Daily Update: May 9, 2024

Start every business day with our analyses of the most pressing developments affecting markets today, alongside a curated selection of our latest and most important insights on the global economy.

Pensacola and Dharan Tell Different Stories About the Future of Energy

People like to tell simple stories about the future of energy. One simple story is that fossil fuel infrastructure is a stranded asset destined to become derelict and forgotten as the energy transition proceeds. Another simple story is that fossil fuels will be around for decades to come; nothing will change because fossil fuels are too convenient and cheap to abandon as an energy source before the wells finally run dry. But simple stories about energy markets are often wrong. Recent statements from UK-listed Deltic Energy and Saudi Aramco illustrate the complexity and political stakes around the stories we tell about energy.

Deltic is a company that invests in resources such as oil and natural gas field licenses. In January 2023, Deltic announced that it acquired a 30% stake in the Pensacola discovery, a natural gas and oil field found by Shell in the southern North Sea. But Deltic said it has struggled to find a farm-out partner to exploit Pensacola despite its potential as one of the largest gas discoveries in the southern North Sea in over a decade. The company attributed the “hostile” political environment in the UK for the lack of investment interest, according to S&P Global Commodity Insights.

In March, the UK government extended the 35% Energy Profits Levy on oil and tax revenues to 2029. The current tax burden for oil and gas revenues stands at 75%. However, the opposition Labour Party, which is ahead in the polls and widely expected to become the governing party after an election later this year, intends to raise the Energy Profits Levy to 38%. The Labour Party also plans to reduce the tax deduction on capital investments to 46% from 91.4%. Deltic said that these anticipated changes have made Pensacola unappealing to investors and may require the company to withdraw from its license.

"The struggle to find a way forward on a project like Pensacola … is a real-world consequence of our political leadership using the nationally important oil and gas industry as a political football at a time when energy security is of paramount importance," Deltic CEO Graham Swindells said. 

At Saudi Aramco’s headquarters in Dharan, Saudi Arabia, a different story is being told. On April 29, Saudi Aramco CEO Amin Nasser said the Global South will continue to fuel global oil demand growth for decades to come. According to Nasser, 50% to 60% of oil demand is already coming from developing economies where populations face challenges in accessing an adequate standard of living and wages. Nasser expects that demand to rise to 80% by 2050.

Saudi Aramco has maintained that a lack of investment in oil exploration and development and costly renewables would push countries in the Global South to adopt cheaper hydrocarbons such as coal. The company, which has a net-zero goal of 2050, believes that continued investment in all sources of energy will be necessary to accomplish a multispeed energy transition. Nasser cautioned that picking winners and losers in the energy transition would harm developing economies.

Today is Thursday, May 9, 2024, and here is today’s essential intelligence.

- Written by Nathan Hunt.

Read all of our research and insights here.