The Pandemic Depression
The Global Economy Will Never Be the Same
On January 7, the oil and gas companies Apache Corporation and Total SA announced a major oil find off the coast of Suriname, not far from enormous offshore deposits in neighboring Guyana discovered by ExxonMobil last year. The size of the Suriname discovery is yet to be determined, but it could be large enough to transform the small South American country, where per capita income is less than $6,000. Just three months prior on the other side of the Atlantic, the British oil major BP announced the largest natural gas discovery of 2019: the energy equivalent of 1.3 billion barrels of oil lies waiting to be extracted off the coast of Mauritania, more than enough to support a liquefied natural gas (LNG) hub. And the same year in Mozambique, Total acquired a $3.9 billion stake in an LNG project whose total cost will likely dwarf that country’s national economy.
At a time when many countries are finally trying to reduce their reliance on fossil fuels, the world is suddenly awash in oil and gas discoveries. But for the countries with the newest finds, many of them in Africa and South America, mineral wealth may not be the bonanza it was in decades past. Large oil and gas companies see long-term prices trending downward. As a result, they are investing in fields that can be brought into production quickly instead of developing expensive, far-flung reserves. Global natural gas markets, in particular, face a huge glut of resources and projects that must compete against the falling price of renewable energy technologies. As a result, Suriname, Guyana, Mauritania, Mozambique, and a handful of other developing countries with recent fossil fuel finds are in a desperate race against time.
The party hasn’t ended yet, but for the world’s newest petrostates it may be last call. To preempt a possible price slump, many oil and gas companies are pursuing aggressive timelines for new projects to lower costs and return cash quickly to nervous shareholders. ExxonMobil has pulled out all the stops to get its Guyana find online as fast as possible: its discovery-to-extraction timeline is the shortest ever for a greenfield project of its scale. In Mozambique, Total appears to be fast-tracking development of the LNG project, after other investors dragged their feet for years. (Anadarko Petroleum discovered the gas reserves in 2010.) The Suriname and Mauritania finds may well be developed, but the former is still in the exploration phase and the latter will have to overcome a number of financing and other obstacles.
Even on accelerated timetables, recent discoveries may not yield the same windfalls that previous finds did.
Even on accelerated timetables, however, these recent discoveries may not yield the same windfalls that previous finds did. New oil and gas states will have to compete with surging fossil fuel exports from the United States, which absorbed most, if not all, of the rising demand for petroleum in 2019 and may continue to do so for the next few years. What is more, other developed countries such as Norway and Canada are developing their own recent fossil fuel finds with the benefit of new technologies that lower the cost of drilling and facilitate greater production. Competition between these markets and new developing ones will only stiffen if global economic growth falters down the road, reducing the immediate demand for oil.
Making matters worse for new oil producers, some of the world’s biggest markets—such as China and the European Union—have enacted policies that incentivize a rapid move away from oil. France, the United Kingdom, China, and India have all announced future bans on the sale of gasoline-powered cars. And rising targets for renewable energy in the United States, Europe, and Asia have clouded the prospects for natural gas. For all of these reasons, recent finds in the developing world are unlikely to be as lucrative as similar discoveries in the past.
Other finds may never be developed at all. New producers are on the hunt for capital just as many existing oil producers in the developing world are struggling to find continued investment for their remaining resources. In a recent tender for offshore drilling rights in Brazil—billed by President Jair Bolsonaro as the “biggest auction there’s ever been”—the government found few takers. Angola’s oil production is falling because of a lack of interest in new drilling.
Part of the problem is the broader market forces described above. But part of it is mounting hostility from international financial institutions such as the World Bank and the European Investment Bank, both of which have sworn off lending to new fossil fuel projects because of climate change. In the past, these institutions played a critical role in helping poorer nations get lucrative oil and gas projects, including major pipeline projects in Africa, off the ground. The World Bank alone issued $21 billion in fossil fuel–related loans, grants, and guarantees between 2014 and 2018. Governments and sovereign wealth funds are increasingly climate conscious as well: last year, the UN-backed Green Climate Fund—which finances investments in climate adaptation, clean energy, and energy efficiency projects in the developing world—attracted commitments of close to $10 billion from 27 countries to spend on climate aid over the next four years.
The apparent hypocrisy of rich nations swearing off fossil fuels just when many poor nations are discovering their own has fueled debate about how best to balance climate and development goals. Climate justice advocates have gone as far as calling for long-standing and wealthy oil producers such as Norway to shut down their oil industries to make room for poorer nations with oil reserves. The 2017 Lofoten Declaration—signed by some 600 organizations in 76 countries—was a step in that direction, pushing for wealthy nations to lead the way in abandoning fossil fuel production because their economies have already benefited from burning oil and gas and are in a better position to diversify. But the Lofoten Declaration applies only to extant producers, and it is difficult to imagine a fair or uncontroversial way to determine which countries with new discoveries should be given priority to develop their oil and gas reserves.
In the end, markets will determine which new discoveries get exploited and which remain stranded in the ground or underwater. Projects with lower costs will advance further than those with a comparatively higher overhead. That will pit new oil states against wealthy Middle Eastern producers, which have among the lowest oil and gas production costs. At a recent OPEC meeting, the Angolan oil minister reportedly stormed out when his Saudi counterpart suggested that his country—which faces low rates of investment and high production costs—should lower production alongside OPEC’s richer members in order to shore up oil prices. Such heated debates among OPEC members reflect the high stakes for countries that depend heavily on oil and gas revenues for their state budgets. For nascent oil producers trying to break into that well-heeled club, however, the competition will be tougher than ever.