Oil has been a driver of the global economy for the last 150 years. It is consumed as an energy source in the transportation sector (65%), industries (7%), buildings (5%) and used as feedstock (17%) in many industries including petrochemicals and plastics. Today, production is relatively concentrated with the US, Saudi Arabia, Russia and Canada producing nearly 50% of total supply. The oil industry relies on highly energy-intensive processes to extract crude oil and refine it into oil products. Nearly all the energy consumed is fossil fuel. The extraction of oil also releases methane in the atmosphere –35% of these emissions are involuntary (fugitive methane) and 65% part of operational processes (vented). The combustion of oil products releases about four times more emissions (scope 3) than production (scope 1 and 2).
Including scope 3, oil is responsible for 30% of all man-made GHG emissions. However only a 5th (6% of total) is directly emitted by the industry –35% in the form of methane. In the IEA Stated Policies Scenario, oil demand is projected to rise by 17% by 2050, with developing countries in Africa, the Middle East and Asia Pacific seeing a sharp increase while China, Europe and the US seeing a decline. However, aligning with IEA Net-Zero by 2050 requires a decrease in oil consumption by 73%.
Scope 3 emissions aside, the oil industry needs to address four sources of emissions: fugitive and vented methane, flaring, energy use in well delivery and production, energy use and processes in refining (e.g. steam methane reforming for hydrogen production). Technologies exist to reduce 70% of methane emissions at no or minimal cost to the industry considering the monetization of captured methane. Zero flaring technologies are commercially available. Well delivery and production can be electrified with low-carbon power. Reducing refining emissions remains a technological challenge; CCUS is well-placed and can be supported by electrification and hydrogen technologies. Overall, known technologies can reduce oil industry scope 1 and 2 emissions by up to 70%for an increased production cost of 8-10%.
Besides investing in production assets, such technologies will require more than $100 billion infrastructure investments in low-emission power generation, clean hydrogen production and carbon transport and storage –such amounts are relatively small compared to the over $300 billion spent on the upstream oil industry every year. Low scope 1 and 2 emission oil products are expected to reach the market with a green premium of 6-10%. To incentivize investments, demand signals for these products are critical. Governments will need to strengthen producers’ confidence in their ability to pass the premium to end consumers, and in parallel, prevent poorer households from being hit by rising sustainability costs.
Policy measures and international cooperation on methane fees, flaring bans and carbon pricing can help create a differentiated and economically viable market for first movers into the low-emission oil industry. Investments to decarbonize the oil industry are estimated at $720 billion on top of business-as-usual investments, i.e. approximately $25 billion per year until 2050, which is also a minor amount compared to annual industry CapEx. The business case to invest in low-emission assets is already attractive in upstream but remains challenging on the refining side.
We emphasize five priorities for the oil sector:
1. Rapidly deploy existing technologies to drastically cut vented and fugitive methane and flaring emissions.
2. Boost the number of low-emission projects in refining to accelerate the learning curve, drive costs down and bring forward technology commercial readiness.
3. Develop the renewable power capacity, clean hydrogen production and CO₂ transport and storage infrastructure around production assets.
4. Multiply demand signals for low-emission oil to incentivize producers and investors to direct capital towards low-emission production assets.
5. Develop policies to support the four priorities above and strengthen the business case for low-emission oil production