If oil and gas companies faced with critical challenges in the fight against climate change delay their energy transition to 2030, $1.2 trillion in capital could be stranded, a new International Energy Agency (IEA) report revealed Monday.
The IEA’s Oil and Gas Industry in Energy Transitions report produced in cooperation with the World Economic Forum (WEF) will be presented to government and industry leaders during the WEF's upcoming annual meeting in Davos on Jan. 21.
The report highlighted that oil and gas companies need to step up climate efforts to address the challenge of balancing their short-term returns with their long-term license to operate.
The report also demonstrated the need for oil and gas companies to clarify what clean energy transition means for them and accelerate these efforts.
"If there is a delay in implementing emissions reductions, or if market participants do not fully take market signals on board, the level of stranded capital can escalate rapidly. In a disjointed transition occurring in 2025, stranded capital rises to around $950 billion, if the transition is delayed to 2030 it rises to $1.2 trillion," the report showed.
Fossil fuels drive the near-term returns of the companies, but failure to address growing calls to reduce greenhouse gas emissions could threaten their long-term social acceptability and profitability, the IEA said.
“No energy company will be unaffected by clean energy transitions. Every part of the industry needs to consider how to respond. Doing nothing is simply not an option," the IEA's Director General Fatih Birol was quoted as saying.
While some oil and gas companies have taken steps to support climate action by diversifying their operations to include renewables and other technologies, the average investment by oil and gas companies in non-core areas has so far been limited to around 1% of total capital spending with the largest outlays going to solar and wind.
- 15% of global energy-related emissions derived from oil and gas industry
Birol advised that the first immediate task for all parts of the oil and gas industry is in reducing the carbon footprint of their 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," he noted.
Reducing methane leaks into the atmosphere is the single most important and cost-effective way for the industry to bring down these emissions, the report highlighted.
The report also addressed other opportunities to lower the emissions intensity of delivered oil and gas. It advised that emissions would be reduced by eliminating routine flaring and integrating renewables and low-carbon electricity into new upstream and LNG developments.
“Also, with their extensive know-how and deep pockets, oil and gas companies can play a crucial role in accelerating the deployment of key renewable options such as offshore wind, while also enabling some key capital-intensive clean energy technologies such as carbon capture, utilization and storage and hydrogen to reach maturity,” Birol added.
He underlined that without the industry's input, clean energy transition technologies may simply not achieve the scale needed for them to move the dial on emissions.
Within 10 years, these low-carbon fuels would need to account for around 15% of overall investment in fuel supply if the world is to get on course to tackle climate change, the report said.
- Absence of low-carbon fuels make transition more expensive
The path towards decarbonization is assumed to be clear and visible to investors and so they do not develop new resources in the expectation of a much higher trajectory for demand and prices, the IEA said.
In the absence of low-carbon fuels, transitions become much harder and more expensive, according to the report.
According to the WEF's latest Global Risks Report 2020, the five biggest long-term concerns of global experts and decision-makers are all environmental based.
Extreme weather events, failure of climate change mitigation and adaptation, major natural disasters, major biodiversity loss and ecosystem collapse and human-made environmental damage and disasters ranked as the top five likely global risks to occur over the next 10 years.
For the first time in the survey’s 10-year outlook, the top five global risks in terms of likelihood are all environmental marking the severity of the climate crisis.
By Nuran Erkul Kaya