The oil and gas industry is facing a ‘moment of truth’ as the world transitions to a cleaner energy future, as structural changes in the energy sector are now moving fast enough to deliver a peak in oil and gas demand by the end of this decade under today’s policy settings.
The report, titled “The Oil and Gas Industry in Net Zero Transitions,” which comes just a week before COP28, outlines the challenges and opportunities for the industry as it grapples with the transition to a net zero emissions economy.
Despite accounting for 82% of global energy consumption in 2022, fossil fuels could face a significant decline if governments fulfil their national energy and climate commitments.
According to the Institute for Energy Research, these pledges could slash oil and gas demand by 45% by 2050, limiting the global temperature rise to 1.7 °C. However, to achieve the more ambitious goal of keeping warming to 1.5 °C, an even steeper reduction of 75% in oil and gas consumption would be necessary by 2050.
“The oil and gas industry is facing a moment of truth at COP28 in Dubai,” says IEA’s executive director Fatih Birol.
To date, the report reveals, oil and gas producers account for just 1% of global clean energy investment, with over 60% of that concentrated in just four companies. As of today, the IEA suggests that the industry as a whole is simply a “marginal force” in the world’s transition to a clean energy system.
Despite this, the authors recognise the potential for the industry to play a significant role in the transition, outlining several strategies that oil and gas companies need to take to accelerate net zero transitions.
The first-order task is to cut emissions from company operations. Emissions from oil and gas production, transport, and processing activities generate nearly 15% of global energy-related greenhouse gas emissions, equivalent to all energy-related greenhouse gas emissions from the United States.
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As of today, less than half of global oil and gas production comes from companies with targets to reduce these emissions.
Next, companies need to drastically scale up investments in clean energy. In 2022, the oil and gas industry invested around $20 billion (£16bn) in clean energy, just 2.5% of its total capital spending. Furthermore, companies that have announced a target to diversify their activities into clean energy account for just under one-fifth of current oil and gas production.
Lastly, to align with the Paris Agreement goals, the oil, and gas industry must significantly scale up developments in clean energy technologies, such as hydrogen and offshore wind. While oil and gas companies currently hold a mere 2% of the installed offshore wind capacity, a substantial increase is necessary to achieve net zero emissions. By 2030, the industry should allocate 50% of its capital expenditures to clean energy projects.
The International Energy Agency (IEA) also recognises carbon capture and storage (CCS) as another promising technology for the oil and gas industry. But, it emphasises that CCS, which it considers one of the ‘pitfalls for the discussion about the future of oil and gas’ should complement, not replace, efforts to reduce oil and gas production and demand.
“The uncomfortable truth that the industry needs to come to terms with is that successful clean energy transitions require much lower demand for oil and gas, which means scaling back oil and gas operations over time – not expanding them,” said Birol.
“There is no way around this,” she added.
You can read the full report here.
