Sustainable Recovery

World Energy Outlook Special Report
River running through a forest

Fuels

Oil and natural gas meet more than half of global primary energy demand today and the oil and gas industries employ around 13 million people in upstream operations, refining and processing, transport and distribution and services. The Covid-19 pandemic has had a major impact on markets, particularly for oil, and oil demand is expected to be around 8.5% lower in 2020 than in 2019. There have also been sudden short-term shocks in both supply and demand that were well in excess of the industry’s near-term capacity to adapt: in April 2020, oil demand was around 25% lower than a year ago, and prices have been very volatile. A number of countries have responded to lower prices by building up their strategic petroleum reserves, while a number of companies have announced sharp downward revisions to investment plans. We expect global upstream oil and gas investment to fall by almost one-third from 2019 levels, and around 1.2 million workers in the oil and gas industry at risk of losing their jobs. The reduction in the oil price has made products such as LPG cheaper but alternative fuels such as sustainable biofuels more expensive. Biofuels have been hit harder than any other forms of renewable energy to date: demand is expected to fall by around 13% in 2020.

This section examines the implications of the Covid-19 crisis on methane emissions from oil and gas operations, fossil fuel subsidies and biofuels, and the extent to which sectors could contribute to an overall sustainable recovery programme.

Reduce methane emissions from oil and gas operations: We estimate that it is technically possible to reduce around three-quarters of the current 82 Mt of methane emissions that are released from oil and gas operations each year. Some of the skilled oil and gas workers at risk of being laid off because of Covid-19 could be re-trained to work on abatement programmes: we estimate that around 4 jobs would be created for every million dollars spent to reduce oil and gas-related methane emissions. The economics of monitoring, reduction, and methane prevention measures and programmes are likely to be impacted by the drop in natural gas prices. Continued and enhanced government support to address gaps in information, infrastructure and investment will be important to ensure the oil and gas industry tackles its methane emissions. It would be cost effective to deploy nearly all technically available abatement options at a GHG price of $15/tonne CO2-eq.

Reform fossil fuel subsidies: The global value of fossil fuel consumption subsidies in 2019 was around $320 billion. Without any changes to existing subsidy regimes, this is likely to fall to $180 billion in 2020 because of the drop in oil and gas prices. However, oil and gas income in producer economies in 2020 is likely to drop by nearly $800 billion – a reduction of 55% on 2019 levels. Phasing out inefficient fossil fuel subsidies would create new budget space, remove economic distortions and make room for more spending to boost long-term economic growth; the dramatic fall in oil and gas prices also offers opportunities to cut inefficient subsidies without increasing end-user prices. Reform programmes need to carefully consider national circumstances, not least the need to keep energy affordable for the poorest in society.

Support and expand the use of biofuels: The liquid biofuel industry employed around 2.1 million people in 2018, and is a critical employer of both low and high skilled workers across many countries. However, a significant share of production capacity has been idled or is operating at reduced capacity as a result of the slowdown in overall liquid fuel demand. New policies and targeted support – which should be closely linked to meeting appropriate sustainability criteria – could help stabilise the industry and create a large number of new jobs in a short period of time. We estimate that each million dollars of investment would create around 15-30 jobs, a significant proportion of which would be in rural areas. Investment in sustainable biofuel production and consumption infrastructure could also have other long-term benefits such as offsetting the need for oil imports and supporting demand for nationally important agricultural commodities. Sustainable biofuels also have a potentially important part to play in reducing emissions from sectors that are challenging for low-carbon electricity to reach such as heavy-duty vehicles, aviation and shipping.

Investment impacts on abatement costs in the Sustainable Recovery Plan

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Investment impact on job creation in the fuels sector in the sustainable recovery plan

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Global total of annual fossil fuel subsidies, 2015-2020e

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Reduce methane emissions from oil and gas operations

Estimates of methane emissions are subject to a high degree of uncertainty, but the most recent comprehensive estimate suggests that annual global methane emissions from human activity are around 350 Mt. The largest sources of anthropogenic methane emissions are the agriculture and energy sectors, which includes emissions from coal, oil, natural gas and bioenergy. We estimate that oil- and gas-related methane emissions in 2019 were around 82 Mt, equivalent to around 2.5 Gt CO2-eq (assuming that one tonne of methane is equivalent to 30 tonnes of CO2, the 100-year global warming potential.)

There is a great deal of uncertainty over what might happen to methane emissions in 2020. While global emissions of CO2 will fall this year, a similar reduction in methane emissions from oil and gas cannot be taken for granted. The drop in natural gas prices means that many reduction and prevention measures are now less cost effective to deploy than was previously the case. Declines in revenues from oil and gas operations may also mean that companies pay less attention to efforts to tackle methane emissions; regulatory oversight of oil and gas operations could also be scaled back. 

Sources of methane emissions

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Continued and enhanced government support for reduction programmes will be important to ensure that methane emissions fall in the coming years. Strengthening efforts to reduce methane emissions could form an important part of any support that may be offered to the oil and gas industry. In Canada, for example, around US$550 million is included in a federal stimulus package to help oil and gas companies reduce methane emissions. Examples of policies and approaches to encourage or require methane emissions reductions include:

  • Encourage direct measurement: To improve understanding of the issue, help measure progress against goals, and develop and refine objectives and targets.
  • Ensure transparency on data and methods: Essential for credible reporting, which would be strengthened through third-party verification.
  • Introduce quantitative targets: Reduction commitments are included in some Nationally Determined Contributions (e.g. Canada) and their use could be expanded.
  • Establish well-designed regulations: Including how oversight will be carried out, the institutional arrangements for enforcement and penalties for non-compliance.

We expect oil and gas companies to cut upstream investment in 2020 by around one-third compared with 2019 levels. A large portion of the pain arising from this will be felt by companies providing oil field services and supplies. We estimate that around 1.2 million oil and gas jobs could be lost in 2020, or around 10% of the workforce. Jobs servicing the shale sector would be hardest hit, but the effects would be widely felt across the industry. Incentivising reductions in oil and gas methane emissions could make use of some of the skilled members of the oil and gas service sector who are laid off. We estimate that it is technically possible today to reduce around 75% of current oil and gas methane emissions. Around $15 billion spending would be required annually to fully realise this reduction.

Marginal abatement cost curve for oil- and gas-related methane emissions by mitigation measure, 2019

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Some of the opportunities for reducing oil and gas methane emissions can be quite labour intensive. For example, leak detection and repair programmes are required to identify and fix sources of fugitive (or accidental) methane emissions. There have been many recent advances in remotely detecting methane emissions through the use of satellites, planes and drones. This expedites the process of finding leaks but operators are still needed to repair these leaks. Similarly, vented emissions can occur during the normal operation of equipment along the oil and gas value chains, and dealing with these requires operators to replace or retrofit existing pieces of equipment. Taken together, around 4 jobs would be created on average globally for every million dollars invested in reducing fugitive and vented methane emissions.

While natural gas prices are generally much lower than in the past, we estimate, on the basis of 2019 prices, that around one-third of methane emissions from oil and gas operations could be avoided at no net cost. This is because the value of the captured methane is higher than the cost of deploying the measure. Around $5 billion spending would be required to mobilise these reductions, but these would end up saving natural gas worth nearly $10 billion each year.

Many of the international oil companies as well as a number of national oil companies have set individual or collective targets to restrict methane emissions or the emissions intensity of production. However there are limits to what can be achieved by voluntary action because the pool of those willing to take such action is limited, and because the actions themselves may fall short of what is desirable from a public policy perspective. Because methane is a very potent greenhouse gas, even those measures that cost more money than they save are a very cost-effective way to reduce GHG emissions. For example, with a GHG price of only $15/tonne CO2-eq, it would be cost effective to deploy all abatement options, i.e. to reduce total emissions by around 75%. Governments will therefore play a critical role in helping to reduce methane emissions.

Methane emissions of 82 Mt are equivalent to around 145 billion cubic metres of natural gas. This represents less than 5% of global natural gas consumption, but reducing leaks and the flaring of natural gas could substantially improve the trade position of a number of natural gas producers and exporters. There is also increasing interest in differentiating sources of natural gas by the GHG emissions intensity of their production, and the level of methane emissions is the largest component of this. For natural gas exporters, ensuring that methane emissions are kept as low as possible could therefore be an important factor in ensuring the resilience of gas export markets. Natural gas importers could reinforce this incentive by announcing and implementing pathways towards procuring natural gas that entails the smallest possible methane leaks in production and transport.

Reform fossil fuel subsidies

Fossil fuel consumption subsidies lower the price of fossil fuels or fossil fuel-based electricity to end-use consumers. Many major oil and gas exporting countries have traditionally provided very cheap energy to their populations, though a number of importing countries also subsidise the use of fossil fuels. In 2019, the global value of fossil fuel consumption subsidies was around $320 billion. If there were to be no changes in pricing regimes, we estimate that total fossil fuel subsidies would fall to around $180 billion in 2020 because of the drop in oil and gas prices. However a number of countries have introduced additional price interventions, particularly in the electricity sector, to protect newly vulnerable consumers and so this number may increase.

Many of the world’s key producer economies cut oil production in response to the collapse in oil demand, and along with the fall in prices, this will have a major impact on their public finances. If the oil price were to remain at $30/barrel for the remainder of 2020, oil and gas income in economies with fossil fuel subsidies would be nearly $800 billion lower in 2020 than in 2019. Beginning, or accelerating, reforms to inefficient fossil fuel subsidy regimes could provide some relief to their fiscal positions. While the reduction in oil and gas revenues may undercut some of the means of supporting these reforms, the dramatic fall in oil and gas prices presents an opportunity to cut subsidies without increasing end-use prices. The drop in oil and gas prices may also offer the opportunity for all countries to introduce or strengthen effective or real carbon prices (see Chapter "Sustainable recovery plan for the energy sector").

Net income from oil and gas production and fossil fuel consumption subsidies, 2015-2020e

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While there may be fiscal pressure to enact reforms to fossil fuel pricing regimes, there are also social and political sensitivities, not least the need to tackle energy poverty and keep energy affordable, especially in periods of crisis. National circumstances mean that there is no single path to follow when reforming inefficient fossil fuel subsidies, but governments may consider to:              

  • Aim to ensure that prices reflect the full economic cost of the energy that is being supplied, and that pricing systems are transparent, well-monitored and enforced.
  • Introduce reforms in stages to avoid any abrupt or large price rises that may be difficult for some parts of the population to absorb.
  • Implement parallel reforms to protect vulnerable groups. For example, there might be a strong case for targeting conditional cash transfers to those who lack reliable access to clean cooking fuels and electricity.
  • Accompany reforms with a comprehensive communication strategy that persuades citizens of the need for reform and that it is being implemented in a just manner.

Many existing subsidies disproportionally benefit wealthier segments of the population that use more of the subsidised fuel. Such untargeted subsidy policies encourage wasteful consumption and increase pressure on budgets that in many cases are already under strain from dealing with the immediate health and economic crises. Phasing out fossil fuel subsidies would create new budget space and remove economic distortions thereby facilitating spending to flow to more productive uses and boost long-term economic growth. Many of the world’s key producer economies also have abundant wind and solar resources and removing inefficient fossil fuel subsidies would create a more level playing field for these energy sources.

If we assume that fossil fuel subsidies are fully phased out by 2030 in all regions except the Middle East (where the average subsidisation rate is reduced to around 25% by 2030 compared with around 55% today), then global CO2 emissions in 2030 would be around 700 Mt lower than they would have been otherwise. That could lead to even greater emissions savings if some of the financial savings are directed towards other efficiency and low-carbon measures.

Emissions savings in 2030 from a gradual phase-out of fossil fuel consumption subsidies by region

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For exporting countries with large subsidy regimes, economic diversification into non-oil economic activities would improve their economic and social resilience. Given the importance of these countries to global oil and production, such diversification might also reduce commodity price volatility and aid the overall resilience of global energy markets. For importing countries, reducing fossil fuel subsidies would reduce domestic consumption and import requirements. Diverting this spending to support other domestic energy sources would also improve overall self-sufficiency.

Support and expand the use of biofuels

Just over 2 million barrels of oil equivalent per day (mboe/d) of biofuels were consumed globally in 2019 (expressed in energy-equivalent volumes of gasoline and diesel). Around 80% of consumption occurs because of policies that mandate blending with fossil fuels for transport. The containment measures to combat the Covid-19 pandemic that strongly reduced transport fuel demand have also lowered biofuel demand, and this has had a dramatic impact on the biofuels industry.

Biofuel production is expected to fall by around 15% in 2020, which has damaged the profitability of production and has led to a significant share of global biofuel production capacity being idled or operating at reduced capacity. Markets integrated with biofuels have also been affected: for example, there is now less demand for agricultural feedstocks used in biofuel production, and lower availability of co-products (e.g. animal feeds and CO2 for beverages and cooling). Before the Covid-19 crisis, there was an expectation that biofuel consumption would grow in 2020 as a result of strengthened policies in a number of countries, and of rising fuel demand in markets with existing mandates. However, several countries in Southeast Asia have now delayed planned mandate increases, plus the introduction of Brazil’s flagship RenovaBio policy could be disrupted.

Historical and projected global biofuels production, 2017-2020e

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New policies and a targeted support could help stabilise the biofuel industry and create a large number of new jobs in a short period of time. Blending shares could be raised in regions that are not yet at the technical limits of fuel blending in road transport, and support provided for fuels that are not subject to blending limits or that can be used in long-distance transport.1 Specific policies to support the biofuel industry, which should be closely linked to meeting appropriate sustainability criteria, include:

  • Change fuel tax regimes to boost the consumption of biofuel blends and markets for “drop-in” fuels (which can be used unblended or at high blend shares without modifications to engines) and flex-fuel vehicles.
  • Extend programmes to supply biofuels at service stations.
  • Implement financial de-risking measures to modernise production facilities and construct new plants that produce biofuels from low-carbon wastes and residues.
  • Mobilise programmes for the collection and supply of sustainable waste and residue feedstocks for hydrotreated vegetable oil (HVO).

Biofuels production is one of the most labour-intensive energy industries. The liquid biofuel industry employed around 2.1 million people in 2018 (IRENA, 2019), and was the second-largest source of renewable energy jobs after solar PV. Around $2.5 billion was invested in liquid biofuels in 2019, less than 20% of levels seen ten years ago. Job creation and production has grown despite this drop, in part because of increasing production in countries with labour-intensive agriculture. The number of people employed in the sector increased by around 40% between 2013 and 2018, while biofuel production increased by around 25%. In recent years, we estimate that around 15-30 jobs were created for every million dollars of investment.

Ethanol accounts for around 70% of total biofuel consumption today (by volume). In the United States, the world’s largest global producer, around 45% of employment is in agricultural activity to produce feedstock, 30% is in production facilities, and the remainder is in professional services and trade. In countries with less mechanised agriculture, the share of jobs in feedstock production is much higher.

Planting, harvesting and logistics jobs are seasonal in nature, and can be informal in many developing countries. Large-scale biofuel production facilities take around two to three years to build, requiring a large number of construction workers. Once commissioned, there are skilled permanent technical and professional staff associated with O&M and the logistics of fuel supply. Building a more extensive advanced biofuel industry would require highly skilled research and development personnel as well as specialised roles to collect and pre-treat the waste and residue feedstocks that are used.2

A key benefit of biofuels is that they can reduce emissions compared with the use of oil products. Biofuels will be particularly critical to lowering emissions from transport modes where it is technically challenging to use low-carbon electricity such as heavy-duty vehicles, aviation and shipping.

The choice of feedstock and source of process energy used significantly affects the overall emissions reduction potential of biofuels. CO2 emissions from ethanol are between 30-70% lower than gasoline.3 In the United States and Brazil (which account for around 80% of global production), ethanol production has an abatement cost of $20-120/tCO2 for crude oil prices ranging from $30-60/barrel.

There is growing interest in the use of alternative feedstocks that can avoid the potential sustainability concerns associated with some conventional biofuels. Use of waste and residue feedstocks can also provide deeper emission reductions of around 80-90% compared with fossil fuels for transport. However the maturity of these technologies varies. Producing biodiesel and HVO from lipid feedstocks is a mature technology,4 and has an abatement cost of $150-250/tCO2 (for crude oil prices from $30-60/barrel). Other technologies, such as converting solid waste and residue biomass feedstocks into liquid biofuels, are not yet widely commercialised, although some plants do exist.

Support for conventional biofuels is strong in oil importing countries and regions where agriculture is an important contributor to GDP, as is the case in many countries in developing Asia. Biofuel blending can offset a share of import demand and therefore enhance security of supply, while also supporting demand for nationally important agricultural commodities and the associated jobs.

There are a number of additional co-benefits of developing bioenergy industries. Sustainable bioenergy can provide employment and income for rural communities, and health benefits from reduced air pollution and proper waste management. It can also promote sustainable forest and agricultural management and improve resource efficiency.

References
  1. Bioethanol and biodiesel are generally blended with gasoline and diesel up to volumes of less than 10%, although there are some instances of blending of up to 30%.

  2. Advanced biofuels are produced from non-food crop feedstocks, result in significantly fewer GHG emissions than fossil fuels, do not compete with food for agricultural land, and do not adversely affect sustainability.

  3. These figures exclude emissions from land-use change over which there is a large level of uncertainty. Including land-use change emissions would mean that bioethanol would reduce emissions by around 15-70% compared with gasoline.

  4. Lipid feedstocks include waste and residue fats, oils and greases.