FUTURE OF HYDROCARBONS

FUTURE OF HYDROCARBONS | La Jolla Conference 30 th Anniversary Policy Brief

Given their government ownership and leadership structures, NOCs are more often than not tied to political cycles. Abandoning hydrocarbons is bad news for them and their transition will be delayed as much as possible, especially in oil-dependent countries like Mexico, but also Argentina, Ecuador, Venezuela, Trinidad & Tobago, and even Peru, Brazil and Bolivia. For all the talk about new technologies, there is considerably less talk about what we will leave behind. There is concern about who will take care of the remaining oil and gas infrastructure, much in need of refurbishment. Cash flows will start declining as well and it is rare to see legislation that obligates the oil and gas sector to put money aside for environmental liabilities. The cash flows from oil and gas are important for many economies and officials need to start considering this and figuring out how to manage the legacy issues. If underpinned by a longer- term vision, some of this infrastructure can also be leveraged as part of the future energy system that will emerge in the region. When we talk about stranded economies and NOCs, the transition will introduce existential problems for the future of state energy firms and their governments. Latin America has several well-run NOCs which puts them at an advantage to transition, but there may be political challenges to head down that path. The key is that there is continuity in policy goals to transition, but Latin America has a strong pendulum effect which makes policy permanence illusory.

Governments and their NOCs need to make irreversible commitments through legislation to avoid this problem. A positive example is Ecopetrol, which is doing a lot to develop clean technology. There are also private companies in Colombia that are innovating. Policymakers have to set up NOCs for success where they can have longer-term thinking about how they can transition. Beyond rent-seeking and politics, many NOCs have strong trade unions and thus elements of reskilling and considerations as to how people will be displaced from their jobs are part of the energy transition and NOC discourse. Workforce development must be part of the stakeholder management plan, or it will be a huge inhibitor for NOCs to evolve and embrace the global energy transition. Political interference and imperatives have allowed many industries to survive even as they become obsolete. Look no farther than the example of the steel industry in the US as a key example.

FUTURE OF HYDROCARBONS | INSTITUTE OF THE AMERICAS