As COP28 kicks off, the oil and gas industry finds itself facing a “moment of truth”, according to the International Energy Agency (IEA).
As clean energy transitions advance, the IEA warned oil and gas producers will be left with a choice – be part of the solution and embrace the shift to cleaner energy or contribute to a “deepening climate crisis”. To align with a scenario that limits warming to 1.5°C, the oil and gas industry must cut its own emissions by 60% by 2030, yet only companies responsible for less than half of global oil and gas output have such a plan in place. Furthermore, oil and gas companies account for just 1% of clean energy investment globally, with most of this (60%) coming from only four companies.
Today’s policy settings have global demand for oil peaking in 2030, before dropping 45% on today’s levels by mid-century – assuming governments meet their national energy and climate pledges in full. A net zero path, however, needs this fall to be 75%.
There is, however, plenty of potential for vast improvements. Oil and gas producers with the highest emissions have an emissions intensity that is five-to-ten times higher than those with the lowest. Methane reduction strategies are not only well known, but they can be pursued at low cost too.
Consumers have a role to play as well. The $800bn invested into the sector today is double what will be needed by the end of the decade to align with a 1.5°C scenario, with oil and gas still needed going forwards for energy security purposes and to aid sectors where emissions are harder to abate. Signals from consumers on the direction and speed of travel will be important to help firms make informed decisions on future spending.
Even though the business is destined to become less profitable and riskier as the energy transition gathers pace – according to the IEA, the valuation of oil and gas firms could drop 25% if all national energy and climate goals are reached and 60% under a 1.5°C scenario – there are still opportunities that lie in wait.
The oil and gas sector is ideally placed to scale up some of the technologies that are considered crucial to clean energy transitions. It calculated that around 30% of energy set to be consumed in 2050 in a decarbonised energy system will come from technologies that could benefit from the industry’s skills and resources, including hydrogen, carbon capture, offshore wind and liquid biofuels.
This will still require a step change in how the sector allocates its financial resources. In 2022, it invested around $20bn in clean energy. This is 2.5% of its capital spending. If producers are to match up with aims under the Paris Agreement, 50% of their capital expenditures need to go towards clean energy projects by 2030, as well as investment in efforts to reduce emissions from their own operations.
It also stressed carbon capture – a central part of many transition strategies – cannot be used to maintain the status quo. If oil and gas consumption evolves as projected under today’s policy settings, limiting the rise in global temperatures to 1.5°C would call for 32bn tonnes of carbon being captured for use or storage in 2050, with 23bn from direct air capture. The electricity needed to power these technologies would be greater than the entire world’s electricity demand today, making it wholly unrealistic.
