For this year’s review, I highlighted events that I believe are gamechangers and identified the unprecedented moves that can reshape global politics and global energy trends. When I look back at the all the events, I can’t help but think that October 2023 should be coined the month of the year where there were several power moves on display. If you carve back the layers of these developments, you get a deeper insight into what will drive strategy and sustainability decisions in organizations. They underscored the challenges and the uncertainties of the energy transition and a reality check that meeting targets are not as simple as signing on the dotted line. There were many signals of the greater importance of managing geopolitical risks in organizations. What started off to be a sleepy year quickly hockey sticked into geopolitical turbulence with a war between Israel and Hamas starting in October (no less). The muscled force of geopolitics continued to forge new alliances and trade flows. 2023 is where shackles were broken from emerging countries. They took their rightful place in global conversations and influenced change in the development world’s policy positions. The Caribbean, South America and Africa reminded the world about their relevance thereby expanding the dimensions and perspectives of global matters. The caused a shedding of the cloak of impossible realities.
2023 Highlights….
1. BP reverses course to produce more oil and gas- February 2023
Bernard Looney, the company's then-CEO (The end of his 4-year tenure was another shakeup, September 2023), announced that BP would abandon its intentions to reduce oil and gas production. An action that would likely cause carbon emissions to exceed projections. The shift was a response to changes in the geopolitical environment, at least partly caused by the war in Ukraine, which sent oil and, especially, natural gas prices soaring. Due to the high profitability of oil and gas, BP said that it would invest an additional $1 billion annually over the next ten years in the production of fossil fuels. Additionally, it would raise expenditures on low-carbon enterprises by a comparable proportion (New York Times, 2023). The company however believed that whilst conversation on cleaner energy and lower carbon energy were relevant 3 years ago, the company also had to be responsive to issues around energy security and energy affordability. Investing in current energy systems were important.
Implications: This announcement is noteworthy given the rhetoric from many energy majors on scaling back fossil fuel investments. Whilst the private sector has their role in the energy transition, there is a tension that persists. What could be seen as flighty values is sheer pragmatism. Green agenda announcements were made when oil prices were low during a pandemic. When BP took a $US17 billion write off on its oil and gas fields (WSJ, 2022) amidst negative oil prices, the mythical peak oil seemed around the corner. Now the price environment is buoyant, double that of 2020. There were supply disruptions caused by Russia’s invasion of Ukraine and energy distribution was weaponized. Following years of censure on their contribution to climate change, governments worldwide are now pressing oil and gas corporations to increase output (Fortune, 2023). Whilst ESG and stakeholder capitalism are burning issues, leaders have obligations to deliver value to investors. Leaders are expected to follow the money and adapt given the opportunities presented. Shareholder supremacy with expectation of dividends and share buybacks still holds sway. With all the beckoning calls for the green transition to be accelerated, a paradox occurred. Swiftly after BP’s announcement, their share price rose 8% (Reuters, 2023).
2. Dubai reshapes oil trade- March 2023
For decades, Geneva has been the hub to many of the traders who sold Russia’s oil to consumers around the world. However, when Switzerland joined the embargo imposed on Moscow following its invasion of Ukraine much of that trade has shifted to Dubai and other cities in the United Arab Emirates. This has been termed the biggest redirection of global energy flows in history causing analysts to label Dubai as the “New Geneva.” Several trading companies were incentivized to register in the small Gulf state which has facilitated the trade of over 39 million tonnes of Russian oil worth more than $17billion between January and April 2023— around a third of the country’s exports declared to customs during that period. (Financial Times, 2023). The UAE is the world’s seventh-largest oil producer (EIA, 2022), but historically has not been a major oil trading location. With sanctions, its proximity to Africa and Asia and waivers on personal income taxes, has switched its destiny for some time to come.
Implications: Economic sanctions are a form of coercive foreign diplomacy used by governments to exert economic pressure and influence political outcomes (Eaton and Engers, 1992, 1999; Felbermayr et al., 2020; Anesi and Facchini, 2019). The objective is typically to disrupt established trading routes (Bove, Salvatore, Nistico, 2023), deny investment and access to capital. They have unintended consequences as they allow opportunists to innovate and develop a competitive advantage (Peterson Institute, 2023). The sanctions against Russia were intended to penalize for instigating a war with Ukraine however, the uncomfortable truth is that the world benefits from disruption proof open trade. The value manifests in reduced oil price volatility and international economic stability therefore all parties inclusive of the US is better off when Russia’s oil continues to flow. Washington has even encouraged traders to keep moving Russian oil to avoid supply disruptions, provided they trade below the relevant price cap. Some countries have chosen to circumvent the restrictions by exhibiting “spoiler behaviours” or sanctions-busting activities secretly exchanging goods. (Early, 2015; Bove and Bohmelt, 2021). Others have set up commercial structures that make their activities legal. Western sanctions only prevent imports of Russia oil into EU, UK and others following G7 rules. Under the restrictions western companies can also continue selling Russian oil to other parts of the world if that oil is sold under US$60 (Reuters, 2023). Though not obligated some Dubai-registered traders have complied to maintain access to western services such as shipping, banking and insurance. Others have sold above the cap by employing non-European shipping and financial service providers.
3. BRICS expands its membership- August 2023
The economic bloc of emerging territories known as BRICS (Brazil, Russia, India, China and South Africa) expanded its membership for the first time since 2010 (Fortune) at its 15th BRICS summit hosted by South Africa. The group added Saudi Arabia (Oil Producer), Iran (Oil Producer), Ethiopia (fastest growing economy in Africa), Egypt (Second largest economy in Africa), Argentina (4th largest lithium producer) and the United Arab Emirates (Oil Producer) effective 2024. BRICS therefore now represents 46.5% of the world population, 32% of the planet’s area (Aranha, 2023) and 37% of the global GDP (USIP.com). Expanding membership of the group is intended to balance the scales of power against G7 territories (Canada, France, Germany, Italy, Japan, the United Kingdom and the United States) which have heavy influence over global affairs. Controversial talks of a common BRICS currency represent an ambition to reclaim control over national economies by reducing the dollar’s dominance of the global financial system. Being tied to the US dollar in some instances has restricted trade via sanctions and on occasions when it is stronger due to high interest rates, national imports can become expensive. This has propelled countries with dollar shortages to contemplate switching currencies (Business Insider,2023). New members like Argentina have already started trading in yuan. Egypt, the Japanese yen. For the membership of BRICS, its association will deepen economic ties and increase cross-border investments. Thus far differences in political systems, interests, currencies, production standards and economies have weakened the groups impact on world trade. Perhaps that is set to change. Whilst some still question the bloc’s economic purpose (O’Neill, 2023), there are clear synergies that can be leveraged if structured constructively.
Implications: With its expanded membership, it can be a force to be reckoned with on energy and food security matters. Its members now sit on 45% of the world’s oil production (Energy Institute, 2023) needed for transportation and petrochemicals. Lithium is a critical component for electrical vehicles’ role in the energy transition. Many sovereign and private investors are moving into this space. With the BRICS additions, it will now house 3 of the 5 largest lithium producers in the world with China and Brazil. Maneuvers such as this should be noted as there is currently an intensifying battle for technological supremacy (CNBC, 2023) with export controls being placed on key metals. The land masses covered by the group possess renewable energy potential, strong sectors in agriculture (grain, soybeans, meal, sugar), iron ore, coal and bauxite. I wouldn’t sleep on BRICS. The pieces are shifting into curious directions in this battle for global influence.
4. Easing of US sanctions against Venezuela, October 2023
The most significant relaxation of Trump-era restrictions on Caracas occurred on October 18, when the Biden administration lifted sanctions on Venezuela's oil industry in response to an agreement struck between the opposition and the government for the 2024 election (Reuters, 2023). The nation has been unable to freely export oil onto the open market since 2019 due to crippling sanctions. Under the new guidelines, American and foreign companies will be allowed to produce and export Venezuelan oil and gas and conduct business with state-energy monopoly Petróleos de Venezuela, though transactions with Russian oil companies in Venezuela remain off-limits.
Implications: The license is a big win for international oil companies such as Conoco Phillips, Repsol and Eni who have been trying to collect billions of dollars in unpaid debt for years. Despite having some of the greatest oil and gas reserves in the world, Venezuela's September production of just 824,000 barrels per day was a long cry from the country's daily output of over three million barrels in the 1990s and a distant third in Latin America (WSJ, 2023). This development serves as an opportunity for my country Trinidad and Tobago as it will trigger greater collaboration on natural gas projects. The relaxation of the sanctions for the next 6 months, allows the country to bring to execution phase the Dragon gas project with 4.2 trillion cubic feet of gas (Reuters, 2023) as well as development of cross border fields such as Loran Manatee and Manakin (Energy Chamber of Trinidad and Tobago, 2023) that will strengthen its petrochemical and LNG sectors. On October 17th, The United States granted an amendment requested by the government of Trinidad and Tobago to a license allowing the joint development of an offshore gas project with Venezuela. The amendment would allow payments in hard currency or in kind to Venezuela for any gas supplied by state-run oil company PDVSA. On December 22nd, the government of Trinidad and Tobago secured a licence to proceed with the extraction of natural gas from Venezuela's Dragon gas field.
5. Chevron Steps forth to bask in Guyana Riches, October 2023
This year Chevron made bold steps by spending $US53 billion dollars to acquire Hess Corporation, one of the last major US oil companies controlled by a single family (WSJ, 2023).
The opportunity? 11 billion barrels of oil off the coast of Guyana. The acquisition allows Chevron to gain a 30% stake in Guyana’s Stabroek Block, the largest crude discovery of the past decade and the most profitable. (Financial Times, 2023). Exxon has 45% with China’s CNOOC Ltd the remaining 25%.
Implications: Many oil majors are coming around to accept the energy transition movement. There are driving forces. Besides government policies and shareholder activism, banks and investors no longer want to fund new oil projects. The International Energy Agency has most recently called for no new oil and gas fields to be approved for development. Whilst oil majors remain firm that there is a role for oil in the long term (oil still accounts for 90% of transportation needs), they are pursuing growth through acquisitions rather than virgin explorations. Companies like Chevron do not want to risk capital by exploring expensive unproven reserves. Instead, they are allocating cash where the returns are proven to be lucrative (Reuters, 2023). Guyana has some of the lowest breakeven costs for new offshore developments anywhere in the world (Kaieteurnews.com) with prices ranging between US$25 to$32 in an oil environment of on average US$80. Its production is on course to triple to US$1 million barrels a day by the end of the decade and it is light crude making it cheaper to refine than high-grade fuels. The oil being produced has a low carbon intensity, 30% lower greenhouse intensity (S&P Global, 2023) than the average upstream portfolio therefore as the world pushes towards decarbonization, fossil fuel investments will be compelled to follow the direction of lower emitting greenhouse gas projects.
6. Exxon Mobil becomes an oil Mega Major- October 2023
With its US$59.5 billion acquisition of Pioneer Natural Resources, the US energy supermajor will become the leading producer in the Permian Basin, which is rich in gas and oil and spans Texas and New Mexico (Financial Times, 2023). The deal with Pioneer Natural vastly expands Exxon’s presence in the Permian Basin, a massive oilfield that straddles the border between Texas and New Mexico. Drilling the Permian accounted for 18% of all U.S. natural gas production last year, according to the U.S. Energy Information Administration. Exxon's 570,000 net acres in the Delaware and Midland Basin and Pioneer's more than 850,000 net acres in the Midland Basin will be integrated. This investment supports Exxon's assertion that, in the short term, the markets that depend on fossil fuels for fuel and feedstock will experience a severe shortage if there is no investment in these resources. This deal adds US$5 billion of annual free cash flow and establishes a Permian resource base of over 16 billion barrels oil equivalent and creates the world’s largest tight oil player (Wood Mackenzie). ExxonMobil secures decades of supply for its growing integrated full value-chain infrastructure that stretches from the Permian to the Gulf Coast – including midstream, refining, petrochemicals, carbon management, LNG and commodity exports. ExxonMobil already has one of the strongest oil and gas production growth outlooks this decade, supported by an opportunity-rich upstream portfolio.
Implications: Sleek strategy execution. This is another example of an oil major reducing upstream risk and cost by investing in already profitable assets and consolidating upstream acreage. Wells payback in less than 24 months, driving stellar returns and some of the lowest breakeven prices in the sector. Consolidation offers companies greater opportunities to use their operating systems to deliver operating and capital efficiency as well as increase production. Pioneer’s upstream operating cash margins over the next five years are 20% higher than ExxonMobil’s global upstream average. Pioneer’s Scope 1 and 2 emissions intensity is also 75% lower than ExxonMobil’s global upstream production. Exxon has forecasted that by 2027, about 60% of the combined company’s production will come from low-cost, high-growth strategic assets, including the Permian, Guyana, Brazil, and LNG, with total production of more than 5 million oil equivalent barrels per day.
7. The Panama Canal is drying up
Connecting the Atlantic and Pacific oceans by 82 kilometers, the 100-year-old Panama Canal is one of the world’s crucial shipping routes however, rainfall has been its lowest since 1950. The Gatún Lake is the artificial lake that vessels use to transit between the Atlantic and Pacific locks. It holds the water supply needed to operate the lock systems of the canal. This river is traversed by an estimated 5% of all maritime trade worldwide however, this year, lack of rain due to a severe drought has lowered vessel depth restrictions thereby limiting ship traffic (36 to 24 per day), creating long delays and causing shipping rates to escalate and increasing the cost of commodities. The main users of the canal include dry bulk ships, chemical tankers, LNG and LPG gas carriers.
Implications: This signals that companies cannot afford to ignore climate shifts and weather-related uncertainties in their business. There is the inaccessibility of resources, the inconvenience of having to change supply chain routes amidst the rising cost of doing business. Countries like Chile, Peru and Ecuador will have to get cargoes from the US Gulf coast via the Strait of Magellan, leading to a larger share of fleets being tied up on longer voyages, significantly boosting freight rates. (Argus, 2023). The cost of shipping fuel on a US-Japan route has risen to record levels of US$250 per ton (EIA, 2023). Bloomberg reported that shippers overall spent $235 Million in a bid to bypass Panama congestion. Companies transit the canal as its half the journey time of the alternatives. From the US Gulf, the Suez Canal route takes a little over a month to Japan while the Cape of Good Hope route is about 40 days. This compares with just over 20 days to reach Japan via the Panama Canal (S&P Global, 2023). In August ships travelling through the canal had to wait 17 days to transit with some companies having to bid over US$1.5 million in auctions to access slots. In November, one company set the record with winning the largest bid at US$4 million (Bloomberg, 2023).
8. COP 28- December 2023
For nearly three decades, the UN has been at the centre of global climate summits – called COPs – which stands for ‘Conference of the Parties’. COP28 held in Dubai 2023 edition of United Nations Climate Change Conference where climate change remains a global priority. At the COP28 climate meeting in Dubai, nearly all nations committed to "transition away from fossil fuels," which are the primary cause of climate change. In the 28 years that international climate talks have taken place, “the global stockade” which represents a first of its kind facilitated a pledge of ways that nations may step up their efforts to meet the objectives of the historic Paris Agreement. Many nations, however, left the negotiations angry that there was not a clear directive to "phase out" fossil fuels this decade and that there was a "litany of loopholes" in the agreement that may allow the extraction and use of coal, oil, and gas indefinitely.
Implications: The Caribbean and other small island development states has been particularly vocal on climate justice. Finally on December 13th, 2023, the final stocktake deal, included text on “transitioning away from fossil fuels” after 12 hours of intense shuttle diplomacy.
9. Brazil flirts with joining OPEC-December 2023
One of the world's fastest-growing oil producers, Brazil maybe set to join the OPEC+ oil bloc as of 2024. Brazil hopes to join the oil cartel in January after a technical analysis of the charter for cooperation. President Luiz Inacio Lula da Silva's office confirmed receiving the OPEC+ invite during his trip to Saudi Arabia, but said he had not formally responded. It remains to be seen whether Brazil will participate as an observer or full participant.
Implications: Thus far OPEC production cuts as a means of boosting prices has had mixed results. According to the International Energy Agency (IEA), booming crude oil production in the United States and Brazil has been frustrating efforts by OPEC+ to rein in global oil supply. Guyana is also experiencing an oil production boom. Analysts believe that Brazil's and other non-cartel oil boom production poses a significant threat to the ability of OPEC+ to control oil prices, and recent investments from Petrobras suggest the boom won’t end any time soon (Oilprice,2013). The world's oil production landscape may be drastically altered by Brazil's decision to join OPEC+. It remains unclear whether the nation will participate in output cuts if it joins.
Conclusion
With such a dynamic 2023 4th quarter, I anticipate nothing less than an intriguing and dynamic 2024.
No part of this publication may be reproduced, translated, stored in a database or retrieval system without expressed permission from the author.