Oil producers face ‘moment of truth’ over green investment, IEA warns

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Oil and gas producers should be spending about half of their annual investment on clean energy projects by 2030 to be aligned with global climate goals, the International Energy Agency has said.

The west’s energy watchdog also warned oil and gas companies that are investing in new carbon capture projects that the technology would be no substitute for cutting emissions and “cannot be used to maintain the status quo”.

Oil and gas producers account for just 1 per cent of global green energy investment and last year committed 2.5 per cent, or $20bn, of their capital to the sector, the IEA said, meaning they would need to execute a massive strategic shift by 2030.

“The oil and gas industry is facing a moment of truth at COP28 in Dubai,” said IEA executive director Fatih Birol, referring to the international climate conference starting on November 30.

“With the world suffering the impacts of a worsening climate crisis, continuing with business as usual is neither socially nor environmentally responsible.”

The latest intervention from the IEA is the agency’s starkest since it shocked the fossil fuel industry in 2021 by saying that there would be no room for new oil and gas exploration projects if climate targets were to be met.

The IEA was founded in the aftermath of the 1973 Arab oil embargo to advise on energy security, with members from OECD countries including the US, the UK and Japan.

Its latest report said oil and gas producers would need to devote half of their annual capital budget to clean energy projects by 2030 if they wanted to align with the 2019 Paris climate agreement, which aims to limit global warming to well below 2C and ideally to 1.5C above pre-industrial levels.

BP has claimed leadership among big oil producers seeking to curb emissions, saying that in 2030 about 50 per cent of group capital spending would be on “transition” businesses, including electric vehicle charging and a convenience business covering refuelling stations.

But the fossil fuel group this year slowed down its emissions reduction plans and pared back its retreat from oil and gas, amid a surge in oil profits.

The two US supermajors, Chevron and ExxonMobil, have declined to invest in their own renewable energy generation and instead focused on low-carbon technologies such as hydrogen, carbon capture and storage and biofuels.

Chevron will spend just $2bn of its $14bn capital spending budget on lower-carbon investments this year. Exxon said last December it planned to spend $17bn in total on lower-emission initiatives through to the end of 2027, while annual capital spending would remain at $20bn-$25bn during the period.

Shell has said it planned to invest about $5bn on average a year between 2023 and 2025 on low-carbon energy, against overall capital spending of $22bn-$25bn a year in 2024 and 2025.

France’s TotalEnergies said it planned to put 33 per cent of its capital expenditure between 2023 and 2028, or about $5bn a year, towards investments deemed low carbon.

Several oil and gas producers have dialled back clean energy commitments in the past two years, amid a surge in oil and gas prices and anxiety about energy security sparked by Russia’s full-scale invasion of Ukraine.

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Birol said oil companies had been slow to invest in clean energy as they “don’t see they will make money” from it, but he argued fossil fuel returns were less stable and only slightly higher than clean energy.

The IEA estimated the return on capital employed in the oil and gas industry was 6 per cent to 9 per cent between 2010 and 2022, compared with 6 per cent for clean energy projects.

Birol added that companies needed to be “letting go of the illusion that implausibly large amounts of carbon capture are the solution”, with the IEA warning that current policies would require an “inconceivable” 32bn tonnes of carbon to be captured annually by 2050.

“The industry needs to commit to genuinely helping the world meet its energy needs and climate goals,” he said.

Additional reporting by Jamie Smyth in New York