The International Energy Agency’s stark position that new oil and gas development must immediately stop to meet global climate goals could boost momentum for governments to restrict fossil fuel production and cause investors to cut off funding for such projects.
“This will strengthen the political argument in many countries for restricting the growth of new oil production,” Bob McNally, president of Rapidan Energy Group and former oil official in the George W. Bush administration, told the Washington Examiner. “It’s going to raise the regulatory risk and scrutiny on oil companies and investors that plan to develop new oil fields.”
NEW FOSSIL FUEL PROJECTS MUST BE STOPPED IMMEDIATELY TO MEET CLIMATE GOALS, IEA SAYS
Climate activists interpreted the surprising statement from the IEA, a Paris-based group with a conservative reputation known for promoting global energy security, as an endorsement of its longtime “keep it in the ground” mantra.
“It’s huge to have the world’s most influential energy modelers bolstering the global call to stop licensing and financing new fossil fuel extraction,” said Kelly Trout of Oil Change International in a statement.
The oil and gas industry warned that reducing fossil fuel supply would pose problems for developing countries demanding more energy.
“We believe we can meet our environmental goals by working together with policymakers to achieve this dual challenge – not cancelling the fuels our world needs to thrive,” said Anne Bradbury, CEO of the lobbying group American Exploration and Production Council, in a statement.
The specifics of what IEA is calling for are vague and subject to interpretation, although experts agree the landscape outlined by the group would represent a sea-change from the way the world produces energy today and create major disruption for the oil and gas industry and its workers.
Most countries have stopped short of mandating an end to new fossil fuel projects, with only Denmark halting new oil and gas exploration. President Joe Biden has paused new oil and gas leasing on federal lands, but most U.S. drilling occurs on private territory.
The IEA is not endorsing a position but rather providing a road map of what types of policies and changes would need to occur for the world to slash carbon emissions to net-zero by 2050, a target supported by the Biden administration that scientists say would hold global warming to no more than 1.5 degrees Celsius, the goal of the Paris Agreement.
Because the globe only has a “narrow” chance to achieve the goal, governments would need to take dramatic action beginning today, including by no longer investing in new fossil fuel supply projects.
More precisely, IEA says, “no new oil and natural gas fields can be approved for development.”
Experts told the Washington Examiner that IEA’s scenario would likely mean no new investments in fields where oil and gas exploration or drilling has not yet occurred but allow for continuing to dig up fossil fuels in fields already in production. IEA acknowledged that “continued investment in existing sources of oil production are needed.”
It projected that if investment were to continue in currently producing fields but no new fields were developed, then the average annual loss of oil supply would be around 4.5%.
Arvind Ravikumar, an assistant professor of energy engineering at the Harrisburg University of Science and Technology, said annual loss of production of 4.5% is “still a big deal” because the reduction is nearly 3 times faster than the rate at which production had grown over the last two decades.
But Ravikumar doesn’t foresee a huge effect in the United States, which has become a top oil and gas producer thanks to the shale boom.
He said production in the Permian Basin, the largest U.S. oil field straddling West Texas and New Mexico, would likely continue.
The only new projects that are being considered would be the Arctic National Wildlife Refuge in Alaska and offshore in the eastern Gulf of Mexico, both of which have bleak prospects for development, given political opposition and economic challenges.
Large U.S. and European oil and gas companies, however, would not be unscathed because they are still searching for new fields in African countries such as Mozambique and Nigeria.
Shell, a British-Dutch company, has ruled out exploring for oil and gas in new areas after 2025, while London-based BP has said it will halt exploration in new countries while cutting production 40% by 2030 as part of their pledges to cut emissions to net-zero.
But American oil majors ExxonMobil and Chevron have not made such commitments.
“For many producers, especially U.S. majors, this would be a big departure from their current business models,” said Daniel Raimi, a fellow at Resources for the Future focusing on energy and climate issues, noting that large companies are dependent on income from oil and natural gas to fund their plans to transition to cleaner energy.
Major banks and other investors, meanwhile, have set goals to reach net-zero financed emissions by 2050, but few have imposed restrictions on oil and gas lending.
Even if shale production doesn’t fall off too much, U.S. drillers are at risk of losing market share to state-backed companies in the Middle East that can produce the lowest-cost oil.
A sharp decline in oil and gas production means OPEC by 2050 would control more than half of the world’s oil supply, compared to more than a third today, the IEA said.
Overall, the IEA says oil production in North America would have to fall from 25 million barrels a day in 2020 to 5 million barrels a day in 2050.
“There would be profound implications for the U.S. and North America, not only because demand is falling but because Middle East producers are trying to take market share in a shrinking market,” said Mark Finley, a fellow in energy and global oil at Rice University’s Baker Institute.
Finley said the IEA is basing its warning on the need to cut oil and gas production on matching the drastic fall in demand the group says must happen to reach net-zero emissions.
Oil consumption must decline by 75%, and gas demand has to decrease 55% by mid-century, the IEA said.
“What they are saying is demand falls away so fast that investment has no choice but to collapse with it,” Finley said. “Demand declines so substantially, it becomes uneconomical to drill wells in new fields.”
McNally, however, is skeptical about the ability of governments to pass policies pushed by the IEA to curb demand, such as pricing carbon or banning new gasoline-powered vehicles in favor of electric ones.
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He warned that policies “inducing peak supply” or limiting new production could lead to oil price spikes if demand doesn’t fall as expected.
“If demand doesn’t fall, this sets up for a big boom in oil prices later this decade,” McNally said.
