Decision time for oil & gas industry: Embrace green energy shift or keep fueling climate crisis

With COP28 only a week away, efforts are heating up around the globe to bring about the changes required to usher in a clean energy future. As a result, the International Energy Agency (IEA) believes that the time has come for the oil and gas industry to take a firm stand during the transition era either by becoming part of the solution and entwining itself around the enduring net zero vision or remaining a high-emission emitting problem child, which is contributing to a worsening climate crisis.

Despite steps taken to enrich the energy mix with renewable and low-carbon energy, climate woes are still hitting the world hard, as hammered home by intensive heatwaves this summer. As fossil fuels entrench their energy supremacy, all eyes turn to oil and gas players, waiting with bated breath to see what the producers will do next. According to the IEA’s new report, ‘The Oil and Gas Industry in Net Zero Transitions,’ oil and gas producers are facing “pivotal” choices about their role in the global energy system amid a deepening climate crisis fueled in large part by their core products.

This report, which shows how the industry can take “a more responsible approach and contribute positively to the new energy economy” by embracing the shift to clean energy, analyses the implications and opportunities for the industry that would arise from larger international efforts to reach energy and climate targets and sets out what the global oil and gas sector would need to do to align its operations with the goals of the Paris Agreement.

While the IEA’s projects indicate that global demand for both oil and gas is set to peak by 2030 based on current policy settings, stronger action is still being sought to tackle climate change and bring a decline in demand for both fuels, which will fall 45% below the current level by 2050 if governments deliver in full on their national energy and climate pledges. Therefore, a pathway to reaching net zero emissions by mid-century and keeping the goal of limiting global warming to 1.5 °C within reach requires oil and gas use to drop by more than 75% by 2050.

However, the International Energy Agency’s report accuses the oil and gas sector of being “a marginal force at best” in transitioning to a clean energy system, as oil and gas companies currently account for just 1% of clean energy investment globally with 60% of this coming from just four companies, even though the sector provides more than half of global energy supply and employs nearly 12 million workers worldwide.

Although the oil and gas industry invested around $20 billion in clean energy in 2022, or roughly 2.5% of its total capital spending, the report finds that producers looking to align with the aims of the Paris Agreement would need to put 50% of their capital expenditures towards clean energy projects by 2030, on top of the investment required to reduce emissions from their own operations. Therefore, this calls for a step-change in how the sector allocates its financial resources.

Dr. Fatih Birol, IEA Executive Director, commented: “The oil and gas industry is facing a moment of truth at COP28 in Dubai. With the world suffering the impacts of a worsening climate crisis, continuing with business as usual is neither socially nor environmentally responsible. Oil and gas producers around the world need to make profound decisions about their future place in the global energy sector.

“The industry needs to commit to genuinely helping the world meet its energy needs and climate goals – which means letting go of the illusion that implausibly large amounts of carbon capture are the solution. This special report shows a fair and feasible way forward in which oil and gas companies take a real stake in the clean energy economy while helping the world avoid the most severe impacts of climate change.”

The report further notes that the transition strategy of each company needs to include a plan to curb emissions from its own operations, as the production, transport, and processing of oil and gas results in nearly 15% of global energy-related greenhouse gas emissions. This is said to be equal to all energy-related GHG emissions from the United States, but in spite of this, oil and gas players with targets to reduce their own emissions account for less than half of global oil and gas output, based on this report.

Furthermore, the IEA’s findings point out that the oil and gas industry’s emissions should be slashed by 60% by 2030 in a bid to meet the requirements for a 1.5 °C scenario, as the emissions intensity of producers with the highest emissions is currently five to ten times above those with the lowest. This can be fixed by pursuing strategies to cut emissions from methane at low cost, as these emissions account for half of the total emissions from oil and gas operations.

”Carbon capture, currently the linchpin of many firms’ transition strategies, cannot be used to maintain the status quo. If oil and natural gas consumption were to evolve as projected under today’s policy settings, limiting the temperature rise to 1.5 °C would require an entirely inconceivable 32 billion tons of carbon captured for utilization or storage by 2050, including 23 billion tons via direct air capture. The amount of electricity needed to power these technologies would be greater than the entire world’s electricity demand today,” highlighted the IEA’s report.

The report does not call for an immediate phase-out of all fossil fuels, as oil and gas production is expected to be present even in a 1.5 °C scenario, but it is anticipated to be “vastly lower.” The IEA underscores that some oil and gas supply investment will still be needed to ensure the security of the energy supply and provide fuel for sectors in which emissions are harder to abate.

Despite this, all oil and gas companies will not be able to maintain output, “requiring consumers to send clear signals on their direction and speed of travel so that producers can make informed decisions on future spending,” emphasized the report. In light of this, the $800 billion currently invested in the oil and gas sector per year is said to be double what is required in 2030 if the world is determined to comply with the Paris Agreement.

Therefore, declines in demand need to be steep enough that no new long-lead-time conventional oil and gas projects are needed with some existing oil and gas production being shut in. With the transition to net zero case, the IEA points out that oil and gas is set to become “a less profitable and riskier business over time.” In lieu of this, the report finds that the valuation of private oil and gas companies could fall by 25% from the current $6 trillion if all national energy and climate goals are reached, and by up to 60% if the world gets on track to limit global warming to 1.5 °C.

The IEA claims that the oil and gas sector is well positioned to scale up some crucial technologies for clean energy transitions, with around 30% of the energy consumed in 2050 coming from technologies that could benefit from the industry’s skills and resources in the decarbonized system. This encompasses hydrogen, carbon capture, offshore wind, and liquid biofuels.

“The fossil fuel sector must make tough decisions now, and their choices will have consequences for decades to come. 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,” concluded Dr Birol.

As fossil fuels continue to reign supreme in the global energy mix by controlling the lion’s share of 80%, ExxonMobil’s Chairman and CEO, Darren Woods, said at the APEC Summit in San Francisco last week that the plan to tackle climate change and energy demands would need to go beyond expanding wind, solar, and EVs. According to ExxonMobil’s CEO, the world needs to commit to solving its “energy and emissions challenges simultaneously” to bridge the global North-South divide. 

Woods stated that the problem was not oil and gas but emissions, echoing Kevin Gallagher, Santos’ Managing Director and Chief Executive Officer, who underscored that “the climate enemy is emissions, not fossil fuels” while addressing a WA Energy Club luncheon in Perth, Western Australia.