The oil and gas industry must make “pivotal” decisions about its role in the global energy transition as the climate crisis worsens, a new report from the International Energy Agency (IEA) warns.
The IEA’s Oil and Gas Industry in Net Zero Transitions report, published on Thursday ahead of the COP28 summit next week, outlines the ways in which oil and gas producers, which “in large part” fuel climate change, can take a more responsible approach to business and align their emissions with the goals with the Paris Agreement.
According to IEA projections, even under policies in place today (which are generally understood to be lacking) global demand for both oil and gas is set to peak by 2030. A faster transition to a cleaner global energy system will inevitably result in an even steeper decline: if all governments were to fully meet their national climate targets, demand for oil and gas would drop to 45% below today’s level by 2050. Were pathways for keeping global warming below 1.5°C followed, then use of both fuels would fall by more than 75% by 2050.
Against this backdrop, the 224-page report looks at the different roles that oil and gas companies can play in the energy transition, particularly in relation to transition technologies, as they look to “escape the narrowing walls of their businesses”.
The report finds that the oil and gas industry is set to become riskier and less profitable as the energy transition accelerates. Under the Announced Pledges Scenario (APS), which measures the extent to which current announced climate targets will result in emissions reductions, the current valuation of private companies operating within the sector is anticipated to fall by 25% from the $6trn it is worth today. In a scenario that limits global warming to 1.5°C, this decrease could be as much as 60%.
Despite this fall in demand, the report finds that the industry is well placed to scale up some crucial technologies for clean energy transitions. Some 30% of the energy consumed in 2050 in a decarbonised energy system comes from technologies that could benefit from the industry’s current capital, infrastructure, skills and resources, the IEA finds. These include carbon capture, electric vehicle charging, geothermal energy, hydrogen, liquid biofuels, offshore wind and plastics recycling, many of which share similarities with various stages of oil and gas company operations.
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Realising this potential will require a significant change in how the industry allocates its financial resources, the global oil and gas industry invested approximately $20bn in clean energy in 2022, equivalent to roughly 2.5% of its total capital spending. The report finds that producers looking to align with the goals of the Paris Agreement would need to put 50% of their capital expenditures towards clean energy projects by 2030. This would have to be on top of the investment required to reduce or abate emissions from companies’ own operations.
The report also warns that carbon capture technologies, which currently underpin the net-zero commitments of many companies and governments, cannot be used to abate emissions from the oil and gas sector as they currently stand. Use of the fossil fuels must decline in combination with clean technologies if a 1.5°C scenario is to be maintained.
“The fossil fuel sector must make tough decisions now, and their choices will have consequences for decades to come,” IEA executive director Fatih Birol said. “Clean energy progress will continue with or without oil and gas producers. However, the journey to net zero emissions will be more costly, and harder to navigate, if the sector is not on board.”