COP27: Hopes and Despair

As last year’s COP 26 in Glasgow proved a disastrous show, many people around the world weren’t sure about the outcome of COP27 in Egypt. However, conclusions of this summit proved to be the most positive and a step forward to reach a goal. I would say that the most solid texture of Sharm El-Sheikh was the involvement of true players of energy sector, oil and gas in particular to which I will arrive shortly.

Emergence of Global South with almost identical voices pushed the summit towards a relatively better understanding of the subject matter. COP27 galvanized climate action and accountability on loss and damages(L&D) that goes beyond talk shop. For developing countries, oil rich or oil poor, L&D finance is the key negotiation point. Economic Loss and Damage from climate change is expected to be on average around 1.8 percent of their GDP annually by 2050. This volume of L&D for net oil and gas exporting countries is even higher.

The current climate finance architecture to which Iran is a party, fails to acknowledge, let alone address L&D within its preview. The rise of unprecedented and widespread climate disasters globally has caused profound impacts on human sustenance and survival, with disproportionate consequences for Global South. Between 2008 and 2018 alone, the overall economic toll was recorded highest for Asian countries at $55 billion, followed by Africa at $30 billion and Latin America at $26 billion. Notwithstanding the mitigation and adaptation efforts the developing countries will be compelled to undertake, the impact of climate change in annual residual damages cannot be prevented and Global South is likely to face a loss of some $290-580 billion as early as 2030. This is particularly very damaging since the United States has weaponized climate change issues in its international policy mix towards certain countries namely; Iran.

The imperative calls for L&D financing in COP27 emerged as a crucial pillar for climate change summit. However, the recent climate change summit was nearly failing since the rich industrial countries which are most responsible for pollution and carbon emissions wanted the South to be penalized most rigorously for its energy consumption and still pay even more to clean up the mess that the Western economies are responsible for. COP27 was different from precedent COPs in that it showed the Global South the way forward. Unity and persistence is a key to success in international forums.

Fossil Fuels: From Defensive to Offensive

Powerful presence of National Oil Companies as well as other major players in international energy chains, helped to balance the theme of COP27 summit, though marginally. A Goldman Sachs contributor said:” $3.8 trillion of investment in renewables moved fossil fuels share in global energy consumption from 82 percent to 81 percent between 2000 and 2020. You heard it right. This is simply mind blowing. However, the world is now reversing course and moving backwards from gas to coal. This is a reality. After the war in Ukraine and imposition of sanctions on Russian gas supply, several countries in Europe and Asia are moving back to coal which is much more polluting than gas and oil.

In Paris and then in Glasgow climate summits of Heads of State, finger- pointing was the name of the game. OPEC and non-OPEC countries were the main culprits. The theme of summits were designed as if all blames is on the producers of oil and gas and consuming nations were the innocent victims of all carbon emissions.

In COP27, no delegate mentioned gas supply interruptions from Russia but blamed the US for double standards. The US president travels to the Middle East to ask for more oil and then championed disinvestment from oil and gas in his own country. The irony is that the United States is digging deep into its Strategic Petroleum Reserves (SPR), which is meant for security emergencies for market balancing and price appeasement and then demand that the world must stop to invest in oil and gas.

COP27 owes its relative success to the tension in Ukraine. Many analysts and oil market observers came forward and sounded vocal in condemning previous oil and gas policies of the Western countries and UN false assumptions. Back in 2021, British government banned presence and sponsorship of oil companies in Glasgow summit. In COP27 in Egypt, presence of oil companies were powerful and omnipotent. In COP26, a country like Poland was harshly criticized for still allowing coal industry to carry out its mining. In COP27, Poland was praised as a successful instance of energy self-reliance.

Green Politics

The last couple of COPs were influenced by “green movements” and expansive political extremism in Europe. Since 2015, a global anti oil and gas movement led by European ultranationalist parties organized regular demonstrations all over Europe in favor of decoupling growth and fossil fuels. Renewables and green energy was the game of the game. Europe began to phase out refineries while petrochemical plants were in full operation. Green movements went further in phasing out nuclear power plants, too.

Europe was addicted to abundant, cheap natural gas from Russia for several decades, and had taken Russian gas for granted. Most heavy industries of the continent,in particularGermany were built around cheap Russian gas. War in Ukraine suddenly changed everything. The greens went on offensive and oil and gas found a breathing space away from fictitious scenarios that overshadowed the realities of the climate change.

Oil and gas supply crunch helped to bring the consuming energy world to their senses. There was a lack of consensus over the role and future of gas with clashing options voiced at events and at the sidelines during the first week of COP27 climate summit in Sharm El-Sheikh. However, gas was once again viewed as a bridge fuel in the energy transition. Though its role may still be short-lived and unstable. We noticed that given the lack of substantial investments in gas industry, the world economy has limited time to begin moving away from gas to renewables by 2050.

One of the most vocal supporters of gas at COP27 was French TotalEnergies which emphasized that the company’s growth strategy in gas has been reinforced by Europe’s understanding that gas is an essential component of the continent’s energy mix. This was more evident when Russian gas was sanctioned by OECD members. During the summit TotalEnergies said that the company intends to move away from oil to gas. This made net gas exporting countries jubilant. This means to indicate that gas was recognized as the transition energy carrier within the next three decades span. Gas completes the intermittency of renewables.

Nevertheless, no Western country or company advocated investment in oil upstream sector as they believed that oil will be phased out by 2050. This leaves investment on oil upstream mostly and almost solely on National Oil Companies (NOCs). In fact NOCs are mostly technologically advanced to undertake investments on their own. For one, the United Arab Emirates head of state who spoke in the summit that his country is committed to expanding oil industry.

COP28: The Way Forward

COP28 summit is scheduled to commence in UAE. This is considered a positive sign of strength from OPEC producers who have been marginalized in couple of past environmental summits. It goes without saying that COP27 was held during one of the most critical geopolitical backdrops. Tension in Ukraine and sanctions against Russian energy was particularly challenging since it involves a major source of energy i.e. natural gas.

The package that was agreed, reaffirmed the usual commitments that was expected for limiting global temperature rise to 1.5 degrees Celsius above pre-industrial era levels. The package also strengthened actions by countries to cut GHG emissions and adapt to the inevitable impacts of climate change, as well as boosting the support of finance, technology and capacity building needed by developing economies.

Creating a specific fund for L&D marked an important point of progress, with the issue added to the official agenda and adopted for the first time at COP27. Governments took the groundbreaking decision to establish new funding arrangements, as well as a dedicated fund to assist developing countries in responding to L&D. Governments also agreed to establish a transitional committee to make recommendations on how to operationalize both the new funding arrangements and the funds at COP28 in UAE next year. The first meeting of the transitional committee is expected to take place by the end of March 2023.

Parties also agreed on the institutional arrangements and quantify the network of L&D for technical and financial assistance to the affected developing world that are particularly vulnerable to the adverse effects of climate change. As such COP27 saw significant progress on adaptation of specific countries such as landlocked and island states.

Though the issue of finance was discussed, it was decided that no transfer of money be made before 2024. This is a disputable factor amongst countries attending the summit. Developing countries announced that no payment is transferred to them for a specific climate-related project. Developing countries’ Heads of State also announced that all transfers that has been so far made has been the regular loans or payments by international agencies such World Bank and International Monetary Fund (IMF).

What I learned from COP27 is that, environmental issues can not necessarily be handled by an international institution. Climate issues and related aspects of environmental topics should be best dealt with on regional basis. Different regions of the world face different environmental challenges. Middle East and oil producing regions face different sets of challenges, compared to Europe or Africa. Existing regional pacts and treaties can also be evolved in a way as to institutionalize climate affairs. America is in the business of politicization of all international organizations. This isn’t a perfect framework within which all countries may fit. Possibly a regional COP can shape up within COP27.

COP28 will be crucial for the future of oil and gas industries. This requires a great deal of lobbying prior to November 2023 when the world leaders gather in the UAE.

FereydounBarkeshli

Energy Market Analyst

Courtesy of Iran Petroleum