Oil companies, poor performers in the energy transition

The oil and gas companies are being criticized for their inadequate contribution to the energy transition, according to a new report from the International Energy Agency (IEA). The report suggests that the oil and gas sector must significantly increase its commitment to clean energy, allocating half of its capital expenditures to clean energy by 2030, compared to the current 2.7%.

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Published just days before the COP28 in Dubai, the report reveals that only 1.2% of investments in clean energy come from companies in the oil and gas sector. Additionally, 60% of these investments in renewables by oil and gas companies are traced back to four European firms: Equinor, TotalEnergies, Shell, and BP. The entire sector currently allocates only 2.7% of its capital expenditures to clean energy (approximately $20 billion in 2022), while the report suggests this figure should increase to 50% by 2030.

The report emphasizes that the production, transportation, and processing activities of the oil and gas sector contribute to nearly 15% of global energy-related greenhouse gas emissions, equivalent to the total energy-related emissions of the United States.

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To meet the climate commitments and limit global warming to 1.5 degrees by 2100, the sector would need to reduce emissions by 60% by 2030 and achieve near neutrality by the early 2040s.

The IEA highlights the need for the sector to recognize that its profitability will decrease over time. The report states that the volatility of fossil fuel prices means that revenues may fluctuate from year to year, and as the energy transition accelerates, oil and gas activities become less profitable and riskier.

The global valuation of the entire sector is estimated at $6 trillion today. However, this valuation could drop by 25% if all national climate goals are achieved and by 60% if the 1.5-degree warming limit is maintained.

The IEA does not call for a complete halt to investments in the sector but suggests that the current investment levels are twice as high as needed. To achieve the 1.5-degree scenario, the report recommends limiting investments to $500 billion per year, compared to the current $1 trillion.

Addressing a much-debated issue, the IEA clarifies that investments in existing and some new fields would be necessary in a world that adheres to national energy and climate commitments. However, in a carbon-neutral scenario by 2050, the report suggests that no new conventional long-term projects would be necessary. Any new investments would require producers to justify the viability of resources and be transparent about how they plan to meet their climate goals. The agency also emphasizes that future oil producers should be concentrated in regions with low costs and emissions, likely referring to the Middle East.

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Finally, the report underscores that the oil and gas industry is well-positioned to develop key technologies in the transition or provide expertise, including carbon capture, offshore wind, geothermal energy, biofuels, and biomethane.