Coming to grips with a mixed bag of energy transition expectations

As COP28 nears, concerns surrounding climate change are heating up and the pressure on the fossil fuels industry is mounting day in, day out. The oil and gas industry’s bumpy decarbonisation road has been paved with difficulties, but are things coming to a head now that global leaders have agreed to triple renewable energy capacity?

From going in different directions to trying to find common ground with the emerging energy sectors by looking for ways to come together from different directions and eventually meet and gather around the low-carbon movement and emission reduction expectations, the fossil fuels industry has come a long way in this journey, but many still believe that the current achievements are far from enough and are ardently demanding more action from the sector in a bid to accelerate the transition to low-carbon and green sources of supply.

With recent heatwaves still fresh in people’s minds, the calls for more oil and natural gas and a phase-out of fossil fuels grapple for dominance on the global scene while energy security and sustainability continue to imbue the energy agenda, putting an emphasis on the need for all types of sources of supply, including oil and gas along with renewables and other low-carbon fuels to meet the growing energy demands of the future.

This energy blueprint is in Norway’s plans, as the country recently underscored the importance of the coexistence of multiple energy industries on the Norwegian Continental Shelf (NCS) since it believes that there is more than enough room to create values from oil and gas alongside renewable energy in Norwegian waters.

Australia seems to share Norway’s sentiment, as a new report highlighted the need for additional gas supply while the opening of bids for the next round of Commonwealth offshore greenhouse gas storage acreage was seen as a step towards furthering the deployment of carbon capture, utilisation and storage (CCUS) technology in the country.

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The UK is another country that also believes in exploring its hydrocarbon potential while pursuing more renewables, carbon capture and storage (CCS), tidal power, and other less emission-intensive sources of supply. The European Union recently showed its vigour for the ramp-up of its renewable power, after its Parliament voted to boost the renewables’ share of the EU’s final energy consumption to 42.5 per cent by 2030.

This came shortly after G20 leaders made up their minds to intensify efforts towards tripling total renewable energy capacity. While endorsing recommendations from the International Renewable Energy Agency (IRENA) for global renewable energy adoption, they underscored the global need for over $4 trillion of annual investments until 2030, providing a toolbox of sorts to increase the availability of low-cost capital in G20 countries and beyond.

Some, primarily those pushing for a swift end to fossil fuels, are not happy with the conclusion of this G20 meeting. This includes Tracy Carty, Global Climate Politics Expert at Greenpeace International, who said: “Despite record-shattering temperatures, raging wildfires, drought, floods and other climate disasters over recent months impacting tens of millions of people, G20 leaders have collectively failed to deliver anything meaningful on climate change this year. Fossil fuels are killing us, and the G20’s reckless failure to act will be measured in further lives and livelihoods lost.

“Leaders failed to reach agreement on the phase-out of all fossil fuels. They also made a timid commitment to triple renewables, but only through ‘existing targets and policies’. Unity, urgency and ambition to end the fossil fuel era are required now more than ever from the G20 group of the world’s major economies which account for around 80 per cent of global emissions.”

The energy sector is not the only one working to dimmish the role of fossil fuels – albeit not fast enough to everyone’s satisfaction – and step up green fuels, as this is also high on the shipping industry’s agenda, which was confirmed by a recent analysis, done by the UK-based maritime consultancy UMAS, regarding the alignment of the Revised IMO GHG Strategy with science-based targets.

As the implications of the Revised IMO GHG Strategy continue to reverberate across various facets of the maritime industry, urging stakeholders to reevaluate their strategies and actions, the huge level of modifications to existing and new ships, even at the minimum level of ambition, which requires the average ship’s GHG intensity to be reduced by 86 per cent by 2040, spells an end to the era of fossil-fuelled shipping. 

Bearing in mind these shifts towards a greener and carbon-free world, the International Energy Agency (IEA) is predicting a peak in coal, oil, and gas demand before 2030, despite new fossil fuel projects continuing to spring up as companies seek to secure more energy supplies while also looking for ways to lower their emissions footprint. Even though its forecast shows the demand for fossil fuels will peak before 2030, the IEA believes that the decline in oil, gas and coal will not be “steep enough” to meet the requirements of the Paris Agreement.

On the other hand, OPEC is adamant that the energy security provided by coal, oil, and gas is “vital,” thus, it sees the attempts to dismiss fossil fuels or suggest they are at the beginning of their end as “an extremely risky and impractical narrative.” Where do all these developments leave the fossil energy sector?

A new survey from Deloitte Research Center for Energy & Industrials dives into a comparison of the expectations coming from oil and gas executives and institutional investors around the energy transition amid a growing focus on net-zero, running the gamut from divergence to convergence.

These diverse expectations from the oil and gas industry regarding the energy transition shed light on the evolving landscape with some highlighting their 1.8 per cent share in global clean energy spending, expecting more action over the coming years while main oil and gas players cite a 28 per cent average reduction in Scope 1 and Scope 2 emissions over the last three years and remain confident about achieving a 50–60 per cent emission cuts by 2030.

Following the energy crisis, which gripped the world in its clutches last year, the fossil fuels industry enabled high dividend and buyback yields to investors, spearheading all industries with a combined yield of 8 per cent in 2022. As a result, oil and gas companies continue their capital discipline and pursuit of bankable low-carbon projects while empowering investors to invest their received dividends in the most promising companies and low-carbon solutions.

Despite divergence between surveyed executives and investors on some expectations, the Deloitte survey identified many areas where these expectations align which includes the need for new and improved financing mechanisms to plug the “capital gap;” scale-up of demand for low-carbon energy via robust commercial models to achieve economies of scale; leveraging critical mineral and controlling clean supply chains to offer a unique way to play in the renewables space; and conducive and well-defined policies as a cornerstone for accelerating the adoption of low-carbon technologies. In light of this, slow decision-making is perceived to represent a major challenge to the energy transition.

Even though the oil and gas executives’ and investors’ paths toward net-zero are by no means fully aligned, this Deloitte survey still hammers home a shared consensus on the industry’s potential to achieve its overarching goal, with 75 per cent of both surveyed groups exhibiting confidence in the industry’s aptitude to harmonise economic and environmental considerations. This is one of the key ingredients towards the much-anticipated low-carbon transition.

Global policymakers are engaging in a race to make energy systems more sustainable, however, many point out that further investment in energy efficiency is crucial at this time, as doubling down on progress in energy efficiency goes hand in hand with massively ramping up a wide range of clean energy technologies this decade to curtail the demand for fossil fuels and reach net-zero goals in a timely manner. This is in line with views spotlighting affordable access to power and clean energy solutions as a growing necessity, along with the need to safeguard the supply chains of critical materials to foster a more sustainable clean energy transition.

The IEA has outlined multiple times that limiting global warming to 1.5 °C calls for strong action in the energy sector to drive a significant reduction in the world’s greenhouse gas emissions by 2030. Renewables such as solar and wind are expected to play a critical role in this endeavour. Therefore, tripling the global installed capacity of renewable power by the end of the current decade would avoid about 7 billion tonnes of CO₂ emissions between 2023 and 2030, which is equivalent to eliminating all the current CO₂ emissions from China’s power sector.

Regardless of the progress made so far, 2023 is touted as a pivotal year for countries to increase both ambition and action on the clean energy transition front, thus, the upcoming COP28 climate summit in Dubai is seen as a crucial moment to agree on concrete steps to keep the goal of limiting global warming to 1.5 °C within reach. As oil and gas, especially LNG, are expected to be required for decades to come to fuel the transition process and meet the world’s energy demands, it is imperative that the industry shows its commitment to tackling climate change by delivering a major reduction in greenhouse gas emissions from its operations by 2030.

While acknowledging the findings of the Factual Synthesis Report of the Technical Dialogue of the First Global Stocktake published by the United Nations Framework Convention on Climate Change (UNFCCC) to reinforce the urgent need to rally together to accelerate creative and actionable solutions and close the gaps to keep 1.5 C within reach, the COP28 UAE President-Designate recently called for a ramp-up in the speed and ambition of climate action.

The UNFCCC’s report, which lists 17 key technical findings, confirms that current emissions are not in line with the global mitigation pathways consistent with the temperature goal of the Paris Agreement, as there is a rapidly narrowing window to raise ambition and implement existing commitments to limit warming to 1.5°C above pre-industrial levels. It also highlights existing and emerging opportunities and creative solutions to bridge these gaps.

Commenting on this, Dr. Sultan Al Jaber, COP28 President-Designate, remarked: “Today’s Global stocktake provides clear direction on how we can meet the expectations of the ParisAgreement by taking decisive action in this critical decade. To keep 1.5 C within reach we must act with ambition and urgency to reduce emissions by 43 per cent by 2030. That is why the COP28 Presidency has put forward an ambitious action agenda centered around fast- tracking a just and well managed energy transition that leaves no one behind, fixing climate finance, focusing on people lives and livelihoods, and underpinning everything with full inclusivity.

“I am calling on leaders from both the public and private sector to come to COP28 with real and actionable commitments to address climate change. We need to rapidly decarbonise both the supply side and demand side of the energy system at the same time. We need to triple renewable energy by 2030, commercialise other zero carbon solutions like hydrogen and scale up the energy system free of all unabated fossil fuels, while we eliminate the emissions of the energies we use today.

“We need to protect and enhance nature, safeguard carbon sinks and transform food systems that account for one third of emissions. And we need fundamental reform of the international financial architecture that was built for the last century. I believe we can deliver all of this while creating sustainable economic growth for our people, but we must urgently disrupt business as usual and unite like never before to move from ambition to action and from rhetoric to real results.”

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It is certainly no secret that there is a tendency to label COP events depending on what they focus on or achieve. In lieu of this, COP15 is known as the Paris Agreement COP, COP26 in Glasgow is associated with the Paris Rulebook as one of the outcomes was to finalise the guidance to operationalise the Paris Agreement while COP28, which will be held in November 2023 in Dubai, is often talked about as the stocktake COP.

The Global Stocktake, which started in 2021 and will conclude at COP28, looks into the progress made towards achieving the Paris Agreement targets. This is why this year’s COP is seen as the stocktake COP, although the stocktake process will be repeated every five years.

Lorena Perez Bajo, Climate Change Senior Manager at Ipieca, stated: “The aim of the Global Stocktake at COP28 is to assess the world’s collective progress towards achieving the agreement and its long-term goals. It’s a really important exercise as by measuring our progress, we can then identify any gaps and opportunities for increased action.”  

Moreover, the UN World Meteorological Organisation’s new report indicates that insufficient progress towards climate goals is slowing down the global fight against poverty, hunger and deadly diseases. This was also echoed by António Guterres, UN Secretary-General, who warned that record temperatures and extreme weather were “causing havoc” around the world, as the global response has fallen “far short.” The warning came on the heels of the latest UN data, which underlines that the Sustainable Development Goals (SDGs) are only 15 per cent on track at the midway point of the 2030 Agenda.

WMO’s report claims that current policies will lead to global warming of at least 2.8 degrees Celsius above pre-industrial levels over the course of this century, which is well above the Paris Agreement target of 1.5°C. The report underlines that there has been “very limited progress” in reducing the gap between promises that countries made to reduce greenhouse gas emissions and the level of emissions cuts really needed to achieve the temperature goal of the Paris Agreement. 

To limit global warming to 1.5°C, global greenhouse gas emissions need to be reduced by 45 per cent by 2030, with carbon dioxide emissions falling close to net-zero by 2050. For most countries, this means that energy security will continue to go hand in hand with decarbonisation, thus, steps are being taken to shore up different supplies – renewables, nuclear, hydrogen, marine energy, etc. – to make the energy system more resilient to shocks while boosting low-carbon solutions to lower the emissions footprint from the oil and gas industry, so that, it can continue to have its place in the future energy mix.

Are net-zero targets still deliverable? This question is heard more often these days, as confidence in the transition seems to be on shaky ground in the aftermath of the energy crisis. Due to this, an uphill battle is being waged to make sure not only that most people are convinced of the necessity to transition to a carbon-free world but also that they are sure this is practically achievable. This means that people need to be assured solutions exist to make this happen, the timeframe is not too short, it will not cost too much, and the disruptions to the way they live will be, if not minimal then at the very least, acceptable.

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The UN, along with other organisations, is urging countries around the globe to take swift action to slash emissions, as the window of opportunity to do so has not closed yet. Whether this call will be headed in time to reach 2050 aspirations remains to be seen. However, most stakeholders around the world have set their sights on a just energy transition, which entails the further use of oil and natural gas with a lower greenhouse gas footprint and are hammering away at the roadblocks on the way to achieving low-carbon and net-zero goals.