Petrostates are currently confronted with significant challenges arising from the ongoing energy transition. The diminishing demand for oil and gas is exerting downward pressure on commodity prices, which in turn threatens the future revenue streams of these countries.
Carbon Tracker has recently highlighted this issue, emphasising that, despite a few countries making efforts to reduce their vulnerability, the overall situation of the 40 analysed petrostates remains as precarious as it was in Carbon Tracker's original 2021 Beyond Petrostates analysis. These countries are facing growing risks on multiple fronts.
This update from Carbon Tracker stems from two key factors. First of all, there are growing socio-economic challenges faced by petrostates that have intensified their vulnerability. Secondly, the availability of new data reflects the impact of recent geopolitical events on energy markets, further compounding the risks these nations face.
In a moderate-paced transition scenario, twenty-eight out of the 40 petrostates are projected to lose more than half of their expected revenue, aligning with the climate pledges of their respective governments. This translates to a potential loss of up to $8 trillion in expected revenue by 2040. The impact varies significantly among different petrostates.
To assess the vulnerability of these countries, Carbon Tracker categorises them into five tiers based on their revenue shortfall and their dependence on oil and gas revenues. Timor-Leste and Venezuela are identified as the most vulnerable, with many African petrostates, including Nigeria, Angola and Chad, falling into the highest tier. This is concerning, especially given Africa's rapidly growing populations and existing development challenges, which are exacerbated by the increasing impact of climate change.
While some petrostates may appear to have low risk according to Carbon Tracker's metrics, they could still be vulnerable within a broader economic context, as indicated by high fiscal breakeven prices. Even the lowest-cost producers, such as those in the Middle East, would face significant revenue losses in the moderate-paced transition scenario compared to a slow transition.
It's important to note that while oil and gas exporting countries in Europe and North America have relatively low dependence on hydrocarbons for government revenue and are not classified as petrostates, they still face substantial relative losses due to their higher production costs.
The International Energy Agency's (IEA) latest World Energy Outlook predicts that demand for oil, gas and coal will peak by the end of this decade due to the declining costs of clean technologies. This trend is anticipated to continue despite temporary setbacks caused by current high inflation and interest rates. The increasing economic competitiveness of clean technologies has led many governments, primarily in the Global North, to announce future bans on the sale of new petrol and diesel vehicles and gas boilers, further reducing fossil fuel demand.
There is growing momentum for governments to commit to tripling renewable energy capacity by 2030 and doubling energy-efficiency measures at COP28, signalling a clear shift away from fossil fuels.
Recent geopolitical events, including Russia's invasion of Ukraine and conflicts in the Middle East, have prompted many countries, especially in the G7 and European Union, to accelerate efforts to reduce their dependence on fossil fuel imports. This poses additional challenges to petrostates as their customer base is further threatened.
Carbon Tracker notes a change in the discourse around fossil fuels at UN climate summits, with a shift towards addressing the issue. The COP26 agreement in 2021 included language on phasing down unabated coal power and phasing out inefficient fossil fuel subsidies. Additionally, the Beyond Oil and Gas Alliance was established, aiming to facilitate the managed phase-out of oil and gas production, with Colombia becoming its first petrostate member.
Since 2021, "emerging petrostates" have faced delays in major projects and continue to launch new rounds of licensing, increasing their transition risks. Furthermore, many petrostates have experienced rising national indebtedness and worsening creditworthiness, with several countries having been downgraded in recent years. Poor credit ratings hinder their ability to borrow, further trapping them in fossil fuel dependency.
To reduce vulnerability to the energy transition, petrostates should consider several measures, as suggested by Carbon Tracker. These include diversifying their economies, reforming fossil fuel subsidies, establishing sovereign wealth funds and introducing new taxes, such as fuel and VAT. Implementing forward-looking policies that address the transition and mitigate its negative impacts is becoming increasingly urgent.
Many countries have already undertaken such reforms and can serve as models for others. Forums like OPEC and the Beyond Oil and Gas Alliance could facilitate peer-to-peer learning and the sharing of best practices.
The international community has a significant stake in supporting petrostates through this challenging transition, both for development reasons and to mitigate the risk of conflict and instability. Expanding Just Energy Transition Partnerships beyond coal to include oil and gas could provide the necessary financing for these essential changes.