State energy companies that account for well over half of global oil production and an even larger share of reserves, are ill-prepared for a transition towards cleaner fuels.
The International Energy Agency said in a new report: “Some are high performing, but many are poorly positioned to adapt to changing global energy dynamics.”
The world’s listed oil and gas majors such as Royal Dutch Shell and ExxonMobil have come under fire from activists and shareholders for their inaction on climate change.
But this is the first time national companies, which produce much of the world’s oil and gas and until now have only had to answer to their governments, are in focus.
“No oil and gas company will be unaffected by clean energy transitions, so every part of the industry needs to consider how to respond,” the Paris-based body said.
The IEA report is due to be presented during the World Economic Forum’s annual meeting in Davos this week, where climate change is on the agenda for discussions.
Energy-related carbon dioxide emissions account for almost all global carbon dioxide emissions and about two-thirds of all greenhouse gas emissions.
Profitable national oil companies such as Saudi Aramco are stepping up research efforts, while others such as CNOOC of China and Malaysia’s Petronas are investing in offshore wind and solar.
Yet, the IEA said “none of the large NOCs have been charged by their host governments with leadership roles in renewables or other noncore areas.”
National oil companies are responsible for the stewardship of their countries’ hydrocarbon resources on behalf of governments that rely heavily on the income derived from it. Oil and gas sales comprise more than 60 per cent of fiscal revenues in countries such as Venezuela, Saudi Arabia, Qatar, Nigeria, Iraq, Kuwait and the UAE.
But should the world take a more aggressive approach to climate action, with some oil and gas assets becoming uneconomic, the risk of stranded volumes is “significantly higher” for the state players than for listed energy majors, the IEA said.
This is why some countries, with 30 years or more worth of reserves, are trying to diversify their economies beyond oil production, even as they believe their low-cost asset base will hold them in good stead through any energy transition.
The IEA said the oil and gas sector broadly faces a “strategic challenge” of balancing short-term returns, while demand for fossil fuels remains robust, with a long-term licence to operate.
Until now, investment by oil and gas companies into cleaner technologies and low carbon research activities, for example, has been less than 1 per cent of total capital expenditure.
Some international energy majors are making a push into electricity. But the IEA said greater investment is needed into low-carbon hydrogen, biomethane and advanced biofuels.
It added that companies also needed to reduce the environmental footprint of their own operations, including the leakage of potent methane emissions.
The IEA said the oil and gas industry — known for its ability to operate across geographies and at scale — will be critical for developing key capital-intensive clean energy technologies.
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