The International Energy Agency has published The Oil and Gas Industry in Net Zero Transitions, which analyses the current actions the industry is taking to decarbonise its activities, what goals companies within the industry has, and how the wider energy transition may effect oil and gas companies, effectively critiquing the strategies of such companies.

The report says that “a moment of truth is coming for the oil and gas industry” – that a peak of oil and gas use will occur this decade, and that although demand is not set to reduce quickly afterwards based on current policies, demand could be between 45% and 75% by 2050, depending on how aggressively governments pursue national energy and climate pledges. (Demand could of course fall by less, or increase, depending on what governments choose to do and how technology and economies develop.) To date, “oil and gas producers account for only 1% of total clean energy investment globally” with 60% of that coming from four companies, while producing more than half of global energy supply.

This is an arresting statistic. The report exhorts all oil and gas companies to reduce emissions from their own operations, as less than half of global oil and gas production comes from companies that have a goal to do so, and that producing, transporting and processing of oil and gas accounts for just under 15% of all energy-related greenhouse gas emissions, half of that being methane. Such emissions need to be reduced by 60% by 2030 (from today’s levels) to be on track to keep the average global surface temperature rise below 1.5^oC. This is achievable, the IEA points out, given the will to do so, as the “emissions intensity of the worst performers is currently five- to ten-times higher than the best”.

Important for oil and gas companies in a different way is the IEA’s assertion that “oil and gas becomes a less profitable and a riskier business as net zero transitions accelerate”. As decarbonisation goals become more ambitious, the oil and gas sector becomes less valuable – by 60% “if the world gets on track to limit global warming to 1.5 °C”. This would suggest a strong motive for such companies to either act to resist such targets, or to change their strategies to embrace alternative energies. There is some reason to follow the latter path. In the IEA’s estimate, “the return on capital employed in the oil and gas industry averaged around 6-9% between 2010 and 2022, whereas it was 6% for clean energy projects”.

Moreover, if more ambitious climate targets are to be met, there will be less need for investment in oil and gas supply (though some will be needed), suggesting an excess of capital to be invested. On top of this, as the IEA puts it, “many producers say they will be the ones to keep producing throughout transitions and beyond. They cannot all be right.” Only the lowest-cost producers seem set to be able to make a return as the decades progress, suggesting that many would do well to increase their clean energy focus.  

On the upside, oil and gas companies have the skill sets to be successful in clean energy sectors such as hydrogen and hydrogen-based fuels; carbon capture, utilisation and storage (CCUS); offshore wind; liquid biofuels; biomethane; and geothermal energy, and indeed play major roles in some of those areas already. On CCUS, however, there is a warning from the IEA, that while it is an essential technology for achieving net zero emissions in certain sectors and circumstances”, it is not a technology to “retain the status quo” – to do so would require an “inconceivable” amount of energy.

Overall, a “step change” will be required from such companies in their investments in clean energy. The full report is packed with interesting detail.