last year, I think, had much more to do with the demand shock than any supply growth in the US. I think the market had some time to get accustomed to what the production levels and growth were in the US, but because of the pandemic, US production quickly started to respond to market forces and adapt. And so, as you point out, we’ve seen a drop in US production from a record high of 13 million barrels a day to, you know, 11 million barrels a day, which is about a 2 million barrel-a-day drop. Of course, the demand hit, as we said previously, was 10 million barrels a day, so I don’t think you could put this on the doorstep of US production.
But at our outlook symposium that we hosted with OPEC and the IEA, we had a presentation from the CEO of Occidental Petroleum, Vicki Hollub, and Vicki before she began CEO of Occidental ran Occidental’s Permian basin operations, and she just said, look, you know, it’s going to take a long time before US production gets back to that 13 million barrel-a-day level because of this lack of investment problem, that you really do need consistent investment especially in the shale sector, which is a little different from the geology and other parts of the world. The wells get depleted 70 percent in the first year, so in order to maintain current levels of production, let alone growth, you have to constantly be drilling and investing, and that is just not happening in the US now. Let’s stay in the US for a moment because, of course, we’re seeing some tragic scenes in the west, in Texas, in particular, and Vicki Hollub, she seemed to cast some of the responsibility for this on to the renewable energy industry. What’s your view on that? Do you see that the rush for renewables has been responsible for any of the problems we’ve seen in Texas? Well, I think we saw that since the storm happened we have seen a lot of hot takes, I think, on both sides of the aisle on this. I mean, certainly, you know, renewable demand, renewable energy was affected, but as we’ve seen natural gas generation was also affected as well. You know, I think it’s a lot more complicated than just pointing out one or two fuel sources.
The other thing that I don’t think a lot of people internationally know, but I think in the US it is fairly well known, is that Texas has its own grid that is isolated from the rest of the US grid. In other parts of the country, you’re able to bring power in from other areas to ride out conditions like this. One thing that Vicki pointed out is that this is like a 100-year type of event that happened and so, even if Texas did have, you know, connections to outside of the grid, the whole region, huge swathes of the US were in this very severe winter situation.
So I’m not sure having interconnections to other parts of the southwest would have necessarily helped here. But I do think it is worth pointing out, we have to be very careful about severe weather now, and I think we’re seeing it all over the world, not just in the US. Forest fires in California obviously, in Australia the fires there. But the Texas regulator that was responsible for keeping power going, basically they had done all sorts of game planning for certain events, and they had a severe weather scenario and this scenario which again, as she pointed out, was 100-year type of event was like 25 percent worse than even the severe weather scenario that they had planned for. So I think the message is we have to start planning for the unthinkable type of weather events because of climate change, and so this is something that I think policymakers are going to have to grapple with.
2020, as you said, was a bad year for oil, but what seems to have pulled us out of it was the coordinated cuts actions by OPEC+, in particular, the organization led by Saudi Arabia in partnership with Russia, the two biggest producers in it. Tell me, how do you see the dynamics of that relationship moving forward? Now, well, I said many times that OPEC+ has been quite responsible in stabilizing oil markets during the pandemic. Of course, like every other producer, it had to adjust its demand lower. But, really, they took a leadership role right out of the box.
I think, you know, really only due to their quick action were prices able to stabilize during the summer. I think if they iust said let’s wait and just see how market forces affect everything, I think it would have been a much more painful transition period. So I would say so far I certainly think this year they have proven to be a very responsible player. I think so far they have proven to be a very successful collaboration. Obviously there are disagreements — there are probably lots of disagreements on prices. Probably everybody has their own idea of what prices should be, and I think as prices go higher, there are going to be some members that are going to want to make modifications to production levels.
But I think they know that they’ve had success working together, and so I think that will help them as they proceed here and in the future. Energy transition seems to be the phrase on everybody’s lips at all the big energy forums these days. Do you think that the IEF, in particular, lays enough emphasis on renewables as opposed to hydrocarbons, wind, solar, hydrogen and nuclear, or are you still looking at fossil fuels as the main driving force of global energy? Well, my predecessor before I got here actually started a collaboration with the EU on their green energy deal. In fact, next week we’re going to be hosting the IEF EU energy and climate symposium, and he also hosted the first-ever collaboration between the IEF and IRENA (International Renewable Energy Agency).
Now the IEF was founded as a forum for producer countries and consuming countries — really, mainly OPEC and the IEA, so OECD countries of the IEA. So, literally, producing and consuming countries to get together and talk because they didn’t have any kind of form to get together and talk. Since then we’ve grown to 70 member countries, more members than both organizations combined, and so we have a much more diverse membership and so our agenda has expanded outside of just fossil fuels and we’re very involved in the energy transition and the role of natural gas, and obviously paying very close attention to renewables. On a global stage, I think renewables are certainly getting a lot of attention. Certainly the momentum initially was because of climate imperatives, but really now I think it is being fueled by attractive economics. I mean just look at the UAE, it’s, you know, one of the leaders in renewable energy investment and power deployment in the Gulf.
IRENA is headquartered in Abu Dhabi. Right here in Saudi Arabia, they have announced a $10 billion investment in renewable power and have set a goal for half of their electricity to come from clean energy, so I certainly think there are more opportunities to deploy and invest in renewables, and we encourage it for sure. At the same time, I think it is important to recognize that wind and solar energy alone can’t really help us meet our climate goals. We really need a shift now by governments and industry to invest more in clean energy R&D, technology and innovation, with a goal to reduce greenhouse gas emissions.
You may recall — I know, Frank, you follow the IEA and all the reports they do, and they really do terrific studies and reports, and last fall they came out with the IEA annual technology report and it was really significant because it really signified, I think, for the first time for policymakers that half of the technologies that are needed for us to meet our climate goals are not even invented or envisioned yet. I think this is a reason you see the EU and Saudi Arabia also pursuing hydrogen. Hydrogen is a very hot topic and trending topic now, and I think that is because you know the EU has recognized intellectually, as I just said, that wind and solar just can’t do it alone, and we are not going to just go off of fossil fuels. We need a replacement, and so that is why I think they are investing so much in hydrogen, and Saudi Arabia is getting very involved in it. So we need other technologies like that.
Another one is direct air capture of CO2 and so there are a lot of technologies that are going to be needed. So I think it is more than just renewables, it is more about technology and innovation. One of those technologies is electrification and EV, electric vehicles. Mercedes says that half its profits will be coming from EV by 2030.
Do you see that as the biggest risk, the most significant risk, to the hydrocarbon industry? Well, look, I think there is tremendous momentum behind EVs. Last year, you know, there were 2.2 million EVs sold globally — that is about one in every 40 cars sold was an electric vehicle or hybrid. These numbers are only going to grow, and some forecasts suggest that global EV sales will make up more than 50 percent in most vehicle segments by 2035.
You may ask why? Well, a lot of it has to do with public policy. For example, the UK announced the policy to ban the sale of gas and diesel vehicles beginning in 2030, Denmark has a 2030 goal for zero emission vehicle sales, and Norway is pressing for 2025 and they have done tremendous things. You may have seen the recent Super Bowl commercial poking fun at a competition between the US and Norway in electric vehicles, and that was a General Motors commercial, and that’s because they had this recent announcement that all of their vehicles sales by 2035 will be zero emission. There is a lot going on in China, too, by way of a policy push behind EVs. Having said that, there are still technology advancements that are needed in terms of battery costs, the amount of time it takes to charge the battery and the issue of vehicle range.
That is why I think, you know, I go back to the previous discussion we had regarding the need for government and industry to invest in R&D, I’m pleased to see also that GM, in announcing this plan, also announced $27 billion over the next five years on EVs and autonomous vehicles. So the momentum is there, and this is the direction it is heading. We are going to need a lot more investment and, really, as I said in our earlier discussion, fossil fuel and hydrocarbon demand is going to continue out to 2040 and maybe some of it gets affected by EVs. But you still have jet fuel, you still have diesel, you have petrochemicals that are driving a lot of the growth. One final one, and briefly, please, Mr. McMonigle, the circular carbon economy is a framework,
a strategy that Saudi Arabia has laid great story in and it won endorsement last year from the G20 as a practical way of confronting climate change. Do you think the world can unite around this? There are some people who are still holding out, aren’t there, Europeans, in particular. Do you think the world can unite around the circular carbon economy (CCE) strategy? Well, I think, regardless of what your sort of path forward is, I think there has to be a recognition that one approach is not going to be necessarily the approach for all parts of the world. I mean, you can pursue electrification in places like Europe and maybe even in the US, where you have such advanced infrastructure, although some might doubt the infrastructure, seeing what just happened in Texas. But I think I go back to our discussion about technology and, really, I think the solution to climate change and protecting the planet is, you know, a technology solution, it’s not about a fuel type.
You know, the goal should be reducing greenhouse gas emissions and how do we do that? You mentioned nuclear and that has to be a part of it as well. That is an off-the-shelf technology if you will. Certainly there can be improvements, but really we need technologies not just in new fuel sources like hydrogen, but also technologies to remove carbon, like direct air capture that we talked about.
Or ways to use oil and gas more cleanly, and so I think that’s really the approach. To answer your question, I think the world has to adopt approaches like the CCE, and just be more technology focused. But there is a huge need now and, in fact, I think one of the things that really got the G20 behind the CCE initiative is Saudi Arabia getting behind it in terms of investment, because, you know, in the circular carbon economy initiatives, one component of it was carbon capture and sequestration. You know, up until now, it has just been the US, maybe the UK and Norway and Australia, that have invested in it, but if Saudi Arabia is going to get behind it in a big way, that’s really going to advance the technology — not just on this but on the other technologies that will help us solve our climate crisis. Mr. McMonigle, thank you very much, indeed, for appearing on ‘Frankly Speaking’ today. It’s been a pleasure to have you.
Great to be with you.