COP26: What Did It Mean for the Oil & Gas Industry?

Table of Contents

1 INTRODUCTION

1.1 The 1.5°C threshold

Countries have been negotiating how to combat climate change under the United Nations Framework Convention on Climate Change (UNFCCC) for decades. Multiple agreements have resulted from these negotiations, notably, the 2015 Paris Agreement, in which countries pledged to keep global warming below 1.5 degrees Celsius or “well below” 2 degrees above pre-industrial levels. Earth is on track for a 2.4°C global temperature increment above pre-industrial levels by 2100 if countries persist with the 2030 emissions reduction targets (in jargon, nationally determined contributions, NDCs) they submitted in Glasgow. This is bad news, as science has shown, mankind must limit global temperature increases below 1.5°C to avert the most severe impacts of climate change.

Taking into account the long run net-zero pledges that have been made by many countries a short while ago by India, would limit the rise to 1.8°C in 2100 after some limited overshoot. However, this rate should be taken sceptically, as most of these pledges are currently not backed up by real action or planning.

Given this context, the first climate priority for next years should be to reduce the global emissions gap by ensuring that NDCs are enhanced to a level compatible with the 1.5°C track. The Glasgow Climate Pact agreed by the 197 countries at COP26 provides a solid foundation for this.

In accordance with the Paris Agreement, countries are required to recap their nationally determined contributions (NDCs), i.e. their post-2020 climate actions, that should also uphold “the principle of equity and common but differentiated responsibilities and respective capabilities, in light of different national circumstances”. According to a recent UNFCCC estimate, existing NDCs filed by 2020 would result in global emissions being only 0.5 per cent lower in 2030 than in 2010, compared to the 45 per cent reduction required to keep global warming below 1.5°C [1].

As a result, immediate and long-term strategies to achieve the Paris Agreement’s goals are urgently required. Despite a brief decline in carbon emissions in 2020 due to the COVID-19 outbreak, global greenhouse gas (GHG) emissions increased for the third year in a row in 2019, despite the fact that they will need to fall drastically – to zero by mid-century – to satisfy the Paris Agreement’s targets.

Currently, fossil fuels account for the majority of these emissions (more than 75%). Hence, achieving net-zero emissions necessitates significant reductions in fossil fuel use and supply. According to a determination in the Production Gap Report [2] based on mitigation scenarios compiled by the Intergovernmental Panel on Climate Change, annual average decline rates of around 3%, 4%, and 11% in global gas, oil, and coal production, respectively, would be consistent with limiting warming to below 1.5°C between now and 2030. If carbon dioxide removal solutions are not developed at scale, these rates will need to be considerably quicker.

Figure 1. CO2 emissions from developed global fossil fuel reserves, compared to carbon budgets within range of Paris Goals. Source: http://priceofoil.org/content/uploads/2020/09/OCI-Big-Oil-Reality-Check-vF.pdf

Despite this clear implication for a necessary wind-down of fossil fuels to satisfy climate targets, nations have yet to begin serious discussions on who will generate those declining amounts of fossil fuels. The UNFCCC has not explicitly addressed fossil fuels for a variety of reasons. Nonetheless, discussions on prospective “supply side” agreements on fossil fuels and climate change are beginning to emerge, either as part of the UNFCCC or separately. Several countries, notably Denmark, France, and New Zealand, have started to take steps to phase down their oil and gas production. President Joe Biden of the United States has halted new oil and gas leasing on federal lands and seas, while Vice President Kamala Harris has proposed a “first-ever worldwide discussion of the cooperatively managed decrease of fossil fuel output” [3].

The prospect of a supply-side agreement raises a number of key questions, including how countries would self-organise, what precepts they might use to share the task of cutting down coal, oil, and gas production, and whether they would decidedly seek to do so in a way that is consistent with the Paris Agreement’s ambitions.

The goal of this article is to contribute to this emerging discussion on why countries might work together to rethink oil and gas extraction. This is driven by the importance of regulating fossil fuel supply in effective global climate policy, as well as the equitable implications of a rapid transition away from the commodities – coal, oil, and gas – on which some communities (and countries) rely for their survival. Indeed, when evaluating the supply of fossil fuels as a matter of equality, we are building on a rapidly growing debate on equity considerations in the transition away from fossil fuel extraction.

1.2 The 26th Conference of the Parties (COP26)

The COP26 UN Climate Change Conference, hosted by the UK in partnership with Italy, took place from October 31st to November 12th. It was deemed to serve as the platform for the international community to reach an agreement and accelerate climate action in relation to the 2015 Paris Agreement. Citizens, companies, governments, and investors, all play a key role in achieving this.

Rapid decarbonisation and the divorce of economic growth from resource extraction are undoubtedly the only ways to ensure humankind’s sustainable and fair future. Still, have we delayed action for too long? Even if the world’s nations could still surprise and submit ambitious NDCs based on green stimulus packages derived from COP26, the current prognosis is not favourable. Negative-emissions technologies (NETs) could still be needed to properly chase down the high-reaching carbon targets necessary for warding off dangerous climate change side effects whether we like it or not.

The 26th Conference of the Parties to the United Nations Framework Convention on Climate Change (UNFCCC), held for the first time in Glasgow, Scotland, spanned the fortnight October 31st through November 13th. By some legitimate expectations, the Conference can only be deemed a failure. And yet, in fuller consideration, the failure was not wholly abject.

First, from the viewpoint of the climate system, most emitting nations failed to develop or expand their commitment to timely decarbonisation of the economy and atmosphere. Second, the Conference failed because, as before, wealthy nations offered no resources to help hard-hit least-developed countries to deal directly with climate-associated losses and damages.

Still, COP26 secured some genuine progress, particularly as it expressly targeted fossil fuels for the first time and clarified several important road rules from now on. COP26 featured conflicted pronouncements regarding coal that ended in “efforts towards the phasedown of unabated coal power.” The final Glasgow Climate Pact called to spur technologies and policies aimed at “transition towards low-emission energy systems,” including a “phase-out of inefficient fossil fuel subsidies.”

2 THE OIL AND GAS INDUSTRY ROAD TO COP26

2.1 O&G in the Energy Transitions

The industry is facing increasing demands to elucidate the implications of energy transitions for their business models and operations and break down the contributions they can make to cutting greenhouse gas emissions and achieving the goals of the Paris Agreement.

Oil and gas faces the strategic challenge of harmonising short-term returns with its long-term licence to operate. Societies are requesting both energy services and carbon reductions at the same time. Oil and gas firms have excelled at supplying the fuels that are the foundation of today’s energy system; the question now is whether they can also assist in the delivery of climate solutions. This might be conceivable provided the oil and gas industry takes the required measures.

Figure 2. Gryphon FPSO (Floating Production Storage and Offloading) facility surrounded by windmills in the North Sea. Source: “Gryphon FPSO” by Nik Morris (van Leiden) under >a href=”https://creativecommons.org/licenses/by-nc-sa/2.0/?ref=openverse&atype=rich”>CC BY-NC-SA 2.0 license.

As a result, it opens the path for the oil and gas business to join the “grand alliance” that the IEA thinks necessary to combat climate change, which some corporations are already doing. This initiative would be immensely enhanced if more companies joined in unreservedly. The expenditures of creating low-carbon technology are an investment in a company’s long-term potential to succeed.

No oil and gas company will remain untouched by clean energy transitions, so every element of the industry needs to reexamine how to respond. The O&G landscape is diverse, and there is no single strategic game plan that will make sense for all. The spotlight often focuses on “the Majors”: seven large integrated companies that extensively influence industry practices and business direction. But O&G is much larger: the Majors account for 15% of production, 12% of oil and gas reserves, and 10% of estimated emissions from industry operations. National oil companies (NOCs) – fully or majority controlled by federal governments – account well on top of half of global production and an even bigger share of reserves. There are some high-performing NOCs, but many are poorly resilient to changes in global energy dynamics [4].

To date, investment by oil and gas corporations outside their core business areas has been less than 1% of total capital expenditure, and there are few signs of a major change in company investment spending for the moment. For those companies looking to branch out their energy operations, redeploying financial assets towards low-carbon businesses demands attractive return opportunities in the new markets as well as new capabilities within the companies. Leading individual businesses currently spend roughly 5% of their revenue on initiatives outside of core oil and gas supply, with solar PV and wind power receiving the most funding. Some oil and gas firms have also expanded into new industries by purchasing non-core businesses, such as energy distribution, electric car charging, and batteries while increasing their R&D efforts. To speed energy transitions, a significantly larger shift in total capital allocation would be necessary.

But the core question, against a scene of rising GHG emissions, is rather simple: should today’s O&G companies be considered only as part of the crisis, or could they also be crucial in solving it?

2.2 Strategic responses

This section does not aim to provide categorical answers, not least because of the wide diversity of oil and gas companies and their strategies around the world. It does intend to map out the risks facing different members of the industry, as well as the range of options and responses.

The situation becomes interesting on the following graph from the International Energy Agency showing the contribution in Scope 1 and Scope 3 emission by the various segments of the oil and gas industry. Scope 1 is, of course, the emission generated by one’s own production as CO2 by the direct use of the hydrocarbon. Although the awareness tends to be on the majors, it is easier to see that most of the emissions have come from the NOCs themselves.

Figure 3. Property of oil and gas reserves, production and upstream investment by company type, 2018. Source: https://www.iea.org/reports/the-oil-and-gas-industry-in-energy-transitions

Looking at the majors, especially the European, we can see that “Net Zero” and the “Energy Transition” are on the very first page of most companies’ websites and public reports; these are becoming more serious and stronger commitments and objectives. Repsol and BP recently declarer net zero ambitions by 2050, as well as Shell who is selecting an uptake to upgrade their already existing objective to net zero in2050. So the majors are not only justifying its renewable generation but, of course, also keeping their production of oil and gas, making sure that that goes to a net-zero path at least on Scope 1 emission. That would be an interesting path to follow because that means a big change for the industry.

When it comes to the independents, the situation is a bit different; they are mainly financed by private equity, which means that return on investment is the key message on the web pages and finding something about climate changes on their disclosures is a bit harder. That being said, we want to remember that you do not go to these companies as a consumer, so communication is mainly targeted to their investors. Finally, when we look at the national companies, the point is predominantly about energy security for the country, exporting the maximum of national resources, and making sure that societies can be fueled.

3 KEY OUTCOMES OF COP26

3.1 An Alliance to Limit O&G Extraction

Denmark, Costa Rica, Ireland, and France are among the countries pledging to end oil and gas production within their borders, but big producers decline to join [5]. Portugal, California, and New Zealand withdrew from the pledge but agreed to take “major tangible efforts” to curb fossil fuel production. Italy, the EU’s second-largest oil producer, made a less ambitious vow, saying that future oil and gas development will be in line with the 2015 Paris Agreement.

The novel Beyond Oil and Gas Alliance (BOGA) [6] was hailed as crucial by campaigners who have been urging for a global treaty on stopping fossil fuel extraction, designed upon nuclear weapons proliferation treaties. Analogous international coalitions have already been enacted against coal, but not yet on oil and gas. However, the alliance, launched at the COP26 summit in Glasgow last November, lacks any meaningful O&G producers promising to end extraction. The core affiliates to BOGA are Costa Rica, Denmark, Ireland, Sweden, France, Greenland, Wales and the Canadian province of Quebec. But Wales does not have the ability to issue oil and gas licences; that power lies with the UK government. New Zealand, Portugal, and California are “associate” members of BOGA, while Italy is deemed an “ally” of the coalition.

Activists and the climate science community hope BOGA settles in and reinvents what it means to be a ‘climate leader’. Countries, subnational jurisdictions, and companies committing to net zero emissions by 2050, while refusing to mollify the expansion of fossil fuel yields, should not claim this title — which could be reserved for those equitably tackling both the demand and supply of fossil fuels [7]. To be successful, BOGA may need to listen closely to some of the climate action leaders’ advice:

BOGA should cultivate and redefine climate leadership: Success hinges on convincing a growing number of jurisdictions to diminish the expansion of oil and gas production and commit to a Paris-aligned phase-out. This means mobilising global platforms and diplomatic resources to grow the list of members and standardise the need to phase-out fossil fuel output as a key expectation for states and subnational actors.
BOGA should define an equitable exit path: Members tend to make headlines for their commitments to stop new extraction, yet the second part of their obligation is equally important. New climate pledges are being made every day without reality controls on what gets us to real zero on O&G in a fast enough and fair way.
BOGA should be led by science and maintain integrity: Economically diversified countries siding with BOGA should go beyond a licensing ban and commit to stop all new development of oil and gas, including in licensed areas, as well as accelerate the curtailment of existing production.

The creation of the Beyond Oil and Gas Alliance is an important development and a welcome first step towards a global managed decline of fossil fuel production. UNFCCC urges more countries and subnational actors to join this initiative to create momentum to end oil and gas expansion and to align existing production with the 1.5ºC limit.

3.2 US-China Declaration

The Joint Glasgow Declaration came as a welcome surprise to all. It proved that growing tensions between the two nations need not impede progress on climate action and served as a reminder of the two US-China joint statements that provided an impetus to the Paris Agreement. The U.S.-China Joint Declaration on Enhancing Climate Action in the 2020s was announced on November 10th 2021.

The bilateral statement includes, among other things, an agreement between the two countries to “develop additional measures to enhance methane emission control, at both the national and sub-national levels.” The United States has announced the US Methane Emissions Reduction Action Plan, and China pledged they would proceed similarly. Although no explicit timescale for that plan was given, the Chinese Department of Climate Change said that in 2021-2025 the country would bring out an action plan on controlling the gas and develop a framework for hampering methane emissions from the oil and gas, coal and waste sectors.

Countries also recall “their respective commitments regarding the elimination of support for unabated international thermal coal power generation” and welcome the Glasgow Leaders’ Declaration on Forests and Land Use [8]. The first commitment aims to significantly reduce the cost of renewable energy throughout this decade and encourage its use worldwide. That aligns with China’s engagement to support green and low-carbon energy in developing nations and halt construction of coal power plants overseas. The latter aims to halt and reverse forest loss and land degradation by 2030 while promoting an inclusive rural shift. China is a leading importer of deforestation-risk commodities such as palm oil, soy, and timber products, so its signature is relevant and indicates a willingness to participate in the global governance of these issues.

The two countries intend to cooperate on policies that promote energy efficiency policies and standards to reduce electricity waste; support the effective integration of high shares of low-cost intermittent renewable energy; transmission schemes that encourage efficient balancing of electricity supply and demand across broad geographies; distributed generation programmes that encourage the integration of solar, storage, and other clean power solutions closer to electricity users. The United States has set a goal to reach 100% carbon pollution-free electricity by 2035whereas China will phase down coal consumption during the 15th Five Year Plan and make best efforts to accelerate this work [9].

Figure 4. China’s chief climate negotiator Xie Zhenhua said his country and the US had held more than 30 virtual meetings. Source: https://chinadialogue.net/en/climate/coal-1-5c-and-short-term-actions-china-at-cop26/

Recognising the critical role of methane emissions in rising temperatures, both governments believe that an enhanced effort to regulate and limit such emissions will be necessary for the 2020s. In September, the EU and US issued the Global Methane Pledge, promising to cut anthropogenic methane emissions by 30% on a 2020 baseline. At least another 108 countries signed up to that pledge during the Glasgow conference. Climate Action Tracker [10] estimates that it will avoid the equivalent of one-fifth of all nationally determined contributions (NDCs) so far claimed under the Paris Agreement; that is, 800 million tonnes of carbon emissions. However, China has not signed up for that pledge.

Nevertheless, the United States and China intend to convene a meeting in the first half of 2022 to focus on the specifics of reinforcing measurement and mitigation of methane, including through standards to scale down methane from the O&G and waste sectors, as well as incentives and programs to reduce methane from the agricultural sector.

3.3 Aviation Climate Ambition

It is also worth mentioning a declaration following the inaugural meeting of the International Aviation Climate Ambition Coalition at COP 26, through which Ministers and representatives from 23 countries agree that the International Civil Aviation Organization (ICAO) is the appropriate forum in which to address emissions from international aviation, and identify ways to collaborate through this council. In addition, they utter ways to ensure the effectiveness of the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA).

The meeting recognised aviation’s material contribution to global warming through its GHG emissions, along with its additional, but less well-defined, contribution linked with non-CO2 emissions. Parties conceded that despite the impact of COVID-19, the global aviation industry, the volume of cargo, and the number of air passengers is expected to increase immensely over the next three decades.

Participants also acknowledged the impact of COVID-19 on the international aviation sector and the need to expand initiatives that enable the flight industry to continue to build back better and grow in a sustainable manner. They emphasised that international action on tackling aviation emissions is essential given the transnational nature of the sector and that cooperation by states and aeronautics stakeholders is critical for reducing the sector’s share in climate change, including its risks and impacts.

Consequently, the International Civil Aviation Organization was deemed the appropriate forum to address emissions from international flights through a variety of measures to implement short-, medium- and long-term goals. These measures include the development of a universal sustainability framework to support the deployment of sustainable aviation fuel (SAF) and the CORSIA.

Parties committed to:

Work together, both through ICAO and other complementary cooperative initiatives, to promote ambitious actions to cut aviation CO2 emissions at a rate consistent with efforts to limit the global average temperature increase to 1.5°C.
Support the adoption of an ambitious long-term aspirational goal compatible with the above-referenced temperature limit in view of the sector’s commitments towards net-zero CO2 emissions by 2050.
Ensure the maximum effectiveness of CORSIA by:

Backing efforts at ICAO and working with other member states to implement and strengthen CORSIA as an essential measure to address aviation emissions, including expanding participation in CORSIA and participating in CORSIA as soon as possible, if possible our state has not done so already.
Taking steps domestically to implement Annex 16 Vol. IV of the Chicago Convention as thoroughly as possible and on time, including with respect to enforcement of local regulations, legislation, or Implementation arrangements.
Advancing the ecological ambition of the scheme in undertaking the CORSIA Periodic Reviews.
Striving to ensure that double counting is eluded through the host state’s utilisation of corresponding adjustments in computing its nationally determined contribution used toward CORSIA compliance.

Promote the development and deployment of sustainable aviation fuels through international and national measures that reduce lifecycle emissions and contribute to the achievement of the UN Sustainable Development Goals, particularly avoiding competition with food production for land use and water supply.
Promote the development and deployment of innovative new low- and zero-carbon aircraft technologies through international and national measures that can reduce aviation carbon emissions.
Prepare up-to-date action plans describing ambitious and concrete national action to lower aviation emissions and submit these plans to ICAO well in advance of its 41st Assembly. Such programs have not already been revamped in line with ICAO Assembly Resolution A40-18, paragraph 11.
Promote capacity building sponsorship to implement CORSIA and other ICAO climate measures, including extending uptake of freely available tools and expanding regional expertise, accreditation and access to markets for sustainable aviation fuels and CORSIA Eligible Emissions Units.
Assemble periodically at both ministerial and official levels to advance and review progress on the above commitments.

The declaration was signed by the ministers and representatives of the United States of America, Burkina Faso, Costa Rica, Denmark, France, Finland, Ireland, Italy, Japan, Kenya, Republic of Korea, Malta, Morocco, Netherlands, New Zealand, Norway, Spain, Sweden, Maldives, Turkey, Slovenia, Canada, and the United Kingdom [11].

4 NEXT STEPS

4.1 Changes in O&G Operations

There is much the industry could do right now to reduce the environmental footprint of its own operations. One of the industry’s biggest problems is uncertainty, but this is no reason for majors to “wait and see” as they examine their strategic choices. Attenuating emissions from core oil and gas practices should be a first-order priority for all, whatever the transition pathway.

There are numerous, cost-effective opportunities to bring down the emissions intensity of delivered fuels by tackling methane emissions, minimising flaring of associated gas and venting of CO2, and incorporating low-carbon electricity into new upstream and liquefied natural gas (LNG) projects. The process of bringing oil and gas out off the ground and to customers currently accounts for 15% of worldwide energy-related GHG emissions. The single most important and cost-effective option for the sector to bring these emissions is to reduce methane leakage into the atmosphere.

Figure 5. Changes in the average global carbon intensity of oil and natural gas operations in the Sustainable Development Scenario. Source: https://www.iea.org/reports/the-oil-and-gas-industry-in-energy-transitions

A shift from “oil and gas” to broader “energy” takes companies out of their comfort zone but spawns a new way to manage transition risks. Some large O&G companies are poised to convert to wide-ranging “energy” suppliers that work with various fuels, electricity and other power services to consumers. This entails moving into sectors, such as electricity, where there is already a large number of specialised actors and where the financials and scale of most low-carbon investment opportunities differ significantly from traditional oil and gas projects (except for offshore wind). Given that electricity has surpassed oil as the primary component in consumer energy spending in accelerated energy transitions, it offers long-term development prospects. It also paves the way to more significant and broader reductions in company emissions whilst relieving social pressures.

4.2 Part of the Solution

Without O&G, the transformation of the energy sector will be burdensome and more expensive. Oil and gas companies must explain how energy changes will affect their operations and business models, as well as the contributions they can make to speed up the pace of change. This process has begun, and company pledges to cut emissions (or emission intensities) are becoming more widespread.

However, the industry can go beyond to respond to the peril of climate change. Climate impacts will become more visible and relentless over the coming years, regardless of which pathway the world follows. This will increase the pressure on all elements of society to find solutions, those that cannot be uncovered within today’s oil and gas paradigm [12].

Furthermore, O&G will be critical for some central capital-intensive clean energy technologies to reach maturity. The capabilities and resources of the industry can play a decisive role in helping to tackle emissions from some of the hardest-to-abate economy stratum. This includes advancing carbon capture storage and utilisation (CCUS), offshore wind, low-carbon hydrogen, and biofuels.

Scaling up these technologies and reducing their costs will rely on large-scale engineering and project management skills, qualities that are an excellent match to those of prominent O&G players. For CCUS, the industry accounts for more than one-third of overall spending on new projects, and three-quarters of the CO2 picked up today in large-scale facilities is from O&G operations. If it can partner with governments and other stakeholders to create sustainable business models for large-scale investment, this has the potential to be a huge help for deployment.

Besides, electricity cannot be the only vector for the energy sector’s revolution. A commitment by oil companies to provide clean fuels to the world’s consumers is pivotal to the prospects for bringing down emissions. The 20% share of electricity in final energy consumption is growing, but in the face of increased demand for energy services, it is unable to carry out energy transitions on its own. Reducing emissions from core oil and gas procedures is a key step in helping countries get environmental payoffs from using less emissions-intensive fuels. Companies must, however, increase their investment levels in low-carbon hydrogen, biomethane and advanced biofuels, as these can deliver the energy system benefits of hydrocarbons without net carbon emissions. Within ten years, these low-carbon fuels would need to account for around 15% of overall investment in fuel supply.

5 CONCLUSIONS

While COP26 did not directly impinge on oil and gas output or use, there is no longer any doubt about the direction of travel, and momentum toward a carbon-free world gathered considerable pace.

Progress on plans to cut GHG was achieved on a number of fronts in the run-up to and during the Conference in Glasgow in early November. While there was no global agreement to control the use or production of oil and gas, the event increased the pressure on producers to address their own GHG emissions and plan for a future where they wind down fossil fuel production and manage carbon footprints wisely.

Countries and companies agreed to reduce methane emissions, phase down coal, and many more nations added their names to those already enrolled in net-zero targets. There was also progress on sustainable finance, electric vehicles, aviation and marine transport, and transition aid to developing countries. However, it is unlikely the commitments will avoid a rise in global temperatures of more than 1.5°C, and delegates have agreed to meet annually in an attempt to make more ambitious commitments to achieve that goal.

While there were no direct curbs on oil and gas production or use, it has added to growing activist shareholder momentum and precedes likely tougher regulation and higher taxes in many countries. Pressure includes moves to push big oil to sell off highly polluting assets (causing a switch in ownership toward NOCs and private equity) and even break up into legacy fossil fuel energy businesses and new energies and gas units [13].

Also at the Conference, the Beyond Oil and Gas Alliance set up earlier this year by Denmark and Costa Rica was joined by more countries, including France, Ireland, Sweden, and Wales, with California and New Zealand as associate members. The group aims to add pressure to phase out oil and gas. But most producers, including COP26 hosts, the United Kingdom, say oil and gas will still be needed for some time, and they must ensure consumers are not left short, and industries have time to transition.