State-owned oil companies risk wasting US$400 billion in oil and gas investments – NRGI report

State-owned oil companies, according to a report by the Natural Resource Governance Institute (NRGI), risk wasting over US$400 billion investments in the oil and gas sector as countries around the world transition to much cleaner sources of energy in a bid to combat climate change.

State-owned oil companies or national oil companies (NOCs) according to NRGI, produce half of the world’s oil and gas and are responsible for 40 percent of the total capital invested in the industry worldwide.

NRGI estimates that NOCs could invest about $1.9 trillion in the next ten years, one-fifth – US$400 billion – of which would not result in a profit if energy transitions by countries fall in line with the current climate commitments in the Paris agreement.

“A huge amount of state investments in oil projects will likely only yield returns if global oil consumption is so high that the world exceeds its carbon emission targets,” says Patrick Heller, an NRGI advisor and one of the co-authors of the report titled Risky Bet: National Oil Companies in the Energy Transition.

“This risky spending has major implications for the economic futures of national oil companies’ home countries. State-owned oil companies in developing and emerging countries including Algeria, Mexico, and Nigeria might collectively invest more than $365 billion in such high-cost projects—expenditures that could instead help alleviate poverty or diversify their oil-dependent economies,” he added.

As a reference, the NRGI cites Nigeria’s National Petroleum Corporation stating that almost half of the Nigerian NOC upcoming oil projects spending—an amount that exceeds the government’s expenditures on education and health care—may fail to break even if the world makes rapid progress toward climate goals.

Similarly, Colombia’s Ecopetrol could invest the equivalent of a fifth of its government’s total expenditures into oil and gas projects that will break even only if the world fails to meet its climate commitments.

“State oil companies’ expenditures are a highly uncertain gamble,” says David Manley, NRGI senior economic analyst, and report co-author. “They could pay off, or they could pave the way for economic crises across the emerging and developing world and necessitate future bailouts that cost the public dearly.”

“National oil companies will have a major influence on the success of the push for a managed decline in fossil fuel production worldwide,” says Heller.

“Authorities in many producing countries risk pushing ahead with new investment regardless of what is economically and ecologically feasible, and the outcomes could be dire. If international oil companies and private investors make good on their stated ambitions to move away from hydrocarbons, state actors may be even more tempted to step in and fill the gap in oil production,” she added.

The Paris Agreement is a legally binding international treaty on climate change adopted by 196 States in Paris on December 12, 2015, and entered into force on November 4, 2016.

Its goal is to limit global warming to well below 2 degrees Celsius, preferably to 1.5 degrees Celsius, compared to pre-industrial levels.

To achieve this long-term temperature goal, countries aim to reach global peaking of greenhouse gas emissions as soon as possible to achieve a climate-neutral world by mid-century.

The Paris Agreement is a landmark in the multilateral climate change process because, for the first time, a binding agreement brings all nations into a common cause to undertake ambitious efforts to combat climate change and adapt to its effects.