Russia’s showcase economic gathering, the St. Petersburg International Economic Forum (SPIEF), has long been a marquee energy event, bringing together heads of oil and gas corporates as well as officials from OPEC leading member states.
Mitchell Jennings, Senior Analyst at Sova Capital, answers five questions raised at the forum as the oil and gas sector discussed the green energy transition.
1. Saudi, Russia and Qatar recently suggested the International Energy Agency was being irresponsible with remarks on halting oil investment to achieve carbon neutrality by 2050. Do you agree? Or will this just mean some are halting investment while others must continue?
This could be in part political, but in my understanding the need for oil and gas will remain for some time, as will investment. We may see less investment, especially from European companies, but I believe Russia will not change tact and will continue to plan on future oil and gas projects. It feels to me sometimes there is a bit of a disconnect between the actual reality of energy demand and what is currently possible technology-wise.
2. Do shifts in spending on renewables and gas pose the risk an oil shortage, or is the massive glut that pushed oil to zero just one year still out there in the form of spare capacity? Does this shift in investment and strategy by international majors make Russian producers, for instance, more attractive as a class of stock for investment or less?
In the long term, there could be potential for a deficit of oil, but likely OPEC, and OPEC+ for that matter, will continue to invest. The shift in spending could help improve technology and bring economies of scale for renewables. Spare capacity still remains, but it will likely be managed more carefully than previously, as OPEC attempts to balance price, supply and demand.
For those looking at oil and gas exposure, and exposure to the oil price, I think Russia will become more attractive. The issue seems to be that some funds won’t be able to invest in oil and gass due to emissions and ESG reasons. But for those that can, at least one Russian company has large expansion plans and will continue to be a pretty pure oil play.
3. European oil companies like BP, Total and Shell are adjusting their strategies to greener production. Do you see companies like BP or Total retaining large shares in Rosneft and Novatek?
For the time being yes. I see BP holding Rosneft as it will be producing oil where BP isn’t. BP also has an opportunity to help make Rosneft greener, we are already seeing this, which benefits its stakeholders as emissions are a global issue. Europe will still require oil and gas for at least another decade, probably several, and having access to reserves and supply will remain important.
4. Green-focused utilities, wind turbine manufacturers and hydrogen equipment makers have slumped as of late while oil producers have inched upwards. What are some reasons for that given all the talk of transition? Do you see natural gas as a core fuel in electrification ambitions (especially in the EU)? Or do you see renewables as the end of gas?
I think right now, the reason oil companies’ shares are performing is the trajectory of the oil price. A higher oil price means better dividends, in the context of Russia, at least. Green-focused utilities, wind turbine manufacturers, etc, these seem me to be long-term stories, what I would equate to more of a growth stock.
I think natural gas is a bridge fuel, and will remain for some time. The talk of switching from gas to renewables is sometimes done at too fast a pace. With countries like Germany planning to use coal until the late 2030s, there should be even more discussions, in my view, about increasing the use of gas. Gas is also a fuel that is used to offset the unreliability of renewables, as in if there is an increase in load and no wind or not enough sun.
5. The EU will deliver a big jump in renewables generation in the next decade. What does this mean for other fuels? Who is getting pushed out? Who is catching a ride in the slipstream? Is Nord Stream 2 doomed to be loss-making by energy transition moves?
If this happens – if technology comes on line to allow this to happen – we could see a decrease in some oil demand, and maybe coal. I believe coal should be the priority for phasing out in Europe, not gas. But just because Europe is moving more green, doesn’t mean other parts of the world won’t increase demand for hydrocarbons.
In the far future, the Nord Stream 2 pipeline could ship hydrogen, or gas to be made into hydrogen, in Germany, so I’d say no. The pipeline should also be lower in emissions than older pipelines currently in use, thus it should be a preferred method of transport, from this perspective.
