IEA - Oil and gas industry in energy transitions

International Energy Authority’s (pre-coronavirus) analysis of the oil and gas industry shows stranded assets and stranded capital if the COP 2° warming scenario is to be realized. Solutions to global warming ‘cannot be found within today’s oil and gas paradigm’. Carbon capture is a means of mitigating the risks of stranded assets and capital. But CCUS investment is low and decreasing. On the positive side (for the industry) the risk of a mid-term supply shock means that ‘continued investment in existing oil fields, as well as some new ones, remains a necessary part of the energy transition’.

It is important to remember that the IEA’s report on the oil and gas industry in energy transitions* was written before both the coronavirus pandemic and the subsequent oil price implosion. This review likewise is written without considering the impact of these game-changing events. It is also important to underline the IEA’s premise, as it says on the can, that the oil and gas industry will be impacted by the energy transition. Or, as is stated in the introduction, ‘Rising concentrations of GHGs in the atmosphere, changing energy dynamics, and growing social and environmental pressures represent huge challenges for the oil and gas industry. The twin threats are a loss of financial profitability and a loss of social acceptability. There are already signs of both, whether in financial markets or in the reflexive antipathy towards fossil fuels that is increasingly visible in the public debate, at least in parts of Europe and North America. Either of these threats would be sufficient to fundamentally change the relationship of oil and gas companies with the societies in which they operate. Together, they require a rethink of the way that the industry conducts its business. Climate change is not a problem that can be solved in the existing oil and gas paradigm’.

To get an idea of the magnitude of the problem for oil and gas in the context of the above, page 97 shows that ‘stranded reserves’, i.e. oil and gas that has already been found, amount to around three times the allowable carbon budget for a 2° warming. On page 100, we read that ‘stranded capital’, i.e. monies that have already been invested in condemned oil and gas projects amounts to some $250 billion.

Oil IT Journal’s position on the greening of the industry is that carbon capture and storage (CCS) is the only real ‘solution’ for oil and gas in a low to zero carbon world. Oils investing in wind or PV is all well and good, but these are orthogonal to the fate of oil and gas. As long as there is demand for oil, any diversion of an oil company’s efforts towards green technologies will be compensated by others stepping into the breach. Another lever that oils can activate for a greener industry is reducing or eliminating the ‘15% of global energy related GHG that come from methane leaks to the atmosphere’.

But to get back to CCS, what does the IEA have to say here? ‘The oil and gas industry will be critical for some key capital-intensive clean energy technologies [.. including ..] the development of carbon capture storage and utilization (CCUS**)’. ‘Scaling up these technologies and bringing down their costs will rely on large-scale engineering and project management capabilities, qualities that are a good match to those of large oil and gas companies’. ‘For CCUS, three-quarters of the CO2 captured today in large-scale facilities is from oil and gas operations, and the industry accounts for more than one-third of overall spending on CCUS projects’. So far so good, but then ‘If the industry can partner with governments and other stakeholders to create viable business models for large-scale investment, this could provide a major boost to deployment’. Now what exactly does that mean? Apart from a few well-endowed companies seeking to burnish their green credentials, the only way that large scale ‘investment’ will be made in something that brings in no revenue is government and ‘other stakeholders’ forcing oils to do CCS.

The IEA reports that ‘financial, social and political pressures on the industry are rising’. Capital markets are affected as climate-related shareholder resolutions and investor collaborations, such as the Climate Action 100+, ‘increasingly seek to facilitate engagement on sustainability issues’. The IEA also sees banks and other financial institutions reducing their exposure to oil and gas as they have already done for coal. Other pressures come in the form of ‘sustainable finance’ as per the Michael Bloomberg-backed Task Force on climate-related financial disclosures. Nimby-style opposition to infrastructure projects and a push to keep fossil fuels in the ground have led to lengthy permitting procedures and litigation leading to project delays and cost overruns. Some projects have been indefinitely postponed or canceled and fracking is either banned or impossible in much of Europe, in New York, California and Quebec and in some states of Australia.

The IEA sounds wobbly when trying to explain the role of oils in the energy transition. ‘The transformation of the energy sector can happen without the oil and gas industry, but it would be more difficult and more expensive’. ‘Oil and gas companies need to clarify the implications of energy transitions for their operations and business models, and to explain the contributions that they can make to accelerate the pace of change’. ‘Climate impacts will become more visible and severe over the coming years, increasing the pressure on all elements of society to find solutions. These solutions cannot be found within today’s oil and gas paradigm’.

The IEA report has it that while worldwide wind and solar investment in the period from 2015-18 was just short of a trillion dollars, investment in CCUS was under $5 billion of which only $2 billion came from study group of oil and gas companies and NOCs. Unfortunately, investment in CCUS (the only technology that can mitigate oil’s carbon footprint) has declined enormously from 400 mm$ in 2015 to around $150mm. Interestingly though, corporate venture capital spend on CCUS has increased significantly, from zero in 2015 to (still rather measly) $40 million.

The IEA does offer some comfort to those working in oil and gas. While oil demand is forecast to fall by around 2.5% per year out into the 2030s, this rapid drop is well short of the decline in production that would occur if all capital investment were to cease immediately. This would lead to a loss of over 8% of supply each year. Thus ‘continued investment in existing oil fields, as well as some new ones, remains a necessary part of the energy transition’.

In conclusion, the world is not on track to deliver the emissions reductions required for the SDS. Achieving such will require well-designed policies from governments (including carbon pricing) to promote research, development and large-scale deployment of the relevant technologies and infrastructure.

The IEA’s flagship in this context is Denmark’s DONG (Dansk Olie og Naturgas) which sold its oil and gas business to INEOS and is now ‘a leading light’ in particularly offshore wind. However, as the IEA admits, ‘the oil and gas assets continue to produce under different ownership, a point sometimes overlooked by the divestment movement’ while DONG, now Ørsted ‘has achieved impressive reductions in its overall emissions intensity’.

Apart from the irony of such ‘production under new ownership,’ the IEA reports on the dilemma for today’s fuel companies that are looking at becoming energy companies’ that stems from the fact that oil and gas has been and remains a successful business that has rewarded shareholders with robust dividends. Any transition to ‘energy’ could risk, at least in the near term, these returns. While low-carbon energy businesses can be profitable, the returns for these segments have generally been lower than for hydrocarbons. Oil companies are also at risk as they move into areas where they may currently have much less of a comparative advantage. ‘Companies that are embracing the transition from fuel to energy are attempting to straddle divergent possible outcomes and risks’. IEA forecasts however suggest that ‘however fast energy demand grows in the future, electricity demand grows more quickly’. The composition of this electricity will shift towards lower-carbon sources presenting ‘real market opportunities for related businesses seeking to grow or to offset shrinking markets elsewhere’.

* International Energy Agency The oil and gas industry in energy transitions.

** While CCS, carbon capture and sequestration is fairly clear-cut. The addition of ‘U’ for use opens the debate to some more contentious issues. Using CO2 in oil enhanced recovery (one of the main ‘U’s today) begs the question of the carbon produced from the extra production. Other uses are even more fantastical. Turning CO2 into a syn-fuel is thermodynamically expensive and releases more CO2 when it is burned. Using CO2 in greenhouses is a neat idea but we understand that most greenhouse CO2 is vented before it is absorbed.

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