Reaching 2050 Net Zero Demands Large and Rapid Oil Consumption Drop

Reaching net-zero emissions by 2050 demands large and relatively rapid declines in oil and gas consumption, led by the transport and power sectors, coupled with widespread deployment of carbon capture technologies among heavy industry.

That’s according to analysts at BMI, a Fitch Solutions company, who made the statement in a new report sent to Rigzone recently.

“While net-zero pathways can take a myriad of forms, there is no pathway in which oil and gas demand does not precipitously decline, supply chain emissions are not dramatically reduced, and carbon capture and storage has no role to play,” the analysts said in the report.

One potential pathway to net zero highlighted in the report sees demand falling by around 75 percent, “led by the transport, power, residential, and commercial sectors”. Industrial demand remains relatively resilient in this pathway, but carbon capture technologies are widely deployed downstream, the analysts outlined.

“Upstream and midstream carbon intensity also falls substantially under this scenario, with carbon credits playing only a marginal role in offsetting residual emissions,” the analysts added.

Demand Trajectories

In the report, the BMI analysts noted that current demand trajectories are poorly aligned with the Paris Agreement, “with carbon budgets being rapidly exhausted”.

“Based on our existing forecasts for refined fuels and natural gas consumption, by 2032 global demand will be more than 35 percent above a level consistent with a net-zero 2050 target, absent substantial reductions in the carbon intensity levels and far wider deployment of CCS,” the analysts said.

“These forecasts also suggest that the bulk of the carbon budget available to oil and gas under a 1.5C pathway will have been used up by the end of the decade. Assuming climate targets are ultimately met, this points to the likelihood of significant future policy discontinuity, carrying considerable risk to the oil and gas sector,” they added.

“Extreme examples would include stringent curbs on the import or use of fossil fuels, or moratoriums on drilling and production. Companies can adapt to incremental and forwardly transparent policy evolution, but rapid policy shifts [can] be hugely disruptive to operational and financial performance,” the analysts warned.

The BMI representatives said in the report that aligning corporate strategy to the Paris Agreement can help insulate a company against these risks.

Three Options

In a separate report sent to Rigzone, analysts at BMI stated that, as we progress towards a net-zero economy, oil and gas companies, whose core business is the production, transformation, and sale of emissions-intensive fossil fuels, have three options open to them – “adapt, mitigate or manage their decline”.  

“Adaptation involves the company decoupling its revenue growth from emissions growth, shifting its asset base into alternative, low-carbon energies,” the analysts said in this report.

“Mitigation entails some degree of diversification, but largely within the oil and gas sector itself, with companies focusing on a less pollutive, more specialized and more durable product suite downstream and stripping greenhouse gas emissions out of the upstream and midstream supply chain,” they added.

“Managed decline involves the company in a more or less ‘business as usual’ approach. Investments are focused towards minimizing cost and maximizing recovery and the asset base remains broadly unchanged,” the analysts continued.

Vulnerable to Litigation

In this report, the BMI analysts warned that, as the energy transition accelerates, more stringent disclosure requirements will be brought into place across a wider array of markets.

“Those companies that fail to align with the Paris Agreement will then find themselves increasingly vulnerable to litigation,” the analysts said in the report.

“Equally, efforts to capture emissions at either the asset or company level are currently patchy and unstandardized,” they added.

“However, as emissions monitoring, reporting and verification standards and capabilities are improved, wide divergence in emissions reduction efforts will be laid bare, introducing new legal, regulatory, and reputational risks to the sector,” the analysts went on to state.

To contact the author, email andreas.exarheas@rigzone.com