Preview of global oil and gas economic analysis during energy transition

The perspective of oil and gas in net zero emission transition

Around 97 million barrel/day of oil and 4.150 billion m3 of natural gas were consumed globally in 2022. This resulted in just over 18 Gt CO2 emissions, around half of total energy-related CO2 emissions. Recent momentum in deploying clean energy technologies means that oil and gas demand peak before 2030 in the Stated Policies Scenario (STEPS), but the declines after these peaks are not steep enough to achieve the world’s climate goals.

Net zero transitions require a huge acceleration in clean energy technology deployment and faster reductions in oil and gas use, 2 scenarios have been accessed for developing the framework:

• The Announced Pledges Scenario (APS), oil and gas demand decline by around 2% each year on average to 2050 (to 55 million barrel/day of oil and 2400 billion m3 of natural gas).

• The Net Zero Emissions by 2050 (NZE) Scenario they fall by more than 5% each year on average to 2050 (to 24 million barrel/day and 920 billion m3).

Attention on the oil and gas industry often focuses on the large international oil and gas companies (the “majors”), but they own less than 13% of global oil and gas production and reserves. By comparison, national oil companies own more than half of production and close to 60% of reserves.

Major challenges lie ahead for midstream infrastructure in net zero transitions. The refining sector reduces its output of traditional products like gasoline and diesel, and focuses more on petrochemical feedstocks and products like asphalt and bitumen. Global liquefied natural gas (LNG) trade sees strong near-term growth, but trade peaks in the APS before 2035 and the utilization of export terminals drops; in the NZE Scenario, demand for LNG can be met in aggregate by plants already in operation.

In the APS and NZE Scenario, investment in existing oil and gas assets continues, but with very different outcomes for new project development. In the APS, new oil and gas projects are needed, although in aggregate there would be no need for further oil and gas exploration. In the NZE Scenario, falling demand means that no exploration of conventional oil and gas projects are approved for development and, after 2030, a number of projects are closed before they reach the end of their technical lifetime.

Many oil and gas producers have set out why they think their resources should be preferred for development in net zero transitions. Some say that they have the lowest production costs or emission intensities; others claim that they are a better option for energy security; and some indicate that new oil and gas developments are needed to improve welfare. In the demand environment of the NZE Scenario, any new oil and gas resource developments would need to be matched by production reductions elsewhere to avoid oversupply and fossil fuel lock-in.

Both over and underinvestment in fossil fuels carry risks for secure and affordable transitions. Sequencing the decline in oil and gas investment and the increase in clean energy investment is vital to avoid damaging price spikes or supply gluts. At present, risks appear to be weighted more towards over investment than the opposite.

The strategic responses of the gas oil companies during net zero emission transition

An increasing number of oil and gas companies are facing financial, social and political pressure to clarify the roles they intend to play in net zero transitions. The industry landscape is diverse and no single option will make sense for all, but many oil and gas companies have already made announcements on how they plan to respond.

The oil and gas industries currently employ nearly 12 million workers globally. This falls by 10% in the APS and 20% in the NZE Scenario to 2030. Governments and companies will need to work together closely to maximize opportunities for re-skilling workers.

The ratio of investment in fossil fuels to clean energy rises from 1:1.8 globally in 2023 to 1:5 in 2030 in the APS and to more than 1:10 in 2030 in the NZE Scenario. These ratios can provide a guide for financial actors looking to assess the alignment of their portfolios with the outcomes of net zero emission transitions.

A key strategic challenge for oil and gas companies is aligning existing skills and capital with the new requirements of energy transitions. International Energy Agency (IEA) have developed a new framework to examine the possible contribution of oil and gas companies to net zero energy transitions that allows for a more solid discussion of the targets these companies are setting.

The framework covers the following aspects:

• Scope 1 and 2 emissions: in the NZE Scenario there is a 60% reduction in scope 1 and 2 emissions from oil and gas operations to 2030. A number of companies have already undertaken efforts to cut these emissions and this reduction is broadly consistent with all companies achieving the emissions intensity of current best practices by 2030.

• New oil and gas projects: the NZE Scenario does not require new exploration or the development of new upstream exploration conventional oil and gas projects. No companies have to date made specific pledges on this.

• Investment in clean energy: Clean energy investment by the oil and gas industry represented 2.5% of its total capital spending in 2022. In the NZE Scenario, projected oil and gas revenues would allow the industry to invest around 50% of its capital budget in 2030 in clean energy. Achieving this level of investment would require governments, companies, shareholders and financial actors to work closely together.

It is not axiomatic that oil and gas companies should invest in clean energy. If they do not, they would need to achieve very low emissions intensities and stop investment in new long lead time upstream exploration projects if they are to claim that they are making a meaningful contribution to achieving net zero emissions by 2050.

The NZE Scenario trends on scope 1 and 2 emissions and oil and gas industry investment in clean energy provide important guidance for oil and gas companies looking to play their part in net zero transitions, even if the energy transition does not accelerate at the pace seen in that scenario.