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This week, our guest is Carlos Pascual, Senior Vice President of Global Energy at S&P Global Commodity Insights.
Carlos’s past roles include establishing and directing the new Energy Resources Bureau at the US Department of State and serving as a senior advisor to the Secretary of State on energy issues. He has also previously been a United States Ambassador to Mexico and Ukraine.
Here are some of the questions that Carlos tackled: How do you expect the US will react to the recent attack on an American base in the Middle East that killed three soldiers? What is Iran’s motivation in the escalating proxy war? Is it possible that Donald Trump will be elected president in 2024? How does the US election factor into the US strategy on the Middle East conflict? What are your thoughts on COP28 and the “transitioning away from fossil fuels” language that was adopted? Do you think a peace deal between Ukraine and Russia is possible? What is driving the growing divide between the Global North and Global South? Do you expect OPEC and Saudi Arabia will continue constraining oil production despite strong non-OPEC supply growth?
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Episode 227 transcript.
The information and opinions presented in this ARC Energy Ideas podcast are provided for informational purposes only and are subject to the disclaimer link in the show notes.
This is the ARC Energy Ideas podcast with Peter Tertzakian and Jackie Forrest. Exploring trends that influence the energy business.
Welcome to the ARC Energy Ideas podcast. I’m Jackie Forrest.
And I’m Peter Tertzakian. Welcome back. So, Jackie, we’ve got further unrest and tensions flaring up in the Middle East. We’ve got the Americans now striking inside Iraq and Syria, we’ve got further strikes in Yemen with the Houthis, and so the whole area is continuing to escalate. And we’ve talked about this in the past, but somehow the possibility is there that the escalation will spill from the Red Sea region over to the east into The Strait of Hormuz. Really, the oil price is not reflecting any of this right now, but the tensions continue to escalate, and I think we have to keep following this story.
Yeah, these military actions do increase the risk of a direct conflict with Iran, and this is in retaliation of these three US troops that were killed in a drone attack on January 28th. Well, the good news is, if there can be any good news, in terms of understanding this, in Calgary last week, we had a visitor. We had Carlos Pascual, Global Energy, S&P Global Commodity Insights, who’s a very senior leader. He had very senior roles in the State Department. He was previously an ambassador for the United States to Mexico and Ukraine. He came to Calgary as part of the Haskayne School of Business and PETRONAS, who hosted the PETRONAS International Energy Speaker Series. I was lucky enough to moderate that session. And he gave us some insights in terms of the drivers of the different parties and his perspective on the issue, which was really helpful. Now this was recorded last Thursday, February 1st before the US responded over the weekend with all of these attacks, so keep that in mind. Well, we did do a podcast following that event that we’re going to switch to here right away.
Well, and unfortunately, while that was all going on and you were interviewing Carlos, I unfortunately had to step away and give a presentation of my own. So this week, Jackie, you are on your own interviewing our guest, so take it away.
We’re really delighted to have Carlos Pascual, Senior Vice President, Global Energy, S&P Global Commodities Insights, here in Calgary, and he’s able to join us here at the podcast.
Jackie, thrilled to be here.
Well, we had a discussion earlier today at the lunch and we just want to continue that. You gave a great presentation to everyone and definitely, oh, I think one of the themes you had is these are difficult times, but you also gave us a lot of context in terms of some of the drivers behind the behaviors we’re seeing, and that certainly helps. So, we’re going to get into that on the podcast today, but before we do that, tell us a bit about yourself? You’ve had some really interesting roles in your path to becoming a senior VP at S&P Global, which is a big energy consultancy.
Jackie, I spent most of my career as a diplomat. I started out as a diplomat in the Economic Foreign Service of USAID, I spent nine years working in Africa. Interestingly enough, in Sudan, in South Africa where I had a chance to start some of the first anti-apartheid programs promoting peaceful change, in Mozambique where I had a chance to be part of the work that we were doing to support Mozambique’s transition from a socialist to a market economy. I spent about, oh gosh, a good 13, 14 years working on the former Soviet countries, first in Washington, including five years of working for Bill Clinton on the National Security Council staff, a fascinating period of time. My fascination with the energy in many ways began during that time because one can see that who had energy-controlled corruption, politics, geopolitics in the entire region.
I had an opportunity to be the US ambassador in Ukraine. I had a fascinating time as Ukraine was finding its footing and trying to find a way forward building its own economy. I had a chance to be the US ambassador in Mexico at a time when there was so much concentration in the drug cartels and security issues, and unfortunately, those remained to be serious questions as well. And I had a chance to start the Energy Bureau at the State Department, and all of them were absolutely fascinating, and it taught me a great deal about how politics and energy blend with one another. They’re so integrated, and they influence one another. Politics can promote energy, but energy can be a fundamental factor that is affecting and defining the politics of the world, and that’s what makes it so interesting to be able to work on it and have these conversations with you.
Well, what a fascinating career. I’m sure a lot of students who listen to the podcast would love to hear how you get into such amazing jobs, but there’s a lot of issues going on in the world today, and I think people really want to hear about that. But before we get to that, I want to talk about CERAWeek. You work closely with Dan Yergin. CERAWeek has been called the Super Bowl of energy. It’s coming soon to Houston, March 18th to 22nd. I was telling you, I previously worked… I didn’t work at S&P, but it was called IHS and CERA when I originally joined, so I’ve gone to many of them, and I think they’re amazing events. Tell us what the theme is? There’s always a theme associated with CERAWeek. What’s the theme this year?
This year the theme is multidimensional energy transitions, and the focus of it is the vast range of realities in which countries find themselves where they recognize that we’re in a process of changing energy systems, but they all have different realities, realities of resources, incomes, access to capital, politics. And as a result of that, countries are struggling with figuring out, what do they need to do to be able to take advantage of this process of change? But it’s going to be different everywhere, and we have to recognize those differences and resources and capabilities and build them into the way that politics and policy work, but also the way that companies work as well. And so, we want to explore that and understand, how does that affect commercial viability, how does technology grow and develop in that process? And all of these geopolitical issues that we’re facing in the world right now, how do they cut across them to influence the directions that countries and companies are going to take as they invest resources?
It sounds like a practical conversation. These net-zero scenarios assume the same path for everyone, and that’s not going to happen in reality. People have different resources, ability to pay, so that isn’t a really important conversation. I encourage people to check out CERAWeek. Well, let’s go to the Middle East. I think that’s on everyone’s minds these days. The situation in the Middle East is increasingly volatile. What’s your perspective on the current situation, specifically how the US might react to the attack that happened on the US base in Jordan that was near the Syria border? Could this really escalate into a big war, in your view?
The risk of escalation is huge. Mistakes can be made. Those mistakes can result in additional actions that are taken by any of the critical actors in the Middle East. But let’s back up for a second. We have to acknowledge first, Jackie, that the situation in the Middle East is right now a humanitarian tragedy. The terrorist attacks on Israel on October 7th have threatened Israel’s national security. It’s had an impact on virtually every Israeli in the entire country, it’s impossible not to recognize it. The response has had a huge humanitarian impact in the 26,000 lives that have been lost as well. And both of those add to the imperative of finding some solution that will both protect Israel’s right as a state and will address the challenges and the issues being faced by the Palestinian people that are within Gaza. And getting there has become one of the hardest issues to face in the world, and in particular, how to bring an end to this conflict.
Gaza is one of the most densely populated places in the world. Military activity that took place inevitably had to have significant humanitarian consequences as a result of that, anybody who’s ever seen anything related to urban warfare. About 80% of that population has been displaced, and the question has to arise, how do you get out of this? And because of the destruction and the displacement that has occurred, for any stability to come in the future, there has to be some kind of military force that maintains stability. If Israel stays and tries to provide that, they will inevitably become a target. If there’s an international peacekeeping force that’s considered, it’s not going to happen unless there is a political agreement, a political consensus. Otherwise, countries don’t see how they can eventually leave. They’re there forever. And so right now, there doesn’t seem to be a pathway out of this.
The longer that continues, the more it results in surrounding countries and in particular, Iran, which sees itself as the voice of the Palestinian people, Iran using the militias that are within its round of tools, its access that it’s been using throughout the Middle East, to launch attacks. We’ve seen it from Hezbollah. We’ve seen it, attacks that have occurred internally within Iraq against American forces. We saw the attack that took place that hit and killed three Americans in Jordan. And then of course the Red Sea, from the Houthis. And the risk is that as those attacks expand, that creates the possibility that accidents can actually occur, that a bus with children might be hit and it could result in an escalation of an attack that then takes the war in new directions. I don’t think any of the parties right now want this to turn into a full-scale war in the Middle East. No one gains by it, the risks for everyone are too high.
And yet at the same time, there is this incentive that Iran, by many opinions, has been driving that the more that you test, and you push Israel, the more that you create disarray internally within Israeli society, and it might push for some form of change. And that’s the environment that we’re working in today. Inevitably, the United States is going to respond. It cannot let the death of three American military servicemen or women, for two of them, simply go unchallenged. The question is going to be, how is it going to do it, when is it going to do it? President Biden was clear that there will be a response. He hasn’t said what it’s going to be, but the issues that are being balanced right now is how to create a response that sends a signal and sends a clear message that there are limits to what can be done, and yet at the same time doesn’t escalate the process of violence further. It’s an extraordinarily delicate balance, and the risk of it going wrong at any given point by any of the parties involved is quite significant and serious.
Let’s talk a little bit about Iran. You talked a little bit maybe about what their motivation is, they see themselves as helping the Palestinians, but they also are potentially going to see a bunch of sanctions from the US and other countries that could hurt their economy. Does that not matter to them anymore? Are those not tools in the toolkit that can really help de-escalate this?
First of all, in terms of Iran’s incentives, let’s think about what the most recent news was that we were all thinking about in terms of Iran, so the oppression of women, a democracy, if we want to call it that, whatever one might consider democracy or public participation in Iran at risk and greater and tightening controls over a regime which is seen as increasingly authoritarian. They’ve now become the spokesperson for oppressed people with appeal to the Global South. And that for Iran is a game-changer: its international image is completely changed in the context of what’s happening right now. That’s a part of their incentive. To the extent to which they can do things that complicate life for the United States, that’s also part of their incentive. In the end, whatever is difficult for the United States and they have a role in potentially gives them some leverage if there is any kind of negotiation that resumes over their nuclear program.
In terms of American sanctions on Iran, the sanctions on ballistic missiles continue, the sanctions on individuals have been extended, there are sanctions on oil, but most of that oil is either going to China, to entities that are virtually immune to US sanctions, right? They’re just not connected to the international financial community. And so, the implications would be for the United States to intercept tankers on the high seas and the potential for conflict that could arise or Iranian retaliation in some form against other international tankers is too high. And so, it hasn’t happened, and it hasn’t happened and further incentivized by the concerns that we’ve had geopolitically and the need to ensure that there’s adequate oil and international markets. So, all of those things have come together.
What I think is critical right now is to ask the question, what countries hold influence and sway over Iran, and how can their influence be brought to bear in the current crisis? And that brings us to an interesting perspective on China. Strait of Hormuz hasn’t been interrupted, and it hasn’t been interrupted, I would argue because the principal recipient of that oil is China: Iran needs them as a customer, Iran needs China as an investor. And so we have to ask ourselves, can China play a role here and does it have a self-interest? And the other self-interest that we increasingly see is in the Red Sea, the attacks against ships, 80% of the container ships that we’re going through the Suez Canal are now being diverted to go to Europe. It’s taking from China and additional two weeks the added costs that are involved. But for China, the broader issue is that they are the number one exporter in the world. They have more at stake in freedom of navigation than anybody does, and they’re the last ones that could really sustain a militarization of choke points on the seas.
And this is the challenge that’s being posed now of whether China can have enough of an interest where they take an active interest in pressuring Iran and having Iran pull back on its militias. Because in the end, what you want in the Middle East is not just the attacks on militias or individual groups to be the main influence on creating stability. Because if that’s your main target of creating stability, then there’s always some actor out there that is willing to take action that is going to cause a problem for you. You want something that is more stable. And up to now, China has rejected that. The US has asked. Jake Sullivan, the National Security Advisor, had meetings with Chinese officials, and they demurred. But I think it’s the kind of issue that has to continuously be brought back so that in addition to the military responses that are being taken, that there can be diplomatic action that somehow create a foundation for a more systemic and lasting set of solutions in the Middle East.
Okay, so there’s hope there if China can get involved, and cooperation with China has not been easy for the United States, but maybe we’ll flip now to the US and the political situation in the US because it obviously ties into that, especially in an election year. You had mentioned in your talk that the US elections are seen by a lot of people that they are the biggest geopolitical risk in 2024: why do people make that conclusion?
The fundamental polarization in the United States on just about any possible issue that you can imagine. The ones that traditionally have always come to mind are issues related to race, abortion, gun control, but now it covers the entire spectrum of any question that you might imagine. Immigration issues, international engagement, assistance to Ukraine, the linkage of immigration, and assistance to Ukraine, and how that’s playing out in ways that are potentially bad for US security but are broader global security interests in terms of being able to create restraints on Vladimir Putin. And what the world is seeing is that these tensions are so high in the United States that it becomes increasingly difficult for the US to be able to act as a unifying force internationally.
If we’re so divided within, how can we actually play a significant role in bringing others together to find solutions? And that’s a very different way from the way that the US has played into the international system in the past, and that concern is playing itself out through 2024, even before the elections. Depending on what happens in the elections, that’s yet another question, but even in this year, what we’re increasingly seeing is that those concerns about polarization are having an impact on the perceptions of the United States of being a significant political force in playing a positive role in creating international unity.
Well, and then we talk about the election, it does affect some of the policies that are made in an election year. When we think about things like going after Iran or trying to cooperate with China, how does the election maybe change behaviors because people are thinking about how it plays domestically more than internationally?
The irony is that US engagement with China on issues like the Middle East are good for the United States, they’re good for China, they’re good for global security, they’re good for global commerce, they can help address some of the potential instability in supply chains that we see emerging in the world and that we saw, for example, with the pandemic.
The challenges that at the current time, one of the few issues in which there is not polarization in the United States is on US policy toward China, and it’s usually aggressive, and it’s supported by both Democrats and Republicans. And so, the irony is that there is a risk for the Biden administration if it gets engaged in taking actions of engagement with China that might have very significant benefits globally and for the United States that that could end up being decried in the polarized electoral context of the United States right now.
Oil prices: do you think that’s important to keep oil prices low this year to keep a lot of supply on the market?
Has it ever been unimportant to have lower oil prices in a year that any country has ever had elections? The reality is that when oil prices are high, people experience it in their daily lives, they see it in the price of gasoline, and it affects their transport, it affects the decisions that they take on summer vacations and where they go and whether they drive. And so yes, inevitably it’s going to be a concern of the administration. But I think that what is also significant and sometimes doesn’t get realized is that the United States today is producing 13.2 million barrels of oil a day: that’s more oil than any country has ever produced in history, and sometimes that isn’t completely recognized when there are debates of whether or not the United States is doing something about global energy security or its own energy security.
It’s the largest producer of gas and LNG exports as well, and so those realities are part of a mitigating force that is acting against the political volatility that we see and that production of oil together with Canada’s together, the United States and Canada are going to be producing an increase of over a million barrels a day. Why is that so significant? The total increase in demand globally is only going to be one and a half million barrels a day. So, between two countries outside of OPEC, we’re covering almost all of the world’s demand growth. It’s that kind of capacity to produce oil that has such a significant impact on stability of oil markets globally, and that has to be taken into account when we think about the energy future that we want, how do we ensure that we supply the markets that need these resources, and yet at the same time do what we can to increasingly decarbonize them to be able to address the challenges of emissions reductions in climate change.
Let’s go back to Trump: over the course of the last month, if you listen to the media anyway, his chances are increasing all the time of becoming a president again. Do you think that is a likely scenario?
It’s a very real scenario. I won’t venture into the realms of likely, I’ll tell you why. If you look, the polls, they’re virtually neck and neck. If you look at polls in some of the key states that are going to affect the electoral outcome, they vary. In the fall, there was a major New York Times article that said that President Trump was ahead in I think five of six critical states. Those polls have changed over time, but there’s a bigger factor here that I would point to. A recent poll that came out indicated that 43% of US citizens are now registered as independents. That’s quite a change. Previously it was about a third independents, a third Republicans and a third Democrats. Now it’s 43% independents, about a third Democrats and about 27% Republicans.
And the outcome of this election is going to be driven not so much by the more extreme voices in either party, it’s going to be driven by those independents and what they see as the greatest promise for stability and security within the United States. They don’t want drama, they want predictability and stability, and that makes it a lot more complicated to make judgements about what the actual outcomes might be from the selection because you don’t necessarily see that reflected in the polling data all the time, and you certainly don’t see that reflected in the airwaves.
Let’s talk about climate. You went to COP28. It was described as a controversial meeting because the industry was involved, you had the oil industry there. Tell us about what you thought about COP28 and specifically the text that made all the news after: some people said it signaled the end of the fossil fuel era saying that we’re going to transition away from fossil fuels. How did you sort of take that text?
I think the most important thing that happened at COP28 was that it involved industry in the debate of finding solutions to climate change. And that is going to be absolutely fundamental to any success in bringing the world’s best technology innovation capacity to operate at scale; and access to capital, to the challenges of finding solutions that have an impact on significantly creating either decarbonization alternatives, or new directions in energy fuels that can transform the path of emissions reduction that we have today.
When you think about the COPs, these are Conferences of the Parties, and the parties as defined in the Treaty for the UN Framework Convention on Climate Change are governments, non-governmental organizations, and intergovernmental organizations. Industry is not part of that. The private sector is not part of that. For them to participate, they have to be invited by a party. So a government, the UAE, could invite industries to come in and participate in the meeting. They aren’t part of the official negotiations, but they can participate in expressing views; and in parallel, driving and taking actions that can advance the overall agenda of finding solutions on climate change.
In COP28, you had an oil and gas decarbonization charter. It was signed up at the COP by 50 of the largest oil and gas companies in the world covering 40% of production. They committed to net zero and Scope 1 and 2 by 2050, to approach zero methane emissions by the year 2030 of zero gas flaring. There were other measures that were put in place, for example, by the Environmental Defense Fund; to putting a methane satellite, which is going to go up later this year, that’s going to be providing data on methane, and it’s these types of measures that become so fundamental to giving concrete and tangible reality to pledges that are being made on climate change. Because in the end, governments can set policy they can regulate, but they don’t have the capacity to innovate and deliver in the same way that industry does. In the end, industry has to implement this, and most of the investment that is going to drive this is private. And so what COP28 did is it started to institutionalize that in a way that hasn’t been done before.
There are a lot of controversies around the COP. There was a big debate of phase out or phase down. There was in the end a language that said to transition away from fossil fuels, in a way that’s just and abides by the science, words to that effect. I thought that that was actually a productive outcome. It highlighted the importance of reducing emissions, and that the use of fossil fuels is going to transition down; but at the same time, it recognized that critical word “transition.”
This is not something that is going to be abrupt. It’s something that is going to have to be worked out in a way that helps us do two things at the same time: supply the energy economy that we have right now, because we have to do that for the sake of our ability to function and deliver the economic expectations that populations have and build the energy economy of the future. Two things we have to do together extraordinarily hard, requires massive expenditures and resources, but that’s the way that we have to think about it. Both of them have to be within our sites to be able to succeed in this transition.
Yeah. You said that in your talk. We’ve got to keep the old working and build out the new. So important. I find often we’re not thinking enough about keeping the old working. And by the way, I agree with you. I think someone described COP28 to me as a business, turned into more of a business conference. I think this is all positive. Now, some of the narratives, some of the environmental groups, and some people don’t like that; but I think if we don’t bring the people in that are funding projects who actually have emissions that need to be reduced, it’s hard to see how we get solutions, so I think it’s a positive change.
There’s a growing issue now, a divide, between the North and South; you talked about that in your talk. We’ve got the countries that are rich having different agendas than the countries that are poor. We’ve got climate, which is a big issue where everybody has to reduce their emissions. Do you think the poor, the people in the South, are really going to be able to reduce their emissions at the rates the people expect them to? And is this going to become a greater and greater divide between the North and the South?
Well, I think, first of all, one has to acknowledge that the share of emissions in developing countries is minuscule. You look at Africa, and I forget what the number is of Africa’s share of emissions globally, but let’s say it’s on the scale of 1%, right? And so, the expectation that Africa reducing its emissions is going to be the solution on climate change is obviously unrealistic. Africa is going to have one of the largest growing populations; and by the year 2050, it’s going to have the largest youth population in the world, and it’s probably going to be the manufacturing base of the world, so that has to be taken into account. But today what Africa is saying is that they’ve got to carbonize before they decarbonize, that they have to have access to energy to meet the aspirations of their people; because if they don’t do that, they’re not going to be able to have stability within their countries, and they’re not going to be able to deliver economic growth, access to education, access to healthcare, that those are fundamental priorities.
And so, what we’re hearing and seeing from developing countries is a cry for help and support on some basic economic issues; rescheduling of debt so that they don’t have to use so much of their domestic budgets for debt service, and they can invest it in infrastructure and healthcare and education. Access to capital, but access to capital at lower costs, and how do you get that; the ability to use their hydrocarbon resources and develop them to be competitive in global markets against other resources for hydrocarbons in an economy that’s still going to be using hydrocarbons for a significant period of time. But in particular, one of the things they’re saying is that the benefit to them is to encourage international players to have partnerships with those developing countries, to bring forward the technologies that help reduce emissions in the production of hydrocarbons so that they can be competitive both on price and carbon content.
And so, what developing countries are arguing for is the ability to have a path toward emission reduction that is reflective of their income, the resources within those countries themselves, the access to capital that they might have, the access to technology, and those pathways are going to differ. At the same time, and I think it’s important to be clear about this: in a major share of those developing countries, they’re also pleading with the developed world, the rich world, to accelerate their emissions reduction because the principle impacts of climate change are on them. They feel that in areas where there are near deserts, that desertification is going to go faster, that agricultural possibilities are going to diminish. In areas that are in low-lying states, that they’re going to feel the impacts of flooding. What happened in Pakistan two years ago was a tragic example of what that might mean.
And so the developing world is not saying, “Stop the movement on climate change.” No. Most of them are saying the opposite, but they’re saying we have to understand the realities of who can do how much, and how do we bring that into an international system that needs to recognize the differentiation that has to occur.
Yeah. How damaging do you think 2022 was? We had the year where Europe was short natural gas because of the Russian conflict. They bought up LNG cargoes. They made certain countries that had moved towards LNG have shortages. I think Pakistan even had brownouts at times. How damaging was that to these countries who are now saying, “Well, why am I decarbonizing when I depend on cleaner fuels? I can’t necessarily assume that they’re there. I’d rather use my domestic resources,” which may be coal?
I think one of the sharpest and most frustrating examples of this for some of the developing countries was, from a European standpoint, they needed LNG. They needed gas. They were going to African countries and seeking contracts for imports of LNG. But at the same time, they were saying that “We only want these to be short-term contracts,” when the African countries were having to make investments over a 20-year period of time in order to develop those resources. You can’t have that. And at some point, in time, those countries may need those resources.
Or, for example, in another perspective, the part of the world that has the biggest challenge of transitioning from coal to something else is in Asia, and are you going to take gas away from the toolkit of facilitating that transition in Asian economies? And so, I think that what developing countries are getting frustrated about is they have a perspective that it’s okay from the OECD countries to use hydrocarbons when you need them, and when it has an impact on your political and economic situation. But if you look at it from a perspective of a longer period of time when the developing world needs to have access to those resources, they’re being told that they don’t have the right to develop them. That becomes a real issue and a real contradiction, and part of why there has been so much frustration and anger.
Yeah. It certainly has created a lot of… especially even in the case where we’ll get off coal and get on LNG, but the LNG is only available to you when we don’t need it, right?
I want to talk about the Ukraine. You are the ambassador to Ukraine. Russia invaded Ukraine. It’s going to come up to the two-year anniversary soon. How do you think this conflict ends? Could there be a peace deal here between the two countries?
Not in 2024. Both sides are fundamentally committed to trying to advance their cause and believe that they have a capacity to win. Or if they’re going to negotiate some form of a deal, that they have not reached the point where they’re comfortable going into those negotiations. Vladimir Putin, in his campaign for President, the elections being in March, has campaign posters that say, “Russia knows no boundaries,” indicative of his perspective of what his view is of Ukraine. And in effect, if Russia has gone into Ukraine, the cost that it’s had, the hundreds of thousands of lives and injuries that have resulted for Russians, that generally don’t get publicized domestically… or internationally, for that matter… and Russia only succeeds in gaining a marginal amount of territory. For Vladimir Putin, that’s a defeat, and that is the last thing that he wants to be seen as, suffering a defeat where he spent blood and treasure in Ukraine and has nothing to produce for it.
For Volodymyr Zelenskyy, for him the majority of the Ukrainian people do not want to make any compromises over territory. There’s been a stalemate on the ground, but Ukraine has been able to recapture about 50% of the territory it lost to Russia.
It has been creative in its use of its missiles and drones, driving the Russian Black Sea Fleet out of Crimea and getting it to go back to Novorossiysk in Russia so that Ukraine, again, has access to the Black Sea.
And from their perspective, even with the questions over US assistance that might go to Ukraine. And the current stalemate that we’ve had in the United States to be able to make those resources available, there’s a perception in Ukraine that they still have momentum, they still have the capacity to advance, and they got a huge boost today from the European Union that voted on a four-year program of 50 billion euros a year to provide assistance to Ukraine. That’s not enough, but it gives Ukraine a sense that there is a significant commitment there that allows them to keep going.
Another critical point to watch is what happens with the NATO summit that will take place in July. It’s the 75th anniversary of NATO. And whether there is a willingness on the part of the members of NATO to ask Ukraine to bring in some form of negotiation or process that would eventually lead to membership. All of those factors are going to play into what the prospects might be for a solution, and when that might actually come.
So maybe something could happen, it’s going to be a way away though.
What about, is there any prospect that Russia ever redeems themselves and becomes an energy supplier to the world? I guess in general, when this whole thing started two years ago, there was a view that Russia would have a big drop in their oil production. Of course, they would lose all this gas revenue. It really hasn’t impacted the country as much as I think a lot of people thought two years ago.
Is there a scenario where they want to redeem themselves to become suppliers to the world for energy and other products?
I would put it this way. In 1981, did anybody have the perspective that, in 1991, the Soviet Union could collapse and break into 12 independent states? No.
So, can change happened? Yes. Can that change fundamentally affect political and commercial dynamics? Absolutely. But I would put it from this perspective. What Europe learned was that its dependence on Russia, particularly for energy, was not just an energy security issue. It was a national security issue for them. It created a crisis for them, and they had to be able to respond in some way to avoid domestic protests and the impact that it would have with people in their homes as well as their jobs.
And so Europe has made the decision that it needs to change its energy systems. And the response to the cutoff of gas has been, we have to accelerate our transition out of the use of hydrocarbons. In the interim, it is absolutely real that they have had to import more LNG. They’re probably going to have to import more than they thought, because they were hoping for access to green hydrogen by 2030. That’s going to be strained. They’ve had to use more coal.
But the point is that Europe is not going to compromise on its national security interest, and until it’s created enough of a new base for energy security through changes in its energy system, I don’t think it’s going to go back to considering imports from Russia.
Those changes are made. If there are changes that are made in the politics of Russia, might it be possible to imagine something where Europe imports 40 billion cubic meters a year from Russia? Not an insignificant amount, but not 155? Possibly, but that’s not a near-term issue. A lot has to happen with transformation in Europe before you start seeing those alternative possibilities come into play.
They learned their lesson, not to be too dependent on any one source or country. Let’s come back to OPEC, quickly wrapping up. You did show a chart that showed that there was enough non-OPEC oil supply coming on in the market, with demand of demand growth we have this year, that maybe OPEC wouldn’t really have the ability to increase their production this year.
You think about it, they’ve been keeping cuts really since 2020. There was a little reprieve there, maybe for a short time. But generally, they’ve been producing below their capacity. Saudi’s been shouldering the burden of that. Do you think there’s a risk that this falls apart, and that just like we saw in the 2015-16 period, that Saudi sort of floods the market again? Because they’re tired of not being able to increase their production?
The reality that we’re facing today, so let’s just start there for a second. Between the United States, Canada, the North Sea, Guyana, Brazil, a couple of other countries, the growth in that production, exceeds the projected growth and demand in 2024 and 2025. And that was also the case in 2023.
And the reason it’s important to keep that in mind is that, that surge of supply has contributed to a basically stable band between 75 and $90 a barrel, at a point in time when there has been this enormous political volatility in the world that we’ve been talking about, including volatility in the Middle East.
Given the supply surge that has been arising from this non-OPEC block of countries, it’s inevitably put OPEC in a position where it’s been adjusting supply within a band, but it has not been able to push prices significantly outside of it, because of the massive amount of production that’s in the market.
Today we have about 5 million barrels a day of spare capacity among three countries; Saudi Arabia, UAE, and Kuwait. So the likelihood that Saudi Arabia or other countries are going to increase their production massively or significantly in that kind of a context, invest in increased production capability when there’s already 5 million barrels a day of spare capacity, I think is relatively low.
So I envision a different kind of environment, one in which we’re potentially facing a relatively more stable band of pricing for a period of time. Adjustments that are being made within that, politics continuing to counterbalance supply, but an irony of volatility within a stable environment that has been significantly different from what we’ve seen in the past few years.
Right. But do you think at some point, Saudi’s really been shouldering a burden here. And it’s interesting, they just announced that they’re no longer funding the expansion of their capacity from 12 million barrels a day to 13. Seems to make sense, I think they’re only producing near 9 million barrels a day today.
Do you think at some point though, they just say, “I don’t want these non-OPEC barrels to be always taking my market share?” Do you think that’s a worry? I mean, we saw in the last OPEC meeting, there seemed to be less agreement among the group around cuts.
Certainly the withdrawal of Angola from OPEC might’ve sent a signal that not every country is happy with the policy and strategy that OPEC is following right now. Certainly, we have the memory of November, 2014, when Saudi Arabia took a different approach and decided to bring in additional capacity and oil onto the market. And so, could it change? Absolutely.
What happens in Russia will be a big factor. If Russian supplies significantly decrease, might that somehow affect the Saudi’s perspective on how they see overall balances in the marketplace? That may be the case.
So a lot of ifs in the equation. And one thing we do know is, the Saudis are extraordinarily sophisticated in analyzing the market, and they’re going to make choices and decisions that they see as in their best interest going forward. And so let’s see where it takes us.
Yeah. Well the last year, they continue to make the cuts.
Well, Carlos, thank you so much for taking the time to talk to us today. Obviously a lot of difficult things going on in the world today, making it hard to navigate and think about the future. But you’ve really helped clarify those issues by giving us a bit more context on all the drivers behind them. So thank you so much for joining our podcast.
Jackie, it’s been a real pleasure. And I would just say to the industries that are listening and are involved and engaged in your podcasts, now really is an extraordinary time. Because the solutions to the problems that we have in front of us are going to be driven by innovation and technology. And those industries are at the heart of that.
I hope that in these difficult moments, they take encouragement from that, that their relevance is greater than it ever has been. And it could be the source of really driving a different understanding of how we develop positive outcomes and solutions at a point that is absolutely critical in not just our energy history, but frankly our history as a planet.
Well, thank you for that. And thank you to our listeners. If you enjoyed this podcast, please rate us on the app that you listen to, and tell someone else about us.
For more ideas and insights, visit arc energy institute.com.