MacroPolis

In the bitter politics of the memoranda years, major points of agreement among political parties were scarce - at least in terms of rhetoric. One of the few exceptions to this rule was the programme for oil and gas exploration and exploitation in Greece.

Since 2012, successive Greek governments have progressively granted an area of 78,000 sq km for onshore and offshore exploration and exploitation, with lease contracts encompassing both stages.

The process of leasing this vast area, 2.5 times the size of Belgium, continued under the SYRIZA-led government, while the newly elected center-right New Democracy administration is committed to this endeavour.  

On a superficial level, it is easy to understand why virtually all political parties and media have embraced the prospects of oil and gas drilling. In the crisis-ridden country, upstream oil and gas is widely perceived as a means to attract FDI, enhance employment in what has historically been a high value-added sector, reduce oil dependency and import bills, and even (for some) as an instrument to repay part of the accumulated mountain of public debt via royalties and other taxes on drilling operations.

The narrative of an “easy solution” to Greece’s economic woes may be attractive, particularly in a country accustomed to discourses of simplistic silver bullet “solutions” to economic development.  

However, in the current global context, this consensus thinking is astonishingly narrow-minded, by missing out entirely the complex economics of oil and gas.

Crucially, it ignores the elephant in the room, so to speak, which is climate change mitigation, the implications of the Paris Agreement for energy markets and the fate of fossil fuel infrastructure over the coming decades.

In a world in the process of an energy transition whose scale is akin only to the industrial revolution, the key questions Greece’s policy makers should ask themselves are the following:

• Is it economically strategic to invest in an incumbent fossil fuel industry, as opposed to specialising Greece’s economic tissue in clean energy, efficiency and storage technologies?
• Are these investments likely to result in stranded assets while locking Greece into energy sources whose profitability may sensibly decline over the coming years?
• Finally, if these investments end up stranding, are benefits worth the substantial environmental and socio-economic risks they pose, notably compared to clean energy alternatives?     

The arithmetic of the Paris Agreement

The 2018 IPCC special report on 1.5°C outlined the scale of the transformation required to achieve the Paris agreement target of “limiting global warming to well below 2°C and pursuing efforts to limit it to 1.5°C”. The key message is that the world would need to achieve net zero emissions by 2050.

To achieve this, the IPCC’s central scenario is that, globally, oil and gas use will need to decline by 54% and 37% respectively by 2050, relative to 2020 levels. This median scenario assumes a substantial scope for CCS (Carbon Capture and Storage). With less or no scope for CCS technologies, the decline would be much steeper – a 93% and 88% decline in oil and gas consumption respectively, relative to 2020 levels.

Other analyses anticipate an even larger decline, while even the traditionally conservative International Energy Agency (IEA) reaches similar conclusions in the sustainable development scenario of the World Energy Outlook.        

From an economics standpoint, the whole question is whether there is scope for the development of new oil and gas fields. The answer is blunt: if we are to keep global temperatures from rising above 1.5°C – or even above the much more dangerous threshold of 2°C - there is little scope for the development of new fields, even when accounting for the natural decline rate of existing fields.    

In fact, according to academic research published in Nature, the full exploitation of existing (proven) reserves would overshoot the Paris agreement emissions targets. The same paper estimates that, to meet a target of 2 °C, “a third of oil reserves, half of gas reserves and over 80 per cent of current coal reserves should remain unused”.

Greece’s hydrocarbons in a world of stranded assets

The implications for the oil and gas industry are stark, as investors have started noticing.    

A sharp decline of consumption (through regulation and carbon pricing, and via competition from clean energy sources that are becoming increasingly competitive) will likely result in lower prices, eating into the profitability of the oil and gas industry, and driving the most expensive fields out of the market. And unlike what many assume gas is no exception to this.     

At particular risk of stranding are, first, new projects that haven’t sunk their upfront capital costs, and second higher cost sources – for example shale, deep and ultra-deep water. 

In assessing the economic prospects of oil and gas in Greece, timing is crucial. Indeed, even if assuming that any substantial reserves are discovered and are recoverable, no major field is likely to be operative before the mid-2020s – and some possibly before the late 2020s. This substantially increases the risk of these investments stranding as, by 2030, the dent of climate policies will be biting harder into the oil and gas industry; while innovation and the ongoing plummeting costs of clean energy, storage technologies and electric vehicles will likely render hydrocarbons uncompetitive regardless.

In short, even if Greece’s fields are eventually developed, they will likely generate little value (for either companies or the State), for a limited time period, and will plausibly face the risk of early decommissioning.     

As such, to inform a serious public debate on the merits and demerits of oil and gas drilling plans a number of issues need to be spelled out.

First, the historical context matters for the economic viability of these activities – as the coal industry is painfully finding out. Drilling in Greece in the 2020s is not equivalent to drilling in Norway in the 1970s (a country often depicted as a “role model” by Greece’s policymakers).   

Second, Greece’s operations will be at particular risk of stranding, given their late development and the deep and ultra-deep nature of many concessions in the Ionian Sea and Crete.

Third, due to the above, talks of sizeable economic benefits are hugely overblown. For example, the royalties that the Greek State will receive are calculated on the basis of oil prices and costs of extraction. In a future world of low prices due to declining demand, tax revenues are likely to be fiscally insignificant. Even then, this assumes production will be profitable – which is far from evident – and/or that oil companies won’t require subsidies to maintain profitability.

Fourth, from a dynamic standpoint, the promise of modernizing Greece’s economic tissue is unlikely to be met by specializing in a fading sector. There may be strong opportunity costs in mobilizing financial resources and highly skilled human capital for such an endeavor.

Last but not least, if the above proves correct this is a high-risk–low-return bet. Oil and gas drilling is a heavily polluting activity that will inevitably undermine Greece’s natural capital. It will also put economic activities depending on healthy marine and coastal ecosystems, such as tourism and fisheries, at risk in regions where 50% to 75% of annual incomes rely on those. Any serious assessment needs to question whether these are worth sacrificing for an economic activity whose future viability and profitability prospects seem bleak. 

*Olivier is an environmental and macro economist currently working for WWF Greece. Prior to that, he lived and worked in the UK as a senior economist at NEF Consulting and the New Economics Foundation (2011-2016), before joining HM Revenue and Customs (HMRC) as an economic advisor in the Knowledge, Analysis and Intelligence division (2017-2018). His interests lie, among others, in the economics and politics of the transition to an environmentally sustainable economic model.