IEA (2023), The Oil and Gas Industry in Net Zero Transitions, IEA, Paris https://www.iea.org/reports/the-oil-and-gas-industry-in-net-zero-transitions, Licence: CC BY 4.0
A moment of truth is coming for the oil and gas industry
Structural changes in the energy sector are now moving fast enough to deliver a peak in oil and gas demand by the end of this decade under today’s policy settings. After the peak, demand is not currently set to decline quickly enough to align with the Paris Agreement and the 1.5 °C goal. But if governments deliver in full on their national energy and climate pledges, then oil and gas demand would be 45% below today's level by 2050 and the temperature rise could be limited to 1.7 °C. If governments successfully pursue a 1.5 °C trajectory, and emissions from the global energy sector reach net zero by mid-century, oil and gas use would fall by 75% to 2050.
This new IEA report explores what oil and gas companies can do to accelerate net zero transitions and what this might mean for an industry which currently provides more than half of global energy supply and employs nearly 12 million workers worldwide. Since 2018, the annual revenues generated by the oil and gas industry have averaged close to USD 3.5 trillion. Around half of this went to governments, while 40% went back into investment and 10% was returned to shareholders or used to pay down debt. The implications of net zero transitions are far from uniform: the industry encompasses a wide range of players, from small, specialised operators to huge national oil companies (NOCs). While attention often focuses on the role of the majors, which are seven large, international players, they hold less than 13% of global oil and gas production and reserves. NOCs account for more than half of global production and close to 60% of the world’s oil and gas reserves.
The industry’s engagement with clean energy transitions will be a key topic at COP28, but this report provides a reference for a debate that will continue well beyond the UN climate summit in Dubai.
Most oil and gas companies are watching energy transitions from the sidelines
Oil and gas producers account for only 1% of total clean energy investment globally. More than 60% of this comes from just four companies, out of thousands of producers of oil and gas around the world today. For the moment the oil and gas industry as a whole is a marginal force in the world’s transition to a clean energy system.
The first-order task is to slash emissions from company operations
While there is no single blueprint for change, there is one element that can and should be in all company transition strategies: reducing emissions from the industry’s own operations. As things stand, less than half of current global oil and gas output is produced by companies that have targets to reduce these emissions. A far broader coalition – with much more ambitious targets – is needed to achieve meaningful reductions across the oil and gas industry. The production, transport and processing of oil and gas results in just under 15% of global energy-related greenhouse gas emissions. This is a huge amount, equivalent to all energy-related greenhouse gas emissions from the United States.
To align with a 1.5 °C scenario, these emissions need to be cut by more than 60% by 2030 from today’s levels and the emissions intensity of global oil and gas operations must near zero by the early 2040s. These are appropriate benchmarks for industry-wide action on emissions, regardless of the future scenario. The emissions intensity of the worst performers is currently five- to ten-times higher than the best. Methane accounts for half of the total emissions from oil and gas operations. Tackling methane leaks is a top priority and can be done very cost-effectively – but it is not the only priority.
Transitions will hurt the bottom line for companies focused on oil and gas
The volatility of fossil fuel prices means that revenues could fluctuate from year to year – but the bottom line is that oil and gas becomes a less profitable and a riskier business as net zero transitions accelerate. Prices and output are generally lower and the risk of stranded assets is higher, especially in the midstream sector that includes refineries and facilities for liquefied natural gas. If expectations are that demand and prices follow a scenario based on today’s policy settings, that would value today’s private oil and gas companies at around USD 6 trillion. If all national energy and climate goals are reached, this value is lower by 25%, and by 60% if the world gets on track to limit global warming to 1.5 °C.
Oil and gas projects currently produce slightly higher returns on investment, but those returns are less stable. We estimate that the return on capital employed in the oil and gas industry averaged around 6-9% between 2010 and 2022, whereas it was 6% for clean energy projects. Oil and gas returns varied greatly over time compared with more consistent returns for clean energy projects.
Oil and gas investment is needed in all scenarios, but the demand trajectory in a 1.5 °C world leaves no room for new fields
Continued investment in oil and gas supply is needed in all scenarios, but the USD 800 billion it currently invests each year is double what is required in 2030 to meet declining demand in a 1.5 °C scenario. Investment in existing and some new fields is necessary in a world that achieves national energy and climate pledges, although there is no need in aggregate for new exploration. In a scenario that hits global net zero emissions by 2050, declines in demand are sufficiently steep that no new long lead-time conventional oil and gas projects are required. Some existing production would even need to be shut in. In 2040, more than 7 million barrels per day of oil production is pushed out of operation before the end of its technical lifetime in a 1.5 °C scenario.
In net zero transitions, new project developments face major commercial risks and could also lock in emissions that push the world over the 1.5 °C threshold. Producers need to explain how any new resource developments are viable within a global pathway to net zero emissions by 2050 and be transparent about how they plan to avoid pushing this goal out of reach.
Not all producers can be the last ones standing
Many producers say they will be the ones to keep producing throughout transitions and beyond. They cannot all be right. Oil and gas production is vastly reduced in net zero transitions but does not disappear. Even in a 1.5 °C scenario, some 24 million barrels per day of oil is produced in 2050 (three-quarters is used in sectors where the oil is not combusted, notably in petrochemicals), as well as some 920 billion cubic metres of natural gas, roughly half of which is used for hydrogen production.
The distribution of future supply among producers will depend on the weight assigned to lowering costs, ensuring diversity of supply, reducing emissions, and fostering economic development. Market forces naturally favour the lowest-cost production, but that leads to a high concentration in supply among today’s major resource holders, notably in the Middle East. Prioritising the least emissions-intensive sources drives progress towards climate goals, but this often favours low-cost producers, so supply still becomes more concentrated. It is much better for transitions if all producers take targeted action to reduce their emissions. If production from low-income producers is favoured, these projects may not ultimately be very profitable in a well-supplied market. And if countries prefer domestically produced oil and gas as a way to buttress energy security, they reduce reliance on others but risk finding themselves with relatively high-cost projects in a low-price world.
The oil and gas industry is well placed to scale up some crucial technologies for net zero transitions…
Some 30% of the energy consumed in a net zero energy system in 2050 comes from low-emissions fuels and technologies that could benefit from the skills and resources of the oil and gas industry. These include hydrogen and hydrogen-based fuels; carbon capture, utilisation and storage (CCUS); offshore wind; liquid biofuels; biomethane; and geothermal energy. Oil and gas companies are already partners in a large share of planned hydrogen projects that use CCUS and electrolysis. The oil and gas industry is involved in 90% of CCUS capacity in operation around the world. CCUS and direct air capture are important technologies for achieving net zero emissions, especially to tackle or offset emissions in hard-to-abate sectors. For the moment, only around 2% of offshore wind capacity in operation was developed by oil and gas companies. Plans are expanding, however, and the technology frontier for offshore wind – including floating turbines in deeper waters – moves this sector closer to areas of oil and gas company strength. In addition, industry skills and infrastructure, including existing retail networks and refineries, give the industry advantages in areas like electric vehicle charging and plastic recycling.
…but this requires a step-change in the industry’s allocation of investment
Companies that have announced a target to diversify their activities into clean energy account for just under one-fifth of current oil and gas production. The oil and gas industry invested around USD 20 billion in clean energy in 2022, some 2.5% of its total capital spending. In this report, we offer a new framework for assessing the strategies of oil and gas companies and the extent to which they are making a meaningful contribution to transitions. For producers that choose to diversify and are looking to align with the aims of the Paris Agreement, our bottom-up analysis of cash flows in a 1.5 °C scenario suggests that a reasonable ambition is for 50% of capital expenditures to go towards clean energy projects by 2030, on top of the investment needed to reduce scope 1 and 2 emissions.
Not all oil and gas companies have to diversify into clean energy, but the alternative is to wind down traditional operations over time. Some companies may take the view that their specialisation is in oil and natural gas and so decide that – rather than risking money on unfamiliar business areas – others are better placed to allocate this capital. But aligning their strategies with net zero transitions would then require them to scale back oil and gas activities while investing in scope 1 and 2 emissions reductions.
Two pitfalls for the discussion about the future of oil and gas
A productive debate about the oil and gas industry in transitions needs to avoid two common misconceptions. The first is that transitions can only be led by changes in demand. “When the energy world changes, so will we” is not an adequate response to the immense challenges at hand. An imbalanced focus on reducing supply is equally unproductive, as it comes with a heightened risk of price spikes and market volatility. In practice, no one committed to change should wait for someone else to move first. Successful, orderly transitions are collaborative ones, in which suppliers work with consumers and governments to expand new markets for low-emissions products and services.
The second is excessive expectations and reliance on CCUS. Carbon capture, utilisation and storage is an essential technology for achieving net zero emissions in certain sectors and circumstances, but it is not a way to retain the status quo. If oil and natural gas consumption were to evolve as projected under today’s policy settings, this would require an inconceivable 32 billion tonnes of carbon captured for utilisation or storage by 2050, including 23 billion tonnes via direct air capture to limit the temperature rise to 1.5 °C. The necessary carbon capture technologies would require 26 000 terawatt hours of electricity generation to operate in 2050, which is more than global electricity demand in 2022. And it would require over USD 3.5 trillion in annual investments all the way from today through to mid-century, which is an amount equal to the entire industry’s annual average revenue in recent years.
Producer economies face major uncertainties, but their energy advantages are not lost in transition
Economies that are heavily reliant on oil and gas revenues face some stark choices and pressures in energy transitions. These choices are not new, but the prospect of falling oil and gas demand adds a timeline and a deadline to the process of economic diversification. Transitions create powerful incentives to accelerate the pace of change while also draining a source of revenue that could finance it. Compared with the annual average between 2010 and 2022, per capita net income from oil and natural gas among producer economies is 60% lower in 2030 in a 1.5 °C scenario. New producers entering the market face additional challenges, as they may overestimate the bounty that might lie ahead and underestimate the hazards. Many producers are also heavily exposed to risks from a changing climate, which stand to further disrupt the security of energy supply.
The challenges are formidable, but there are workable net zero energy strategies available to producer economies and national oil companies. Today’s producer economies retain energy advantages even as the world moves away from fossil fuels. In most cases, today’s major producers of low-cost hydrocarbons also have expertise and ample, under‑utilised renewable energy resources that could anchor positions in clean energy value chains and low-emissions industries. Reducing emissions from traditional supplies, including end‑use emissions; putting domestic energy systems on a cleaner footing by phasing out inefficient subsidies and boosting clean energy deployment; and developing low-emissions products and services offer a way forward.
Will the oil and gas industry be part of the solution?
Our scenarios plot out how the transition could be achieved, but the baseline expectation should be for a volatile and bumpy ride. Declining markets are difficult to plan for, and the potential for disruption also comes from geopolitical tensions and increased incidences of extreme weather. Governments need to be vigilant for risks to the affordability and security of supply. The implications of any physical disruptions to supply are felt most strongly in emerging and developing economies in Asia, whose share of global crude oil imports rises from 40% today to 60% in 2050 in a scenario that meets national energy and climate goals. On the supply side, even as overall demand falls back, the Middle East plays an outsize role in global markets as a low-cost producer of both oil and gas.
Dialogue across all parts of oil and gas value chains remains essential to deliver an orderly shift away from fossil fuels – and to ensure that today’s producers have a meaningful stake in the clean energy economy. The industry must change, but this dialogue also needs clear signals from consumers on the direction and speed of travel to guide investment decisions, to assign value to oil and gas with lower emissions intensities, to develop markets for low-emissions fuels, and to collaborate on technology innovation. Energy transitions can happen without the engagement of the oil and gas industry, but the journey to net zero will be more costly and difficult to navigate if they are not on board.