The oil and gas industry needs to step up its climate efforts immediately as the world transitions towards clean energy sources, says a report.
Oil and gas firms are reliant on producing high-polluting fossil fuels but intergovernmental organisation the International Energy Agency (IEA) believes they must reduce their greenhouse gas emissions – otherwise their long-term profitability could be at risk.
The IEA’s report, titled Oil and Gas Industry in Energy Transitions, says some companies have taken steps to support efforts to combat climate change, but the industry as a whole could play a “much more significant role” through its engineering capabilities and financial resources.
IEA executive director Dr Fatih Birol believes all energy companies will be affected by the transition towards clean energy.
He added: “Every part of the industry needs to consider how to respond. Doing nothing is simply not an option.
“The first immediate task for all parts of the industry is reducing the environmental footprint of their own operations.
“As of today, around 15% of global energy-related greenhouse gas emissions come from the process of getting oil and gas out of the ground and to consumers.
“A large part of these emissions can be brought down relatively quickly and easily.”
How oil and gas companies can move towards clean energy sources
As part of the efforts to move towards a greener global economy, a number of industries are set to face increased pressure to reduce their CO2 output across the supply chain.
In oil and gas, the IEA believes reducing methane leaks to the atmosphere is the “single most important and cost-effective way” for the sector to bring down its emissions.
But the report says there are various other opportunities to lower the intensity of the emissions produced.
One option could be to eliminate routine flaring and integrate renewables and low-carbon electricity into new upstream and liquefied natural gas (LNG) developments.
Dr Birol said oil and gas companies can use their “extensive know-how and deep pockets” to play a “crucial role” in accelerating the deployment of key renewable options such as offshore wind.
He added the firms can also play a part in enabling “key capital-intensive clean energy technologies – such as carbon capture, utilisation, storage and hydrogen – to reach maturity”.
Dr Birol believes without the industry’s input, these technologies may not achieve the scale needed for them to “move the dial on emissions”.
Efforts made by oil and gas companies to move towards clean energy sources
Some oil and gas companies are diversifying their energy operations to include renewables and other low-carbon technologies, according to the report.
But the average investment by firms in non-core areas has so far been limited to about 1% of total capital spending, with the largest outlays going to solar PV and wind.
The IEA says some companies have also diversified by acquiring existing non-core businesses – across electricity distribution, electric vehicle charging and batteries – while stepping up their research and development activity.
Despite that, the report highlights there are “few signs of the large-scale change in capital allocation needed to put the world on a more sustainable path”.
The agency believes a step up in investments of fuels such as hydrogen, biomethane and advanced biofuels is essential and can deliver the energy system benefits of oil and gas without net carbon emissions.
Within 10 years, it says these low-carbon fuels need to account for around 15% of overall investment in fuel supply if the world is to get on course to tackling climate change – with transitions becoming “much harder and more expensive” in the absence of these types of fuels.
Dr Birol believes the scale of the climate challenge requires a “broad coalition encompassing governments, investors, companies and everyone else who is genuinely committed to reducing emissions”, which oil and gas companies must be “fully on board with”.
Why investments in oil and gas projects are still required despite clean energy transition
The report notes that low-carbon electricity will “undoubtedly move to centre stage in the future energy mix”, but that investment in oil and gas projects will still be needed – even in the proposed rapid clean energy transition.
If investment in existing oil and gas fields were to stop completely, the decline in energy output would be about 8% per year, it claimed.
That would be larger than any plausible fall in global demand, so the IEA says investment in existing fields and some new ones must remain part of the picture.
The agency speculates that some company owners may be in favour of sticking with a specialisation in oil and gas, with an eye on shifting towards natural gas over time – for as long as these fuels are in demand and investment returns are sufficient.
But the report warns that these companies will also need to think through their “strategic response to new and pervasive challenges”.
It says the stakes are particularly high for national oil companies charged with the stewardship of countries’ hydrocarbon resources and for their government owners and host societies that typically rely heavily on the associated oil income.
National oil companies – such as Saudi Aramco and Abu Dhabi National Oil Company – account for well over half of global production and an even larger share of reserves.
Some of these firms are high performing, but many are poorly positioned to adapt to changing global energy dynamics, according to the IEA.
It adds that global trends have meant a number of countries have renewed their commitment to reform and to diversify their economies, with fundamental changes to development models in many major resource holders now looking unavoidable.
But the report says national oil companies can provide important elements of stability for economies during this process if they are “operating effectively and alert to the risks and opportunities”.
