The International Energy Agency’s assertion that all exploration for oil and gas should end immediately moved the climate debate to a new and crucial stage. In the last two years, the issue has moved from street protest to the long-term aspirations of governments and companies. Now we are getting to the hard detail. The question is whether the ambitious commitments to net zero by 2050, made by more than 100 countries across the world, can really be translated into reality.
The IEA is in some ways a surprising vehicle for the sharp message delivered last week. The Agency was set up in the aftermath of the 1973 Arab oil embargo to ensure the security of global supplies. Members were the oil-importing nations of the world, who agreed on elaborate arrangements to share resources in times of supply disruption. The Agency has long argued for more investment in oil and gas development to ensure adequate supplies. In recent times, however, under transformational leadership, the IEA has redefined energy security and has extended its coverage to other fuels, and crucially to the unresolved climate risks associated with the growing use of hydrocarbons. (For full disclosure, I have been an unpaid adviser on the Agency’s World Energy Outlook for the last several years.)
The Agency has no formal power, but its reputation for providing accurate and objective analysis gives it a powerful voice in the climate debate. Last week’s intervention is at one level simply a statement of fact. More than sufficient oil and gas has already been found to match the maximum amount of consumption possible if the world is to keep emissions below the level of danger. That is no secret, but the amplification provided by the IEA poses a direct challenge both to governments and companies.
For countries which have made commitments to net zero or comparable sharp reductions in future emissions, the conclusion makes for uncomfortable reading. The United States, Norway, and to a lesser degree the UK all fall into this category. They will now have to justify why further exploration—in the North Sea or among the shale rocks of the Permian Basin—is still necessary.
Equally, companies which have embraced net zero will have to explain why they are still exploring around the world. Almost all of the major energy companies will now face further challenges from campaigners and activist investors.
Both governments and companies have some strong lines of defence, beginning with the fact that oil demand globally continues to rise. So long as the world’s population still uses petrol to drive vehicles with internal combustion engines and uses natural gas to power heating systems, hydrocarbons will be needed. The reality is that the transition of energy consumption has hardly begun. The use of oil, gas and coal is growing. The demand for each form of hydrocarbon is likely to be higher at the end of this year than it was at the end of 2019, and higher still through the next decade. Covid has caused an economic recession but not a structural transformation of the energy market. Hydrocarbons still account for 80 per cent of global energy needs. Renewables—led by wind and solar—are certainly growing, but account for little more than 5 per cent of supply. In a market driven by population growth and the spread of prosperity, hydrocarbons will remain dominant for a long time to come.
Governments and companies will argue that the IEA’s calculation is mathematically correct. Sufficient oil and gas has been found, given their climate pledges. But the resources available are in large part controlled by OPEC member states and Russia. Fragile and autocratically led suppliers such as Saudi Arabia and Venezuela cannot be relied upon to provide the secure energy supplies essential for modern economies. So long as consumers need oil and gas, the only answer is to find more diverse sources of supply, particularly as the provinces which have been so important to the world market over the last 50 years—such as Alaska, the North Sea and the deep water of the Gulf of Mexico—run down. Hence the need for continued exploration activity.
They will also remind us that most of the oil and gas producing and exporting nations have noticeably failed to embrace the climate agenda, and would no doubt be happy to revert to a world in which they are the dominant suppliers with the power to impose embargoes or to set ever-higher prices.
The suggestion of ending exploration ignores the political challenges and the insecurities of those who fear finding themselves dependent on others. Exploration will only cease when demand falls dramatically. Achieving that should be the focus of climate policy.
The IEA has, however, performed a useful service by reminding us of what needs to change if vague commitments to net zero are to be translated from rhetoric to reality. The fact that its call for an end to exploration is likely to be ignored is evidence of just how complex and difficult the energy transition is actually going to be.
