This blog post originally appeared in the May/June 2024 edition of Oilfield Technology magazine, titled ‘Playing the right role,’ with minor adjustments made for house style.

July 12, 2024: The energy transition toward cleaner, less carbon-intensive sources is real. Oil and gas are not going away any time soon. That may sound like a contradiction, but it is more like a description.

While fossil fuels are projected to see potential declining demand in coming decades, they will still be a significant part of the energy mix. That will be the case even in scenarios where the world substantially accelerates progress toward net zero.¹

Climate policy is focused on reducing greenhouse gas (GHG) emissions to achieving the 1.5°C pathway which was set out in the 2015 Paris Agreement and reaffirmed in the COP 28 UAE Consensus in December 2023.² However, it is just as important to ensure access to an affordable, reliable, and competitive global energy supply for everyone, everywhere. All four elements are related to each other and addressing all four is essential to a successful transition. Otherwise, the unsteady progress toward substantial emissions reductions could stall further; there are and will be trade-offs.

Recent history confirms this. Germany has been a committed climate change actor, but when it faced the risk of energy shortages due to the invasion of Ukraine in 2022, one of its responses was to re-open coal plants to ensure that its economy could function and that its people could stay warm.³

Given this context, there are two questions to answer: how can the oil and gas industry play a role in the energy transition and what exactly can it do?

How can the oil and gas industry play a role in the energy transition?

The oil and gas industry has a critical role to play in the energy transition. For a start, given economic and population growth, the demand for energy will continue to grow. In its most recent Global Energy Perspective, McKinsey estimates that demand for power will rise 3 to 4 percent a year to 2050.⁴ At the moment, 80 percent of global primary energy demand is supplied by fossil fuels (coal, gas, and oil) which is about the same as in 1997, the year of the first global climate conference.⁵

There is, however, a world of change in the works. McKinsey projects that oil demand could peak in the 2030s and then decline through 2050 (although the scenarios vary widely, with projected declines ranging from 3 percent to close to 50 percent depending on the speed of the transition). For gas, the peak will likely come later, potentially in the 2040s, but could plateau or even keep rising for years after that, though at a slower rate. At the same time, the analysis sees renewables and other low-emissions sources of energy continuing their strong growth; they could account for 65 to 85 percent of global power generation by 2050.⁶

It’s important to remember that there is a human dimension to energy, in the form of economic development. Almost 775 million people lack electricity and 2.4 billion people still cook with traditional fuels—a practice that costs nearly 3.2 million premature deaths a year.⁷ McKinsey estimates that 4.7 billion people live under what it called “the empowerment line”, defined as having the means to securely meet basic needs, including nutrition, health, shelter, education, water, and energy.⁸

Right now, oil and gas account for about 170 million barrels a day of accessible and relatively low-cost energy, which cannot easily be replaced.⁹ When the International Energy Agency modeled future trends, assuming the world comes close to net zero in 2050, it projected that fossil fuels would still account for a quarter of energy demand in 2050. Oil and gas make up the great majority of that, as the use of coal continues to decline.

What it comes down to is that the energy transition is rightly named—the world cannot just switch off fossil fuels. It must transition. And a muddled transition—one that does not bear affordability, reliability, and competitiveness in mind as well as sustainability—risks losing public support, making getting to net zero even more difficult than it is proving to be, and most critically could put lives and livelihoods at risk. Despite all the efforts of recent years, which have slowed the rate of GHG emissions growth to levels not seen since the depression, global emissions are still rising, hitting a record in 2023.¹⁰ The IEA noted, that consumers have very low tolerance for unreliable or very expensive energy.

The oil and gas industry has a dual role: to help ensure that the existing system can power peoples’ lives and livelihoods even as the new system is being built in parallel—and to do so with the lowest emissions possible.

What exactly can the oil and gas industry do?

The short answer is quite a lot. As a matter of common sense, cutting emissions requires going where the emissions are. McKinsey’s Managing director, Bob Sternfels, believes that the bigger the player, the bigger possible reduction can be.¹¹

The oil and gas industry is a big player—its operations account for about 10 percent of global emissions. By making steady progress on its own emissions (known as Scope 1 and 2), the industry can make a discernible difference. One initiative in this direction is the Oil & Gas Decarbonization Charter.¹² Launched at COP28, it was signed by 50 companies (including 29 state-owned ones) that account for over 40 percent of global production.

The Charter sets out two commitments. The first is to reduce methane emissions to near-zero by 2030. The energy sector accounts for 40 percent of man-made methane emissions and methane is a powerful GHG, responsible for about 30 percent of temperature rises since the industrial revolution.¹³ Containing fugitive emissions is eminently doable; indeed, a number of companies are doing it. With greater use of satellite-based and laser-based monitoring and blockchain technology, more can be done, and at diminishing cost. Already, many efforts are cost-effective, through the sale of the captured gas. There is a strong case for making methane reduction a universal practice, which would reduce oil and gas industry emissions by up to half.¹⁴

The second commitment is to be net zero in operations by 2050. Opportunities include electrifying pumps, motors, and furnaces, enhancing energy efficiency, and cutting transport emissions through the use of artificial intelligence for preventive maintenance to name a few. In fact, dealing with Scope 1 and 2 emissions is straightforward—not easy, but more a matter of execution than innovation.

In the longer term, and perhaps more powerfully, the oil and gas industry has an abundance of capabilities that could enable it to take the lead in developing high-potential, but nascent and high-cost, decarbonization technologies such as carbon capture use and storage (CCUS) and hydrogen.¹⁵

All net-zero scenarios see an important role for carbon capture. The UN’s Intergovernmental Panel on Climate Change puts it at 15 to 55 percent of cumulative mitigation by 2100.¹⁶ The wide range indicates the uncertainties; even the lower figure of 15 percent, however, is significant. CCUS technology remains expensive, complex, and controversial. Oil and gas players are already important actors in carbon capture, which they use for enhanced oil recovery. If they can make it work on a much bigger scale, both technically and economically, that would be an enormously positive outcome, and a way for the industry provide opportunities to address Scope 3 emissions.

In the United States, recent legislation allocates billions to clean hydrogen investment, and there is growing interest from sectors ranging from trucking and aviation to steel and cement, as they anticipate either limits on carbon or a higher price for it.¹⁷ Considering the industry is already comfortable in the gray hydrogen space, it could be well positioned to be a leader in blue hydrogen as well.

For both CCUS and hydrogen, the oil and gas industry has advantages, specifically its skill in executing big projects, its expertise in related technologies, and its existing infrastructure of pipelines. McKinsey has estimated that almost half of emissions reductions from now to 2050 could come from technologies that are already in prototyping or demonstration stages, including CCUS and hydrogen. By using its existing strengths in these and other high-potential areas, the oil and gas industry might also find profitable low-emissions strategies that can help them navigate the transition to a lower-carbon future.

Reference site: https://www.mckinsey.com/industries/oil-and-gas/our-insights/oil-and-gas-blog/the-energy-transition-is-happening-what-role-can-the-oil-and-gas-industry-play