Fossil-fuel companies should leverage their huge financial resources, and large-scale engineering and project management capabilities to help renewable energy grow at scale, the agency concluded in its report, Oil and Gas Industry in Energy Transitions.
Since 2015, the average annual investment by oil and gas companies in non-core areas — such as renewables and other low-carbon technologies — has been limited to around 1% of total capital spending, with the largest outlays going to solar PV and wind.
Some oil and gas majors have acquired non-core businesses — for example, in electricity distribution, electric vehicle charging, and batteries — and stepped up research and development activity in these areas, the IEA noted.
But with such companies’ combined annual spending in non-core areas only topping $2 billion for the first time in 2019 (above), the IEA believes there are few signs of the large-scale change in capital allocation needed to put the world on a more sustainable path.
IEA executive director, Fatih Birol, said oil and gas companies can use their "extensive know-how and deep pockets" to play a "crucial role" in the deployment of key renewables like offshore wind while also supporting the development of new technologies.
“Without the industry’s input these technologies may simply not achieve the scale needed for them to move the dial on emissions," Birol said.
Large units
The IEA suggested oil and gas companies could be helpful for “large unit-size technologies that require associated infrastructure and a higher degree of investment risk” — such as carbon capture utilisation and storage, hydrogen, advanced bio-refineries and offshore wind.
It added, however, that offshore wind deployment is “already bringing down costs and investment risks”.
Previous IEA research suggested there are a number of synergies between offshore wind and oil and gas.
It estimates 40% of the full lifetime costs of a standard offshore wind project overlap with those of an offshore oil and gas project.
Smaller footprints
Birol suggested companies should first focus on reducing the environmental footprint of their own operations, noting 15% of global energy-related greenhouse gas emissions come from getting oil and gas out of the ground.
He added this could be reduced “easily”, especially by cutting methane leaks, but also by eliminating routine flaring and electrifying new upstream and liquefied natural gas developments with renewables or low-carbon technologies.
The IEA cited Equinor’s 88MW Hywind Tampen project — an 11-turbine floating wind farm in the Danish North Sea due to power five oil and gas platforms — as an example of renewables being used to decarbonise fossil-fuel production.
Social license
The IEA does not recommend ending investments in oil and gas, and argues if spending was stopped, the resulting decline in output — an estimated 8% per year — would be “larger than any plausible fall in global demand”.
However, the agency warned the oil and gas industry needs to balance fossil-fuel-driven short-term returns with its long-term social license to operate.
Shifting from a narrow focus purely on ‘oil and gas’ to a wider consideration of ‘energy’ will take companies out of their comfort zone, the IEA conceded.
But it will also provide a way to reduce transition risks as the agency forecasts consumer spending on electricity to overtake that of oil and “relieve social pressures”.
Investors will pay close attention to the industry’s ability to balance diversification with expected returns and dividends, it added.
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