It is an "uncomfortable truth" that oil and gas producers will need to scale back their operations over time in order to limit global warming caused by greenhouse gas (GHG) emissions, the IEA said in a report published today ahead of next week's UN Cop 28 climate summit in Dubai. But options for companies and countries which rely on hydrocarbons to transition to equally profitable alternatives in a net-zero world may be limited, it said.
If governments deliver on their announced pledges and limit global warming to 1.7°C by 2050, oil and gas demand will be 45pc lower than today. Limiting warming to 1.5°C would require hydrocarbon production to fall by 75pc by 2050, the report said. This reduction in demand will necessarily require some companies to reduce their hydrocarbons output. To avoid being wound down, firms will have to transition to producing cleaner forms of energy with lower but more reliable returns on capital, according to the IEA. The agency estimates return on capital employed for clean energy projects was 6pc in 2010-22. This compares to 6-9pc for oil and gas production, which had a much higher variability in returns.
A market-led approach of leaving the oil and gas companies with the lowest costs producing last could lead to further concentration of global production in the Middle East. Focusing on emissions intensity of production could also favour Middle Eastern producers, as well as companies operating in Norway, the IEA said. Mismatches in the pace of demand and supply reduction could lead to damaging price volatility, with a risk of price spikes from underinvestment and supply gluts from overinvestment, it added.
The "one element" that should be in all transition strategies for oil and gas companies is reducing emissions from the industry's operations, the IEA said. But it warns against "excessive expectations and reliance on" carbon capture, utilisation and storage (CCUS) to justify continuing current levels of production. Limiting warming to 1.5°C by 2050 while producing as much oil and gas as under current stated policies — roughly flat to current production — would require 23 Gt of direct air capture to strip out the CO2 released. This would consume more than the world's current total supply of electricity, and require investments of $3.5 trillion/yr until 2050, more than the energy industry's annual revenue in recent years.
Escaping the trap
Hydrocarbon producers could be well placed to diversify into clean energy, the IEA said. But all of the pathways examined entailed sharp cost increases.
State-owned oil companies could use their strong vertical integration to transition to producing a mix of oil products for non-combustion purposes and bio- and hydrogen-based liquid fuels, the report said. It suggests that the majors could shift half of their energy production to renewable electricity, while expanding biofuels and hydrogen production. And gas-focused independents could invest in biomethane, hydrogen and CCUS.
All of these options would be more expensive than the fossil-fuelled status quo. Firms would have to invest two to three times as much as at present to reach these goals, the IEA estimates. To maintain a steady income, a state-owned oil company producing low-carbon liquids would need to be paid $200/bl of oil equivalent (boe) by 2030, more than twice current oil prices, according to the report.
Countries which rely heavily on revenues from hydrocarbon production risk sharp falls in income if fossil fuel consumption follows pathways which attain net zero emissions by 2050. Per capita income from oil and gas in 10 Middle Eastern, African and Latin American producer countries could fall by 70pc by 2030, and 90pc by 2050 in this scenario. These countries face some common challenges including low labour productivity and non-diversified economies centred on fossil exports. But many also have the potential to become producers of low-carbon energies, and to gain in macroeconomic stability by no longer being dependent on volatile fossil fuel prices, the IEA said.
