A guest post by my scenarios team colleague Richard Baker – Senior Energy Adviser
There is widespread consensus that a marked decline in the use of all oil and gas over the coming decades is required if the world is to meet the goals of the Paris climate accord. Any discussion of technology that is perceived as prolonging investment in their usage is invariably greeted with condemnation. Recently, in the run-up to COP28 in the UAE, the incoming COP President, Sultan Ahmed Al-Jaber, was criticized in some sections of the media for stating that the world needs to focus on tackling emissions from fossil fuels rather than simply eliminating their use.1
But technologies that reduce emissions from oil and gas play a critical role in a transition to net zero and the incoming COP President was correct to address this. To understand why, Shell’s recently published Sky 2050 scenario provides a useful framework. In this scenario, net-zero emissions (NZE) is reached in 2050. Although the temperatures in the scenario rise to 1.7ºC, as modeled by MIT, negative emissions in the second half of the century result in a temperature rise of 1.2ºC above the pre-industrial average in 2100.
Sky 2050 does not make unrealistic assumptions about near-term oil and gas production or a rapid decline in demand for oil and gas. Global demand is yet to start declining and it is difficult to envisage upstream projects already operating or currently under development being paused or canceled. To that end, the Sky 2050 scenario sees demand mostly plateau this decade, but then rapidly decline in the 2030s and 2040s, with oil at 45 mb/d (million barrels per day) and natural gas at 1.9 Tcm (trillion cubic meters) by 2050, which are both slightly less than half of today’s levels. A demand led trend towards zero oil and gas by 2050 isn’t realistic as we are still far from having a complete set of technologies to replace all the uses for oil and gas.
In fact in Sky 2050 it isn’t until 2100 when the world has largely left the era of fossil fuel energy behind, although even then oil and gas are still used for making things, from solvents to plastic water bottles.
While Sky 2050 in 2050 clearly shows a reduction from today, this is nowhere near zero. Instead, Sky 2050 relies on significant use of industrial carbon capture and storage and negative emissions that use a combination of technological and natural sinks to reach net-zero emissions. The technological storage of carbon dioxide is significant by 2050 and beyond; in Sky 2050, the size of the carbon capture utilization and storage (CCUS) industry is ultimately bigger than the natural gas industry today in terms of the volumes of gas handled and direct air capture (DAC) plays an ever more prominent role in the second half of the century.
Yet moves to capture and store carbon dioxide emissions are not universally popular. Some argue that it gives the industry carte blanche to carry on producing at today’s levels. But continuing to invest in the industry, including emission reducing technologies, is not the same as maintaining or growing production.
Reservoir decline rates are hard to quantify as they are rarely left without any intervention to simply decline. Rates of 4-5% are often quoted, but this usually includes drilling additional wells or installing pumping equipment, and the true rate is probably higher. But even using a 4-5% decline rate from now would give production levels of 23-30 mb/d in 2050 for oil and 0.9-1.2 Tcm for gas, significantly below the demand levels modelled in Sky 2050.
This gap will need to be filled by ongoing investment. Objections to new projects often raise the International Energy Agency’s (IEA) landmark Net Zero study as evidence, but the report is usually misquoted. The report does not say that no investment in oil and gas is required, but instead states that “no new oil and gas fields are required beyond those that have already been approved for development” and the required investment levels reported, which average $500 billion per year this decade, are more or less what the industry is currently spending. Even in the 2030’s, the IEA calculation of required spending levels of $300 bln per year is considerable. And the context behind the IEA statement is almost never included. The scenario from which the statement emerges not only requires a huge investment in new energy systems but very importantly, a world making significant efforts to reduce overall energy demand, through important changes in behaviour (e.g. cycling more, not flying etc.), extreme efficiency measures in the built environment and even some energy austerity. Most of that isn’t happening or at best, isn’t happening fast enough or in a sustained way.
Whether the required oil and gas investment could be focused only on existing fields, or if new developments are required, is a matter of debate. A cursory glance around the world today would find no shortage of oil and gas assets with large resources that are struggling to maintain production, even when incentivized by the recent uptick in oil prices. For many countries, geopolitical and local factors are restricting investment, and in some cases the technical expertise previously provided by international oil companies is lacking.
So how is the industry responding? There are two pathways playing out.
- The first is that existing fields are attracting investment to maintain production, but there is also some new field development underway. The IEA report also goes on to say that ‘minimizing emissions from core oil and gas operations should be a first-order priority for all oil and gas companies’. Many operators are doing just that, seeking ways to reduce their own production emissions, including the electrification of facilities (and generating that electricity from renewable sources) and aiming to eliminate flaring, amongst others. And there is widespread effort underway to clamp down on fugitive methane emissions with techniques such as drone technology, but particularly from aging infrastructure where such initiatives are helping to identify the worst culprits. The counter argument is that for oil, where 85-90% of most emissions come at the point of combustion in a car, plane, or ship’s engine, reducing intensity in the upstream has a relatively small impact on reducing total emissions. But given that Sky 2050 sees 250 Gt of CO2e emissions from oil use in the next 27 years, addressing 10-15% of the issue still adds up to 25-40 Gt, equivalent to global emissions from a single year.
- The second pathway is the focus on developing carbon capture and storage for the so-called Scope 3 emissions, or the emissions from the actual use of oil and gas. Many such projects are in the pipeline but there is also real innovation emerging. For instance, Occidental plan to inject CO2 captured directly from the air into reservoirs in a technique known as Enhanced Oil Recovery. The company claims that more CO2 is injected than is subsequently released when the fuel is combusted, and regulators agree; oil produced via this method will qualify for the low-carbon (45Q) tax credit. For now, it’s the only project under development, but if successful, it may provide a blueprint for others to follow. For gas, where combustion tends to be more concentrated in a power plant or industrial unit, there is significant scope for point source capture and there are many projects in development, although not yet on a par with the scale in Sky 2050.
It’s often said that CCUS is an unproven technology when, in fact, the capture and re-injection of CO2 have both been practiced for decades. According to the IEA, of the 40 Mt captured in 2021, around 75% was captured from oil and gas operations. The question is whether commercial drivers, including carbon taxes, can help deliver the scale envisaged in Sky 2050. The issue with carbon capture and storage has never been the technology, but always the business model to support the investment.
While in Sky 2050 there will be reduced demand for oil and gas in sectors that can be electrified, like transport, by mid-century there will still be sectors of the economy that are using oil and gas because the alternatives are not deploying at sufficient scale. The demand from these sectors is greater than natural decline alone would allow, requiring further oil and gas investment.
Dr Al-Jaber was right to point out that the production that remains will need to be as low carbon as achievable, while a global negative emissions industry needs to be built. These two parts of a burgeoning carbon management industry will require continuous investment as well as policy support. The challenge for the upstream oil and gas sector is to deliver both and that could even mean a combined production and carbon capture sector that is bigger in the second half of the century than the stand-alone oil and gas production sector today.
Note: Shell Scenarios are not predictions or expectations of what will happen, or what will probably happen. They are not expressions of Shell’s strategy, and they are not Shell’s business plan; they are one of the many inputs used by Shell to stretch thinking whilst making decisions. Read more in the Definitions and Cautionary note. Scenarios are informed by data, constructed using models and contain insights from leading experts in the relevant fields. Ultimately, for all readers, scenarios are intended as an aid to making better decisions. They stretch minds, broaden horizons and explore assumptions.