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IEA's Gift to Oil Companies

Copyright © 2021 Energy Intelligence Group
June 2021 Sarah Miller


Oil and gas companies that attack the International Energy Agency's (IEA) Net Zero in 2050 road map are looking the proverbial gift horse in the mouth. True, the report emphasizes the small role fossil fuels can play if global warming is to stay below 1.5°C. But that was obvious -- even before last month's Exxon Mobil and Chevron shareholder moves and the Dutch court decision against Royal Dutch Shell's transition plan. Having the IEA analyze in a supportive way a target its member governments all accepted in the Paris accords should have come as no shock. But it did, causing many in the oil industry to miss an important gift: the clear path the Net Zero report lays out to use "the resources and skills of the oil and gas industry" in a post-carbon economy. With its emphasis on carbon capture, "clean" hydrogen, and biofuels, Net Zero in 2050 is an important and, for the oil industry, positive perspective. It's not designed to please environmentalists who favor heavier reliance on distributed renewable electricity.

The goal of capping global warming at less than 2°C, and preferably no more than 1.5°, is clearly stated in the Paris accords. Now that the US is back in the Paris fold, it's a goal the IEA cannot ignore. It is also the goal to which the Net Zero scenario provides a "pathway." There are other paths to that goal, IEA Executive Director Fatih Birol writes in his introduction, but the agency is presenting the one it considers "the most technically feasible, cost-effective and socially acceptable." 

Amid increasingly destructive weather, there is every reason to believe many -- if not most -- IEA member governments are serious about meeting these goals. And if they try to wiggle out, courts may hold their feet to the fire. Witness not only a Dutch court's May ruling that, on human rights grounds, Shell must slash emissions from its products by 45% by 2035, but also an Australian federal court finding around the same time that the government has a "duty of care" to protect children against the effects of climate change. This month, a similar case was lodged in Polish courts.

Outlining a scenario for halting the burning of fossil fuels that accounts for an estimated 75% of global greenhouse gas emissions is not, therefore, a radical step for the IEA. An aspect of the IEA report that is genuinely new and carries a negative -- if also unsurprising -- message for the industry was its decision to allow no carbon offsets from outside the energy industry. In other words, it assumes that oil companies, airlines and others won't be able to get away with continuing to emit carbon dioxide by paying to plant or preserve trees.

Given the extent to which carbon offsets are being discredited due to double counting, questionable claims about forests being saved that were never in danger, and outright corruption, the IEA's decision to avoid this easy out for carbon emitters isn't radical either, it's realistic. Such credits won't be allowed in a world serious about limiting climate change (WEO Jan.28'20).

Non-reliance on offsets is a key reason for the IEA's consternation-causing claim that "no new oil and natural gas fields are required beyond those that have already been approved for development." Later in the report, the IEA explains: "On average oil demand in the NZE [net-zero scenario] falls by more than 4% per year between 2020 and 2050. If all capital investment in producing oil fields were to cease immediately, this would lead to a loss of over 8% of supply each year. If investment were to continue in producing fields but no new fields were developed, then the average annual loss of supply would be around 4.5%. The difference is made up by fields that are already approved for development."

Those assumptions on decline rates and new output do not, as sometimes claimed, imply that supply reductions should be used to inhibit demand. The assumption is that peak oil demand passed in 2019 and government policies and technology developments will cause fossil fuel consumption to fall from here on out. Nor do they suggest that no new fields can be developed, simply that any new developments would have to out-compete supply already on the market or planned.

So not only does the report suggest some -- albeit limited -- continued oil and gas development through 2050, it provides a role for fossil fuels after that date: Coal, oil and gas production is shown as continuing at least through 2050 at 10%, 25% and 45% of 2020 levels, respectively. How is this possible with net-zero emissions and no use of offsets?

Future Roles for Oil Companies

The explanation for the continuing role for coal, oil and gas lies mainly in assumptions about the energy transition that provide new, non-carbon emitting business opportunities for oil companies going forward.

For oil, an overwhelming 70% of post-2050 output goes for non-combustion applications that don't emit CO2, mainly petrochemicals, lubricants, paraffin waxes and asphalt. The rest is used in aviation and other sectors where alternatives haven't emerged. This is offset by direct air carbon capture or bioenergy with carbon capture, technologies that the IEA accepts -- unlike "non-energy" offsets. The great bulk of the gas and coal use involves carbon capture, utilization and storage (CCUS), directly or to make blue hydrogen, in power generation or heavy industry.

The result is an assumption of 3.5 gigatons of CO2 captured from fossil fuels in 2050. The IEA report notes that this CCUS assumption is at the low end of captured amounts posited in other net-zero emissions forecasts gathered by the UN's Intergovernmental Panel on Climate Change (IPCC), implying that it's conservative. However, it's a lot given the high cost and troubled history of CCUS.

The IEA assumption on biofuels is similarly buoyant: Biofuel use more than doubles by 2050 and it all comes from "sustainable" sources. Liquid biofuels alone shoot up from 1.6 million barrels of oil equivalent per day in 2020 to 6 million boe/d in 2030 -- most of it used in road transport -- and to 7 million boe/d in 2050, by which point it's left electric vehicle-dominated roads for the air, covering 45% of aviation fuel use.

As with CCUS, the IEA says these are more conservative assumptions than those in most IPCC net-zero emissions forecasts. It also insists there's plenty of land to grow the biofuels and plenty of room to store all the captured carbon. But in both cases, the IEA is concerned enough about the viability of its assumptions that it provides alternative scenarios, just in case -- scenarios that suggest an even more dominant role for solar- and wind-generated electricity, backed up by batteries and other storage mechanisms.

The hydrogen component of the IEA forecast is even more evidently favorable to today's oil industry: It's twice or more the volume assumed in other IPCC forecasts, probably in part because most of those predate hydrogen's sudden burst into fashion last year. Hydrogen production balloons from 90 million tons now to 530 million tons by 2050 and it is used in all sectors, including transport, heavy industry and power generation.

The IEA notes explicitly that "the oil and gas industry could play a key role in helping to develop at scale a number of clean energy technologies such as CCUS, low carbon hydrogen, biofuels and offshore wind. Scaling up these technologies and bringing down their costs will rely on large-scale engineering and project management capabilities, qualities that are a good match to those of large oil and gas companies."

It's far from clear that the IEA itself sees any of these controversial aspects of its Net Zero scenario as necessary -- merely desirable on cost and feasibility grounds (WEO Mar.5'21). As an example, it notes in a "Low Nuclear and CCUS Case" that replacing 99% of CCUS-dependent fossil fuel use and 60% of nuclear generation with solar, wind and batteries would add a meager $260 billion to the cumulative cost of electricity to consumers between 2021 and 2050. In the greater scheme of global energy costs, that amount is negligible.

There's much in this report for oil companies to love -- but only if they first take on board the clear message that oil and gas production itself has nowhere to go from here but down.

Sarah Miller is a former editor of Petroleum Intelligence Weekly, World Gas Intelligence and Energy Compass.

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