The phrase “major oil and gas producer” may conjure images of oil and gas wells in Texas or Saudi Arabia. However, about half of the world’s oil and gas is produced by middle-income developing countries, which the World Bank defines as those with annual per capita gross national income between $1,036 and $12,535. These nations are economically dependent on the highly volatile prices of oil and gas but have fewer resources than rich countries to deal with the global transition away from fossil fuels that will help prevent the most dangerous impacts of climate change.
Based on current combined climate pledges the world is on track for 2.5 degrees C (4.5 degrees F) global warming by 2100, and demand for oil and gas has yet to fall. However, as part of an effort to achieve net zero emissions and meet the 1.5C (2.7 degrees F) temperature goal, the International Energy Agency’s 2022 World Energy Outlook estimates that oil demand could decrease over the next three decades from 95 million barrels per day to less than 25 million barrels a day. During the same period, natural gas demand is estimated to drop from 4,200 billion to 1,200 billion cubic meters. At the same time insistence from vulnerable countries and others to cut dependence on fossil fuels to avoid catastrophic global warming continues.
The transition away from oil and gas to meet global climate goals can offer important environmental, social and economic benefits but also presents significant challenges for many countries. Such challenges include how to diversify economies and reduce reliance on oil and gas revenue which could support public services, programs, and public sector employment. They also include how to support those employed directly and indirectly by the industry. Accordingly, the key questions are: How can the costs borne by impacted workers and communities and declines in government revenues in middle-income oil- and gas-producing countries be mitigated? And what policies can enable a “just transition” away from oil and gas?
Pursuing a just transition is crucial to ensure that during this shift, harm to workers and communities dependent on the fossil fuel industry are minimized while the benefits of climate policies are maximized. New research from WRI tackles these questions and identifies key considerations for policymakers as they jump-start this process.
Expanding Just Transition Conversations Beyond Coal
Middle-income countries — responsible for 48% of the world’s oil production and 52% of its gas production — may find it particularly difficult to navigate an energy transition requiring the phase down of oil and gas production. The economies of many such countries are often not adequately diversified, and the oil and gas sector accounts for a significant share of exports and government revenue.
A just transition away from oil and gas will require financial resources from both domestic and international sources. The Just Energy Transition Partnerships (JETP) that have recently been undertaken with South Africa, Indonesia, Vietnam, and funding commitments from G7 and other countries could be a model for financing some just transition initiatives. However, the first such funding initiative, in South Africa, is not yet sufficient to fully finance the transition there, and concerns persist about the limitations of the JETP model, especially about how much funding the ‘just’ element of the transition will receive.
While these initiatives have focused on reducing coal use, less attention has so far been given to just transition in the oil and gas sector. So far, despite the need to meet global climate commitments that is well documented in scientific research and policy discussions, only a few countries such as Costa Rica, Denmark, France and Sweden have made firm commitments to move away from the oil and gas industry.
Richer countries undoubtedly should be expected to go first and fastest in phasing down oil and gas production. At the same time, middle-income oil- and gas-producing countries should not delay planning a just transition away from these industries. Not only will oil and gas markets continue to be volatile —currently because of the war in Ukraine and resulting geopolitical shifts —but as worries about climate change increase and clean energy technology advances, demand for oil and gas is expected to decline in the coming decades. The sooner countries begin the transition away from fossil fuels in a manner that considers the lives and livelihoods of those impacted in the shift, the sooner they can build more reliable and less volatile sources of income on which to base their economies.
Challenges Posed by the Transition Away from Oil and Gas
A failure to proactively manage this transition will bring significant risks to countries and local governments, communities and workers. Specifically, our paper on just transitions in the oil and gas sector highlights some of the biggest risks that declining fossil fuel revenues could bring to middle-income oil- and gas-producing countries:
- Limiting a government’s ability to provide public services such as education, health care and physical infrastructure. Most middle-income countries are already spending too little on social programs and failing to benefit the poorest in society or reduce inequality. Reduced revenues from the oil and gas industry could force governments to make further cuts. In response to the 2014 oil price crash, for example, Angola rolled back infrastructure spending plans, including for a $5-billion electricity access program, and Mexico slashed public spending by $8.5 billion.
- Reducing the revenue available for subnational governments, impacting their ability to provide services to local communities. Subnational governments in many middle-income countries receive most of their funds as transfers from their national governments and then often use these funds to invest in the long-term economic and social development of their communities. Reduced oil and gas revenues will potentially affect their ability to deliver services and pursue economic development.
- Shrinking public sector employment, which represents a large proportion of formal employment in many middle-income countries. Argentina and Mexico’s public sectors employ roughly 17% and 12% of the formal workforce. Across most of Africa, the share of government spending devoted to government employee compensation ranges between 30% and 50%. Declining oil and gas revenues could negatively impact the ability of governments to pay wages and jeopardize the sustainability of public sector employment. Due to the pandemic and oil price shocks, Nigeria’s Kaduna state government implemented 25% and 50% pay cuts for public servants and political appointees respectively in 2020.
- Triggering abrupt, inequitable cuts in fossil fuel subsidies that could harm the most vulnerable and lowest-income consumers. Fossil fuel subsidies are significantly influenced by the price of oil, with governments cutting back on subsidies whenever there is drop in the price. Let’s be clear: fossil fuel subsidies are costly, inefficient, and harmful for the planet and often disproportionately favor the better off; they should be reformed and eliminated whenever possible. However, their abrupt removal can negatively impact vulnerable populations who may suddenly be unable to afford fuel.
Without adequate support, the long-term shift away from oil and gas will also contribute to job displacement and insecurity for workers directly and indirectly supported by the industry, and for their communities. Although data gaps make it difficult to determine how many workers in middle-income countries will be impacted by the energy transition, our analysis reveals:
- Oil and gas production creates relatively few direct jobs, but many more indirect ones. For instance, in Nigeria, the oil and gas industry directly employed an estimated 18,700 workers in 2020, and Mexico’s PEMEX, the state-owned oil company, employed 125,735 workers in 2020. However, when indirect jobs (in the supply chain of the oil and gas industry) and induced jobs (in other goods and services purchased by those employed in the industry) are considered, the total employment impact can be much greater, especially in nearby communities.
- Many oil and gas workers are contract workers with lower wages, precarious working conditions and little or no union representation. In a recent survey of the oil and gas industry workforce, 33% identified themselves as contractors, while 41% identified themselves as permanent staff and 26% said they were unemployed. If the oil and gas industry increasingly relies on contract workers, strategies will be needed to include their voices in just transition discussions.
- Workers who are unionized may receive more attention and support in navigating the transition, but unionization rates in the oil and gas industry vary by region and job type. Countries with more mature oil and gas industries, such as Mexico and Nigeria, tend to have higher levels of unionization than emerging producers, but even within countries with more mature oil and gas industries, there can be variation in which workers are represented by unions. In Mexico, for instance, PEMEX employees are unionized but employees for international oil companies operating in Mexico are primarily non-unionized contract workers.
- Compensation in the oil and gas industry tends to be higher than jobs requiring comparable skills and education. As the oil and gas industry shrinks in the coming decades, relatively well-paying jobs in middle-income countries will be lost, impacting local economies. It will be important to determine what substitute industries in erstwhile oil and gas regions are attractive to former workers in terms of wages, job security and other job quality factors.
- Women are rarely directly employed in this sector, but many are indirectly supported by the industry. Women often make up a large share of workers in the industry’s induced jobs, such as public service or retail jobs in education or food service, where they could be significantly impacted by the wider economic effects of the industry’s decline. As a result, discussions around just transition and economic diversification should focus on strategies that can benefit women, such as improving working conditions in women-dominated sectors, restructuring local employment opportunities that will lead to more gender equity, and ensuring a fairer distribution of care work within family and society.
Key Considerations for Policymakers to Enable a Just Transition
A just transition may take decades to bear fruit, so it is prudent for policymakers in oil- and gas-producing middle-income countries to start planning and taking these actions now.
- Pursue economic diversification. Middle-income oil- and gas-dependent countries can benefit by diversifying their economies to include new sectors such as manufacturing and agricultural processing. Growing the clean energy industry can also offer significant economic and employment opportunities, though it will be essential to understand whether this can be pursued in the same local areas in which fossil fuels are declining. Environmental remediation and efforts to reduce methane emissions, by capping orphan wells for example, can also offer near-term job opportunities to workers and communities.
- Develop proactive, long-term, and place-based planning. Policymakers will first need to understand the scale and scope of who will be most affected by addressing data gaps related to demographics, wages and skills of oil and gas workers, as well as the economics of regions and communities likely to be impacted by the transition. Second, the transition will require an inclusive planning process with all relevant stakeholders, particularly to address the specific context of the oil and gas sector — including the large impacts on local communities via indirect and induced employment and the large presence of contract workers. Support for workers will be necessary and could include support for early retirement or for skills development and training for new positions. In Nigeria, the Nigerian Labor Congress, one of the largest trade unions in Africa, and the Environmental Rights Action-Friends of the Earth Nigeria have formed an alliance to educate the government and employers about the need for a just transition for workers in the petroleum and agriculture sectors.
- Create robust funding mechanisms to finance the transition. Dedicated domestic sources of funding — which can come from earmarking taxes on fossil fuels, reforming subsidies and reallocating their benefits, and requiring the oil and gas industry to cover the cost of support for workers’ and communities’ transition and/or environmental remediation of polluted lands — can provide the certainty and predictability to support just transition efforts. Governments can take steps today to improve the subnational financial management of revenues and help plan ahead. During good economic times, national governments must encourage subnational governments to invest oil and gas revenues in building human, social and physical capital to support a region’s economic diversification Ecuador and Indonesia, for example, a portion of revenues or taxes from natural resource extraction are used to fund areas such as education and environmental restoration. Policymakers should also consider strengthening the social safety net so that vulnerable workers and communities are able to weather periods of economic downturns.
- Leverage international support to help these countries move away from fossil fuels. While middle-income countries may at times be able to draw on their own domestic resources to finance just transition policies, it will be essential for richer countries and international finance institutions to provide financing and technical assistance. Multilateral development banks can also play an important role. The European Bank for Reconstruction and Development’s Just Transition Initiative could serve as a model, and the $2 billion Accelerating Coal Transition initiative launched by the Climate Investment Funds has a similar mission. These kinds of initiatives— currently focused on moving away from coal — could be expanded to the oil and gas sector.
Toward a Cleaner and Better Future
While a decline in the oil and gas production sector will not happen overnight, it is clear that the sector faces a challenging future — and middle-income countries with significant dependence on oil and gas revenues and undiversified economies are likely to bear the brunt of this challenge. It may be tempting to put off this planning, especially at moments when oil and gas prices are temporarily high. But the more that is done today — to build more diverse economies, to design support for workers and communities, and to develop broader sources of revenue — the less wrenching and costly and the more responsive to a country’s critical needs the transition will be.
