The oil and gas sector faces ‘pivotal choices’ about its ‘role in the global energy system amid a worsening climate crisis fuelled in large part by its core products’, says the IEA Oil and Gas Industry in Net Zero report, which suggests how the industry can ‘take a more responsible approach’ and ‘contribute positively to the new energy economy’.

Even under today’s policy settings, global demand for both oil and gas is set to peak by 2030, according to the latest IEA projections. Stronger action to tackle climate change would mean clear declines in demand for both fuels. If governments deliver in full on their national energy and climate pledges, demand would fall 45% below today’s level by 2050. In a pathway to reaching net zero emissions by mid-century, which is necessary to keep the goal of limiting global warming to 1.5°C within reach, oil and gas use would decline by more than 75% by 2050, says the IEA.

However, the oil and gas sector – which provides more than half of global energy supply and employs nearly 12 million workers worldwide – has been ‘a marginal force at best’ in transitioning to a clean energy system, according to the report. Oil and gas companies currently account for just 1% of clean energy investment globally – and 60% of that comes from just four companies.

What’s more, IEA Executive Director Fatih Birol says the oil and gas industry must let go of the ‘illusion’ that carbon capture technology is a solution to climate change and invest in more clean energy. ‘The oil and gas industry is facing a moment of truth at COP28 in Dubai. With the world suffering the impacts of a worsening climate crisis, continuing with business as usual is neither socially nor environmentally responsible,’ he says. ‘Oil and gas producers around the world need to make profound decisions about their future place in the global energy sector. The industry needs to commit to genuinely helping the world meet its energy needs and climate goals – which means letting go of the illusion that implausibly large amounts of carbon capture are the solution.’

Every oil and gas company’s transition strategy can and should include a plan to reduce emissions from its own operations, according to the report. The production, transport and processing of oil and gas results in nearly 15% of global energy-related greenhouse gas (GHG) emissions – equal to all energy-related GHG emissions from the US. As things stand, companies with targets to reduce their own emissions account for less than half of global oil and gas output, says the IEA.

To align with a 1.5°C scenario, the industry’s own emissions need to decline by 60% by 2030. The emissions intensity of oil and gas producers with the highest emissions is currently five-to-10 times above those with the lowest, showing the ‘vast potential for improvements’, suggests the study. Furthermore, strategies to reduce emissions from methane – which accounts for half of the total emissions from oil and gas operations – are ‘well-known and can typically be pursued at low cost’.

The report recognises that oil and gas production ‘will not disappear – even in a 1.5°C scenario’ and says ‘some investment in oil and gas supply is needed to ensure the security of energy supply and provide fuel for sectors in which emissions are harder to abate’. However, it stresses that the $800bn currently invested in the oil and gas sector each year is double what is required in 2030 on a pathway that limits warming to 1.5°C.  

In transitions to net zero, oil and gas is set to become a less profitable and riskier business over time. The report’s analysis finds that the current valuation of private oil and gas companies could fall by 25% from $6tn today if all national energy and climate goals are reached and by up to 60% if the world gets on track to limit global warming to 1.5°C.

Opportunities lie ahead despite these challenges. The report finds that the oil and gas sector is ‘well placed to scale up some crucial technologies for clean energy transitions’. In fact, some 30% of the energy consumed in 2050 in a decarbonised energy system comes from technologies that could benefit from the industry’s skills and resources – including hydrogen, carbon capture, offshore wind and liquid biofuels, it suggests.

However, this would ‘require a step-change in how the sector allocates its financial resources’. The oil and gas industry invested around $20bn in clean energy in 2022, or roughly 2.5% of its total capital spending. The report finds that producers looking to align with the aims of the Paris Agreement would need to put 50% of their capital expenditures towards clean energy projects by 2030, on top of the investment required to reduce emissions from their own operations.

The report also notes that carbon capture, currently the linchpin of many firms’ transition strategies, ‘cannot be used to maintain the status quo’. If oil and natural gas consumption were to evolve as projected under today’s policy settings, ‘limiting the temperature rise to 1.5°C would require an entirely inconceivable 32bn tonnes of carbon captured for utilisation or storage by 2050, including 23bn tonnes via direct air capture’, it says, adding that ‘the amount of electricity needed to power these technologies would be greater than the entire world’s electricity demand today’.

‘The fossil fuel sector must make tough decisions now, and their choices will have consequences for decades to come,’ concludes Birol. ‘Clean energy progress 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.’