IEA warns of oil, gas sector over-investment risk under net-zero push

Upstream investment by the global oil and gas industry is at risk of overshooting global demand needs in the coming decades unless the sector aligns its spending with global climate goals, the International Energy Agency said Nov. 23.

Oil and gas companies currently account for just 1% of clean energy investment globally, with 60% of that from just four companies, the IEA said in a new report ahead of the COP28 climate conference in Dubai, starting Nov. 30. But producers should be spending half of their annual investment on clean energy projects by 2030 to hit the goals of the Paris Agreement, according to the energy watchdog. Currently, oil and gas sector spending of some $800 billion each year is double what is required in 2030 on a pathway that limits global warming to 1.5 C, the IEA said.

As a result, the IEA said the risks were currently "weighted more towards overinvestment in oil and gas than the opposite."

"The oil and gas industry is facing a moment of truth at COP28 in Dubai. With the world suffering the impacts of a worsening climate crisis, continuing with business as usual is neither socially nor environmentally responsible," IEA executive director Fatih Birol said in a statement. "Oil and gas producers around the world need to make profound decisions about their future place in the global energy sector."

For years, the IEA had warned that the world was at risk of an oil supply "crunch" due to underinvestment in new fields under its base-case scenario for future energy demand.

But oil and gas investment has risen in recent years and the benchmark level of investment needed in 2030 has come down, the IEA said, adding that the level of investment in oil and gas expected this year is now broadly equivalent to the level needed in its base-case STEPS scenario.

"The fears espoused by some large resource holders and certain oil and gas companies that the world is underinvesting in oil and gas supply are no longer based on the latest technology and market trends," it said.

In May, the IEA said total global upstream spending should reach 2019 levels of more than $500 billion this year, although half of the increase was likely to be absorbed by rising industry costs. The investment drive is also dominated by national oil companies in the Middle East as major resource holders look to bolster dwindling spare capacity.

Fossil security

A number of European oil and gas producers have curtailed their clean energy commitments over the last year, emboldened by political concerns over energy security triggered by Russia's invasion of Ukraine.

Speaking last month, however, Birol blamed rising geopolitical threats to global oil and natural gas supplies -- in addition to concern over human-caused climate change -- as increasingly hurting the appeal of fossil fuels as reliable, safe energy sources.

The IEA first called for a immediate halt to spending on new oil and gas projects in early 2020 when it published a net-zero pathway to limit global warming to 1.5 C by 2050.

More recently, however, the IEA has softened its message that no new oil and gas projects are needed in order to achieve net-zero emissions by 2050. Updating its landmark net-zero emission (NZE) scenario in September, the IEA said new upstream projects with "long-lead-times" are not needed under the scenario and ruled out new coal mines, mine extensions or new unabated coal plants.

"Some investment in oil and gas supply is needed to ensure the security of energy supply and provide fuel for sectors in which emissions are harder to abate," the IEA said in its latest report. "Yet not every oil and gas company will be able to maintain output -- requiring consumers to send clear signals on their direction and speed of travel so that producers can make informed decisions on future spending."

The IEA said that, although oil and gas projects currently produce higher returns than renewable projects, those returns are less stable. It estimates that returns on capital employed in the oil and gas industry averaged around 6-9% between 2010 and 2022, compared with 6% for clean energy projects.

Analysts at S&P Global Commodity Insights estimate that global oil demand -- including biofuels -- will remain at around 31% of the global energy mix through 2030, while renewable energy sources will grow 6-8%/year to make up 13% of total energy demand at the end of the decade, up from 8% in 2022. Global oil and biofuel demand will peak at around 110 million b/d in 2031, according to S&P Global's reference case scenario.