Russian oil supply curbs no excuse for diluting net-zero goals, IEA says

The world needs near-term alternatives to an impending fall in Russian oil exports, but this does not justify diluting net-zero commitments and requires an extra effort to curb emissions, the International Energy Agency said in its World Energy Outlook published Oct. 27.

In the annual outlook document, the IEA stuck with its view expressed in a much-discussed energy sector "roadmap" in 2021, that investing in new long-cycle oil projects, rather than low-carbon technologies, would be incompatible with net-zero emissions targets.

"No one should imagine that Russia's invasion can justify a wave of new oil and gas infrastructure in a world that wants to reach net-zero emissions by 2050," the IEA said. "It remains the case that with the steep reductions in fossil fuel demand in the Net Zero Emissions scenario in this outlook, fossil fuel demand can be met through continued investment in existing assets and already approved projects, but without any new long-lead time upstream conventional projects."

But while stressing the role of low-carbon technology and extending the life of existing oil fields, the IEA conceded a complete absence of new long-term projects could lead to over-reliance on core Middle Eastern producers to meet remaining long-term demand.

To overcome the shortfall expected to result from shunning Russian supply the IEA recommended investment in short-cycle production such as shale, alongside energy transition efforts. It questioned moves by some countries to hold new offshore licensing rounds as a means to stimulating long-term oil projects.

In case such projects did go ahead -- in response to energy security concerns for example -- this should lead to greater mitigation efforts such as carbon capture and storage, it said.

"The most suitable near‐term substitutes are projects with short lead times that bring oil and gas to market quickly as well as capturing some of the 260 Bcm of gas that is wasted each year through flaring and methane leaks... But lasting solutions to today's crisis lie in reducing fossil fuel demand," the IEA said. Options include, "extending production from existing fields, tight oil and shale gas," it added.

Russian decline

Under the IEA's "stated policies," or STEPS scenario -- the least ambitious in terms of emissions reductions -- Russia's share of internationally traded oil and gas falls by half by 2030. Its oil exports fall 25% from 2021 levels of more than 7 million b/d. "Russian fossil fuel exports never return, in any of our scenarios, to the levels seen in 2021," the IEA said.

It noted Russian oil production and exports remain relatively steady compared with before the invasion of Ukraine and subsequent sanctions, but said "major changes lie ahead" stemming from European Union import bans. Russian exports to the EU totaled 2.6 million b/d in September, it estimated.

It went on to predict only partial success for Russian efforts to redirect the country's oil exports, cutting its projection of Russian oil production in 2025 by 2 million b/d compared with last year's World Energy Outlook.

Russia's long-term production plans rely on challenging projects in less-developed parts of the country and would be harder to develop with reduced access to international capital, partnerships and technology, it said, adding some fields were already at risk of being shut in.

Investment shortfall

In terms of global supply, the IEA acknowledged concerns over a sharp drop in investment in recent years and warned of a risk of increasing reliance on the Middle East, saying that in global terms, just a handful of Middle Eastern countries were now investing above pre-pandemic levels. Capital discipline is now the "default setting" among US shale producers, it added.

Its STEPS projection foresees a 50% increase on investment levels of recent years on average to 2030, to $650 billion/year. However, in 2022 upstream investment is expected to rise by just 10% and "this remains well below the pre‐pandemic level," mostly stemming from cost inflation rather than an increase in activity, it said. "There are relatively few new resources under development and a dwindling stock of discovered resources in the non‐OPEC world," it said, adding oil volumes discovered in 2021 were the lowest since the 1930s.

"The STEPS sees near‐term increases in output in the United States, Guyana and Brazil, among others, but reliance on major [Middle Eastern producers] grows," it said, forecasting that under the scenario OPEC's share of global oil output would rise from 35% in 2021 to 36% in 2030 and 43% in 2050, "implying an increasing degree of market power."

However, it underlined that under its "announced policies scenario," reflecting more ambitious emissions efforts, global oil demand peaks in the mid-2020s, reducing such concerns.