Historic Agreement at COP28: « The 21st Century will be a New Golden Age for Metals! »

On December 13th, agreement was reached at COP28 on a transition away from fossil fuels. Given that COP28 was taking place in the United Arab Emirates, an oil-producing country, with the presence of numerous lobbies, can this agreement be considered historic? What implications will it have for the economic model of oil-producing countries and for oil companies? How prepared are they for the energy transition? What geopolitical shifts can we expect? Is there a risk that, as we move away from the oil economy, we will enter a new era of energy dependency, particularly with regard to rare metals? Emmanuel Hache, director of research at IRIS and a specialist in energy forecasting and the economics of natural resources, takes a closer look. His latest book, Métaux, le nouvel or noir (published by Du Rocher, Sept. 2023), was awarded the Prix Marcel Boiteux 2023 by the Association of Energy Economists.

On December 13th, agreement was reached at COP28 on a transition away from fossil fuels. Should it be considered historic?

At first sight, it is difficult to regard this agreement as historic, given the divergent opinions of the various stakeholders. Some describe it as historic, others as a milestone or an important moment, and others as insufficient. However, for the first time in 28 years of COP, a reference to a gradual phase-out of fossil fuels appears in the final text. While we may regret the absence of terms such as « elimination » or « phase-out » of fossil fuels with a precise deadline, this is certainly the first time that the transition to an economy not based on fossil fuels has been mentioned so clearly. What is also clear is that we have witnessed a great moment of semantic creativity in the final text. The term « phasing out » has been replaced by « transitioning away » in order to achieve consensus. The agreement is also rather unsatisfactory on the issue of methane emissions and coal, for which there is no timetable, precise figures or new advances.

However, given the urgency of the climate situation, it is important to look at the positive points and the global determination to accelerate: accelerate investment in renewable energies (a threefold increase by 2030) and energy efficiency, and accelerate action on loss and damage. A successful COP is one that will lead to action, and we will see the momentum on which future developments on climate issues will be based. To question the organisation of a COP in a producer country is, in my view, meaningless. Where should it have been held? In a consumer country dependent on oil and gas? If we are looking for a virtuous country to organise the COPs, the choice is fairly simple and rather quick. With the exception of Costa Rica and perhaps Bhutan, it would be difficult to organise them if we wanted to find a virtuous country on these issues.

What implications will this agreement have for the economic model of oil-producing countries and for oil companies? How prepared are they for the energy transition? Can we expect any geopolitical changes?

The agreement is not binding, but it is a renewed invitation to the various players to transform their economic and energy models. Oil companies have been facing a number of challenges over the past decade: the need to maintain part of their core business in order to avoid disappearing, to continue to pay their shareholders and to invest in the energy transition. Pressure from the international banking system to stop financing carbon-intensive activities is not strong enough, and neither is public or shareholder pressure. Some companies are trying to transform themselves into global energy companies… but this movement is excessively slow and is not up to the challenges. The European majors (BP, Shell and Total Energies) are certainly much more advanced on this subject than their American counterparts, with investments in solar, wind, batteries and gas and electricity distribution, but these currently represent only a few percent of their turnover.

Similar observations apply to individual countries. The oil monarchies of the Gulf (Saudi Arabia, Kuwait, Bahrain, Oman, Qatar and the United Arab Emirates (UAE), Iraq and Iran) account for almost 50% of the world’s oil reserves (40% for gas) and their degree of diversification is highly heterogeneous. Economic trajectories have always been considered independently. Within OPEC, for example, there has never been a common fund for redistribution and diversification. For producer countries, the low-carbon transition is an unknown. For the most part, they have no control over the pace of the global energy transition, or over the deployment of low-carbon technologies in consumer countries, and hence over changes in oil demand. Some countries are ahead of schedule in the process of economic diversification. The most advanced countries (United Arab Emirates and Qatar) provide good examples of advanced diversification, coupled with an increase in their soft power at global level. Despite the efforts made since the 1970s by the most advanced countries, and more particularly since 2010 with the introduction of plans or visions, including in particular Vision 2030 in Saudi Arabia, the lack of diversification is still evident in most exporting countries. This lack of momentum keeps the state and the economy dependent on oil. The issue of diversification implies a radical transformation of the economic structures of rentier countries. The problem is both financial and temporal, because the clock is ticking for oil-producing countries if, as predicted by the International Energy Agency (IEA), demand for oil peaks by 2030.

Integrating into global or regional value chains, developing technological innovation and adapting the economic and social model to the new global ecological situation requires skills, financial resources, cooperation and vision.

What type of energy should this agreement benefit? As we move away from an oil-based economy, is there a risk that we will fall into a new energy dependency, particularly with regard to rare metals?

The low-carbon transition will require the electrification of all uses, especially the transport sector, which consumes almost 60% of the world’s oil. Similarly, the electricity production sector is undergoing a major transformation with the deployment of renewable energies (wind and solar) to replace thermal power stations (coal, gas, etc.). As a reminder, the world’s leading source of electricity production is still coal (36%).

Each new MW installed of low-carbon technologies requires a significant use of metals. Substituting electric vehicles for combustion-powered vehicles is not without its problems, either, not only in financial terms for consumers (vehicle acquisition costs), but also from a global and geopolitical point of view. Behind every electric vehicle is a battery made up of metals such as cobalt, lithium, nickel and copper. The International Energy Agency estimates, for example, that an internal combustion vehicle is made up of 50 kg of so-called strategic materials, compared with almost 200 kg for an electric vehicle. It should be remembered, however, that despite the production of the battery (and the associated environmental impact), an electric vehicle will be more environmentally efficient in terms of greenhouse gas emissions. What’s more, these impacts will diminish over time, mainly because of the decarbonisation of the global electricity mix.

Alongside this environmental gain, it is clear that the race to electrify transport will add another layer of complexity to the global low-carbon transition. Indeed, this transition is first and foremost a metallic and metal-intensive one, since our consumption of metals will increase exponentially in the decades to come. And consumption means imports and dependence on metal-producing countries. As a result, the low-carbon transition is likely to reshape the global energy landscape, with new metal producers becoming a cornerstone of international relations.

The 21st century will be a new golden age for metals! These include the countries that produce the key metals used in vehicle batteries: lithium, which is produced in Australia, Latin America (Chile, Peru, Argentina) and China; cobalt, most of whose reserves are located in the Democratic Republic of Congo (DRC); and nickel, which is mined in Indonesia and the Philippines. More than 60% of the rare earths used in permanent magnets are mined in China.

All the raw materials involved in the energy transition have very high levels of concentration of production and reserves, far higher than those of the world’s leading traded commodity, oil. This raises the question of the possible cartelisation of markets in the medium term, particularly for lithium and all battery materials. This is not the most certain prospect, but it does have the merit of placing the mineral- and metal-producing countries at the heart of global ecological developments, so often overlooked in the low-carbon transition in favour of countries developing technological innovations. While historically conflicts over raw materials have often focused on energy raw materials, the context of the dual digital and ecological transition is exacerbating competition on the markets for strategic materials, particularly between China, a major player in the production and above all refining of metals, the United States and Europe.

All in all, we are facing a real geopolitical reshuffle in the decades to come, and metals will be at the heart of global geopolitical developments.

 

Translated by Deepl.