The report advocates that the Fossil Fuel Industry is at a turning point, and must do much more to respond to the threat of climate change. The report articulates that:
- less than 1% of global clean energy investment comes from oil and gas companies
- Nations and Companies need to consider scaling back oil and gas operations over time – not expanding them. "There is no way around this." said Fatih Birol.
- Fossil Fuel producers need to embrace the clean energy economy, and the opportunities involved.
The IEA is throwing the Fossil Fuel companies a lifeline, to be part of the clean energy transition through investment, the utilisation of skills in related areas. The report does not detail the result if companies choose to resist and are aided by corrupt and bought off governments. A very bumpy ride for the companies and all of us as the planet cooks.
While the IEA supports efforts at Carbon Capture and Storage both in the report and in comments by IEA head Fatih Birol were very pointed about the unrealistic expectations of carbon capture and storage for abating continued fossil fuels.
“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,” said IEA Executive Director Fatih Birol. “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.”
Fossil Fuel lobbyists are likely to be at their peak at the Dubai climate conference. Will they listen to reason from the International Energy Agency? Will the Petro States listen to the IEA or the companies wanting to extract maximum profit in cooking the planet?
Peak Fossil Fuels
It notes in the foreward that peaks in fossil fuel usage will be met for coal, gas and oil this decade, on current policies. What we do now in the energy transition, in regulating fossil fuel production determines whether the curve flattens or accelerates downward.
For the first time, we see peaks in demand for all of the fossil fuels before 2030, based on today’s policy settings. These settings are not yet strong enough to deliver steep declines in demand on the other side of the peaks. However, if governments deliver in full on their national energy and climate pledges, and even more so if they manage to shift the world onto the narrow pathway to limiting global warming to 1.5 °C, the consequences for the oil and gas industry will be profound.
Climate Analytics released a report recently on When will global greenhouse gas emissions peak? They found that "continued explosive growth of wind and solar in particular would push fossil fuels out of the power sector, leading to peak coal in 2023 and peak gas in 2024. Meanwhile, continued growth in electric vehicles could lead to peak oil in 2025."
Reducing emissions in Company Operations
The first-order task highlighted by the report is for fossil fuel companies to slash emissions from company operations. "While there is no single blueprint for change, there is one element that can and should be in all company transition strategies: reducing emissions from the industry’s own operations.... The production, transport and processing of oil and gas results in just under 15% of global energy-related greenhouse gas emissions. "
"To align with a 1.5 °C scenario, these emissions need to be cut by more than 60% by 2030 from today’s levels and the emissions intensity of global oil and gas operations must near zero by the early 2040s."
Transitions will hurt the bottom line for companies focused on oil and gas
The volatility of fossil fuel prices means that revenues could fluctuate from year to year – but the bottom line is that oil and gas becomes a less profitable and a riskier business as net zero transitions accelerate.
- Today’s private oil and gas companies have an estimated value at around USD 6 trillion.
- If all national energy and climate goals are reached, this value is lower by 25%, and by 60% if the world gets on track to limit global warming to 1.5 °C.
- Oil and gas projects currently produce slightly higher returns on investment, but those returns are less stable.
No room for new fields in a 1.5C world
The IEA reports that under current national energy and climate pledges there is no need in aggregate for new exploration.
To meet 2050 net-zero pledges declines in demand are so steep that no new long lead-time conventional oil and gas projects are required. Some existing production would even need to be shut in.
New projects face major commercial risks, could push the world over the 1.5 °C threshold and become stranded assets destroying shareholder wealth.
Continued investment in oil and gas supply is needed in all scenarios, but the USD 800 billion it currently invests each year is double what is required in 2030 to meet declining demand in a 1.5 °C scenario. Investment in existing and some new fields is necessary in a world that achieves national energy and climate pledges, although there is no need in aggregate for new exploration.
In a scenario that hits global net zero emissions by 2050, declines in demand are sufficiently steep that no new long lead-time conventional oil and gas projects are required. Some existing production would even need to be shut in.
In net zero transitions, new project developments face major commercial risks and could also lock in emissions that push the world over the 1.5 °C threshold. Producers need to explain how any new resource developments are viable within a global pathway to net zero emissions by 2050 and be transparent about how they plan to avoid pushing this goal out of reach.
Not all producers can be the last ones standing
Many producers say they will be the ones to keep producing throughout transitions and beyond. They cannot all be right.
Opportunites in clean energy transition for oil and gas sector
The oil and gas industry is well placed to scale up some crucial technologies for net zero transitions.
Some 30% of the energy consumed in a net zero energy system in 2050 comes from low-emissions fuels and technologies that could benefit from the skills and resources of the oil and gas industry. These include hydrogen and hydrogen-based fuels; carbon capture, utilisation and storage (CCUS); offshore wind; liquid biofuels; biomethane; and geothermal energy.
For the moment, only around 2% of offshore wind capacity in operation was developed by oil and gas companies. Plans are expanding, however, and the technology frontier for offshore wind – including floating turbines in deeper waters – moves this sector closer to areas of oil and gas company strength. In addition, industry skills and infrastructure, including existing retail networks and refineries, give the industry advantages in areas like electric vehicle charging and plastic recycling.
Fossil Sector investment step change needed
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. The oil and gas industry invested around USD 20 billion in clean energy in 2022, some 2.5% of its total capital spending.
Bottom-up analysis of cash flows in a 1.5 °C scenario suggests that a reasonable ambition is for 50% of capital expenditures to go towards clean energy projects by 2030, on top of the investment needed to reduce scope 1 and 2 emissions.
The alternative to diversifying into clean energy is to wind down traditional operations over time. This would require them to scale back oil and gas activities while investing in scope 1 and 2 emissions reductions.
Demand and Supply
The report highlights that the problem with fossil fuels needs to be tackled at both the demand end and the supply side. Both actions are needed, and transitions work best when change is collaborative and cooperative.
"Successful, orderly transitions are collaborative ones, in which suppliers work with consumers and governments to expand new markets for low-emissions products and services."
Excessive expectations and reliance on CCUS
Carbon capture and storage is a 50 year old technology, but it has proved expensive to implement and limited efficiency in sequestration of CO2 emissions.
The Gorgon project in Western Australia was supposed to be state of the art carbon capture and storage but has underperformed by at least 50 percent in its first 5 years of operation according to IEEFA 2022 report.
Gorgon injected only 1.71 million tons of CO2 into underground storage in the 2022/23 fiscal year to Jun. 30, 2023. That is well below the facility's planned annual capacity of 4 million tons per year, reports Energy Intelligence. Chevron continues to provide promises of increased performance.
Only a third or so of the CO2 from the Gorgon gas reservoir was reinjected underground in the last two years, failing Chevron's obligation to capture and inject at least 80% of the reservoir CO2..
here is what the IEA report says on Carbon Capture Utilisation and Storage:
"Carbon capture, utilisation and storage is an essential technology for achieving net zero emissions in certain sectors and circumstances, but it is not a way to retain the status quo. If oil and natural gas consumption were to evolve as projected under today’s policy settings, this would require an inconceivable 32 billion tonnes of carbon captured for utilisation or storage by 2050, including 23 billion tonnes via direct air capture to limit the temperature rise to 1.5 °C. The necessary carbon capture technologies would require 26 000 terawatt hours of electricity generation to operate in 2050, which is more than global electricity demand in 2022. And it would require over USD 3.5 trillion in annual investments all the way from today through to mid-century, which is an amount equal to the entire industry’s annual average revenue in recent years."
See also Climate Action Merribek: The scam of Carbon Capture and Storage: 5 video explainers
Producer economies face major uncertainties
Compared with the annual average between 2010 and 2022, per capita net income from oil and natural gas among producer economies is 60% lower in 2030 in a 1.5 °C scenario. New producers entering the market face additional challenges, as they may overestimate the bounty that might lie ahead and underestimate the hazards. Many producers are also heavily exposed to risks from a changing climate, which stand to further disrupt the security of energy supply.
In most cases, today’s major producers of low-cost hydrocarbons also have expertise and ample, under-utilised renewable energy resources that could anchor positions in clean energy value chains and low-emissions industries. Reducing emissions from traditional supplies, including end-use emissions; putting domestic energy systems on a cleaner footing by phasing out inefficient subsidies and boosting clean energy deployment; and developing low-emissions products and services offer a way forward.
The industry must change, but this dialogue also needs clear signals from consumers on the direction and speed of travel to guide investment decisions, to assign value to oil and gas with lower emissions intensities, to develop markets for low-emissions fuels, and to collaborate on technology innovation. Energy transitions can happen without the engagement of the oil and gas industry, but the journey to net zero will be more costly and difficult to navigate if they are not on board.
Scenarios Considered
The report considers three main scenarios, based on up to date projections of economic growth and population.
The Stated Policies Scenario (STEPS) looks at what governments are actually doing rather than what they say they will achieve. It is an outlook based on a detailed sector-by-sector review of energy and climate policies and measures currently in place or under development by governments. In this scenario, each of the fossil fuels has a peak in demand before 2030, but declines after these peaks are relatively muted. Annual CO2 emissions are 20% below 2022 levels in 2050 and these trends are consistent with a temperature rise of around 2.4 °C in 2100 (with a 50% probability).
The Announced Pledges Scenario (APS) assumes that governments meet all of the climate‐related commitments they have announced in full and on time. Pledges made by companies, businesses and industry organisations are also taken into account. Energy-related CO 2 emissions soon peak and they are around 70% lower than 2022 levels in 2050. There are also major reductions in all other energy-related greenhouse gas (GHG) emissions, including methane from fossil fuel operations. This pathway is consistent with a temperature rise of 1.7 °C in 2100 (with a 50% probability).
The Net Zero Emissions by 2050 (NZE) Scenario describes a pathway for the global energy sector to reach net zero CO2 emissions by 2050 without offsets from land-use measures. Advanced economies reach net zero emissions earlier than emerging market and developing economies, and universal access to electricity and clean cooking is achieved by 2030. There are also efforts to cut down on methane and other GHG emissions. The global average surface temperature rise peaks at just below 1.6 °C around 2040 and then gradually falls to 1.4 °C in 2100 (with a 50% probability).
Stranded Assets Risk
The world currently has around 1.8 trillion barrels of oil and 220 trillion m3 of natural gas 2P reserves. With reasonable assumptions on possible deployment rates of CCUS and negative emission technologies such as DACS and BECCS, a large proportion of these reserves cannot be combusted if the temperature rise is to be limited to well below 2 °C or 1.5 °C. For example, in the NZE Scenario around 30% of today’s oil and natural gas reserves are produced by 2050. However, this does not necessarily mean that large volumes of reserves will be “stranded”. In the STEPS, around half of oil and gas reserves are produced to 2050. In other words, a large amount of existing oil and gas reserves will not be used even under much higher temperature outcomes. There is undoubtedly a large difference in fossil fuel use between the scenarios, but the assessment of risks to the industry is better focused on investment and value losses rather than reserves.
In the NZE Scenario, despite the sharp reductions in demand, the risk of stranded capital is relatively low as it is mitigated by production decline rates that are consistent with no further investment in new projects. Some fields are closed before the end of their technical lifetimes, but most of these projects will have recovered their upfront capital by the time shut-in risks appear. In the upstream sector, stranded capital risks therefore exist primarily in the form of the sunk costs incurred in exploring for resources that are not ultimately developed in the NZE Scenario; we estimate that this amounts to around USD 400 billion in total.
Cutting methane emissions
Oil and gas operations were responsible for around 80 Mt of methane emissions in 2022 (a further 40 Mt were released from coal operations) (Figure 2.7). 3 Methane constitutes nearly half of total scope 1 and 2 emissions from the oil and gas sector, although there are significant variations between different regions. Reducing methane emissions is the single most important measure that companies can take to reduce their scope 1 and 2 emissions intensity.
In the NZE Scenario methane emissions from oil and gas operations fall by more than 75% to 2030. Around 30% of this reduction stems from the drop in oil and gas demand over this period. The other 70% occurs because of targeted efforts to cut methane from oil and gas operations. In other words, even in the NZE Scenario, the reduction in oil and gas demand must be complemented by additional, targeted abatement action on methane to ensure emissions fall at a fast enough pace. Without explicit efforts to tackle methane emissions from fossil fuel supply, global energy-related CO2 emissions would need to reach net zero by around 2045 – five years earlier than in the NZE Scenario – with important implications for equitable pathways.
Around USD 75 billion of spending is required to 2030 to deploy all methane abatement measures in the oil and gas sector. This is less than 2% of the net income received by the oil and gas industry in 2022. Most measures should be financed by the industry itself.
Only around 92% of the gas volumes directed into flares around the world are properly combusted. Nearly 95% of the GHG emissions from flaring are abatable with existing technologies.
Use of Offsets
The report says Three quarters of the companies in their sample indicate their intent to use emissions offsets to achieve their targets. They advocate a role for carbon offsets, but stress the importance to distinguish between projects that avoid, reduce or remove emissions.
The supply of high-quality carbon credits is struggling to keep pace with current demand. A number of questions have been raised around the integrity of many existing schemes, including addressing their long-term permanence, additionality, and the methods used to issue credits (Kreibich & Hermwille, 2021). In some cases, projects generating credits have also had negative impacts on local communities (Robinson, et al., 2016).
In the NZE Scenario, there is a 98% reduction in oil and gas sector scope 1 and 2 emissions to 2050 that is achieved without using any carbon credits. In 2050 remaining scope 1 and 2 emissions from oil and gas supply amount to 75 Mt CO 2 , most of which is from refining. These emissions are offset through the use of DACS and BECCS and account for around 5% of total CO2 removals in 2050 (Figure 3.7).
If oil and gas companies purchase removal carbon credits, this could help accelerate the development of negative emissions technologies more broadly. But the availability of quality credits is likely to be limited, and would only be consistent with the NZE Scenario once all efforts to realise real emissions reductions have been made. Given its existing skills and expertise, the industry could also look to develop negative emissions technologies itself and sell credits to generate an additional source of income.
Under the Australian Safeguard mechanism which covers large emitters, if companies do not meet their annual target in emissions reduction, they are allowed to buy carbon credits to meet their target. There are also integrity issues with Australian offset credits.
References:
IEA, 23 November 2023, Oil and gas industry faces moment of truth – and opportunity to adapt – as clean energy transitions advance https://www.iea.org/news/oil-and-gas-industry-faces-moment-of-truth-and-opportunity-to-adapt-as-clean-energy-transitions-advance
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