In December 2023, COP28 in Dubai set a new course for global climate efforts, calling for an accelerated shift from fossil fuels to mitigate climate change. This implies a need for the oil and gas industry to transform quickly. While the push for a net-zero future by 2050 intensifies, oil and gas play a critical role in this energy transition. They provide a bridge to meet current energy demands while renewable energy infrastructure and technologies are being scaled up and integrated globally.
In 2022, the sector’s direct greenhouse gas emissions (scope 1 + 2) represented around 15% of global energy-related emissions (5.1 billion tonnes (Gt) CO2-eq), mirroring that of the entire USA. Oil production contributed approximately two-thirds of this; the rest was from natural gas operations. This stark reality underscores the need for the sector to evolve, balancing its pivotal role in today's energy landscape with the imperative to reduce its carbon footprint significantly.
Additional details: The “Big Oil” companies
A total of 50%+ of oil and gas production is done by national oil companies (NOCs), which include Saudi Aramco, Petroleo Brasileiro, Petronas, Qatar Petroleum, Gazprom, and more.
13%+ of oil and gas production are the supermajors, formerly the seven sisters, which include ExxonMobil, Shell, TotalEnergies, BP, Chevron, and Marathon.
The IEA's Blueprint for Oil and Gas in a Net-Zero World
The International Energy Agency (IEA) released a report titled The Oil and Gas Industry in Net Zero Transitions in November 2023. The IEA states that for the oil and gas industry to align with a 1.5°C scenario, the industry’s direct emissions need to decline by 60% by 2030. In a net-zero world, oil and gas use must be reduced by 75% before 2050. Current stated policies deliver only a 45% reduction in the use of these fuels by 2050, and that only if policies are fully implemented—a big if!
This implies, for instance, that no new exploration activities are necessary, and such activities should be stopped now. It also creates enormous challenges for governments relying on high tax income from the sector. The report’s analysis finds, furthermore, that the current valuation of private oil and gas companies could fall by 60% if the world gets on track to limit global warming to 1.5°C.
Dr Fatih Birol, the Executive Director of the IEA, emphasised the critical decisions the sector would have to make: “The fossil fuel sector must make tough decisions now, and their choices will have consequences for decades to come. Progress in clean energy 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.” In response to the IEA report, Exxon released a statement: “It is highly unlikely that society would accept the degradation in the global standard of living required to permanently achieve a scenario like the IEA” [report indicates].
Transition Allies: Green investments and stakeholder reporting disclosures
The IEA reports that the oil and gas sector's investment in clean energy is minimal, representing just 1% of global and 2.5% of the sector's total investment (see Figure 1). This disparity points to the need for a dramatic increase in allocation towards sustainable projects. The IEA recommends that 50% of capital expenditures target clean energy by 2030 to align with the Paris Agreement's objectives.
Oil and gas companies’ access to financing will also be a challenge. They have not been able to finance their green projects with green financing, e.g. green bonds, as their business model and revenue are heavily relient on non-green activities. ExxonMobil has indicated that it will divert billions of USD in climate-related investments away from Europe, citing stringent regulations and bureaucratic challenges. Additionally, Barclays' decision in February 2024 to cease financing new oil and gas projects set a USD 1 trillion ESG and transition finance target. In addition to increased transparency disclosures with the CSRD and ESRS, these actions underscore a broader narrative of the financial and regulatory pressures facing the oil and gas industry in the transition towards more sustainable energy practices.
As the world continues to depend on oil and gas for energy and the production of goods, the importance of transitioning to sustainable practices cannot be overstated. This transition will require dedication, significant investment, creative financing solutions, and leveraging the oil and gas sector's extensive knowledge and experience. The future of oil and gas lies in its successful integration into the global energy transition, ensuring it plays a pivotal role in achieving a sustainable and prosperous future for all.
Takeaway questions
Do you feel we have initiated the beginning of the end of the fossil-fuel era?
How realistic is it that oil and gas companies will seriously increase their clean energy investment from 2.5% to, say, 25%? And by what year?
Should regions, including the EU, be more favourable to climate-related investments from oil and gas companies and other sectors and further reduce bureaucracy and red tape?
How will increased reporting disclosure requirements, such as CSRD and ESRS, affect oil and gas companies and their stakeholders?
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