Rocky road to net zero

In Lewis Carroll’s Alice’s Adventures in Wonderland, Alice says at one point: ‘There’s no use trying, one can’t believe impossible things.’ To which the Queen replies: ‘I daresay you haven’t had much practice. When I was your age, I always did it for half-an-hour a day. Why, sometimes I’ve believed as many as six impossible things before breakfast.’

Unfairly certainly, this light-hearted exchange in the Victorian children’s classic comes to mind when hearing the reaction to the latest International Energy Agency (IEA) publication Net Zero by 2050: A Roadmap for the Global Energy Sector. It contains what the International Energy Agency (IEA) describes as the first comprehensive study of what it will take the world to meet the net zero emissions target by 2050. Before and after breakfast, there’s certainly a lot of believing – or is it suspension of disbelief – to think that the 400 milestones set out in the report to guide the global journey will actually be reached.

What instantly captured the attention of two of the world’s largest oil producers was IEA’s call for an immediate halt to new fossil fuel supply projects, stating ‘the trajectory of oil demand … means that no exploration for new resources is required and, other than fields already approved for development, no new oilfields are necessary.’ No further final investment decisions for new unabated coal plants should be contemplated either, according to the IEA.

Russian Deputy Prime Minister Alexander Novak described this approach as simplistic and unrealistic. ‘I can assure you that the Russian Federation, its plans, its strategy is to continue to invest in both oil and gas and in coal. But we also invest in renewables as well, in hydrogen, in electric cars and electric charging stations, so we see the coming decade as using a mix of renewables and fossils fuels.’

The Saudi Arabian oil minister Prince Abdulaziz bin Salman was even more dismissive: ‘It is a sequel of the La La Land’ movie. Why should I take it seriously?’.

The tone of these observations has been echoed in some other oil producing nations, notably Australia for some reason. Industry reaction in the US as expressed by the American Petroleum Institute (API) was much more restrained. In confirming US oil companies’ commitment to a lower carbon future, API vice president of corporate policy Stephen Comstock issued the statement that ‘any pathway to net zero must include continued innovation and use of natural gas and oil, which remains crucial to displacing coal in developing nations and enabling renewable energy.’

None of this adverse comment is entirely fair to the IEA. It is only carrying out its mission – maybe impossible - as it perceives it. Even so, some of its assumptions are far-fetched. IEA was established in the framework of the Organisation for Economic Co-operation and Development (OECD) in 1974 after the 1973 oil crisis. Its role then was to respond to physical disruptions in the supply of oil, as well as provide information on the international oil market and other energy sectors, epitomized by its well-respected annual World Energy Outlook.

Nowadays IEA has taken on an expanded role not only covering traditional energy sources such as oil, gas, and coal but renewables and other clean energy investments in order to assess the conditions for a sustainable recovery and long-term structural decline in carbon emissions. That mandate has broadened to focus on reaching net zero emissions.

Global players in the energy markets, such as Russia and Saudi Arabia, are not members of the IEA club, nor is China. Their absence will always be liable to diminish the authority of the agency’s pronouncements and guidance. Even at the recent G7 meeting hosted by the UK, where all the countries involved sponsor IEA, leaders were tough on coal but said nothing notable about future restrictions on oil production.

Forecasting future energy scenarios, particularly for a period over 25 years from now, can only be a guess based on current trends. As such they should be treated as well intentioned crystal ball gazing and not cause for too much castigation when those guesses turn out wrong.

In this case IEA really has scored an own goal. In its defence, IEA probably felt under pressure to deploy its expertise to set the agenda for the 26^th UN Climate Change Conference of the Parties (COP26) in Glasgow taking place in November. After all, IEA can rightly claim that no other agency has been prepared to spell out the potential pain and disruption to the global community necessary to bring the carbon emissions target seriously into view by 2050.

IEA definitely delivered a wake-up call that no one wants to hear, but details of the roadmap got lost in the furore over its price assumptions. For example, common sense alone suggests that shutting down future oil production plans beyond existing operations will upend IEA’s belief that there will be enough oil to power us into the renewables era without roller-coast supply and demand and volatile oil prices.

Analysts at the Canadian bank BMO have probably nailed the argument as well as any in critiquing the key IEA assumptions that global oil demand will steadily shrink based on changed consumer behaviour and tightening of government regulations. ‘A more likely scenario’, BMO argues, ‘is that global oil demand continues to grow for at least the next ten years, albeit at a slower pace than in the past’. This is because the linkage between population growth, economic growth and oil demand cannot be easily broken until there are viable economic substitutes that are widely available, the analysts say. They also cite the United Nations projection that the world’s population will increase to 9.7 billion people in 2050, up from 7.7 billion in 2019, driven by growth in places including sub-Saharan Africa, India and Pakistan.

In the short term it is arguable that an immediate sharp rise in oil price in the post-Covid economic recovery may be averted. Revived talks on Iran’s compliance with the 2015 deal on development of a nuclear weapon capability and the lifting of some US sanctions is expected to bring additional Iranian output into the market. Meanwhile OPEC+ oil producers agreed in April to return 2.1 million barrels per day (bpd) of supply until at least the end of July. It remains to be seen whether this will be sufficient to stabilize oil prices that have risen 30% this year with Brent crude last month edging over $70 per barrel.

However, BMO among many others warns that ‘global supply could fall well short of demand over the next five years amid growing pressures to slow investment, setting the stage for an unprecedented spike in oil prices.’ Oil supermajors are all coming under pressure from their stakeholders to meet reduced carbon emission targets that will likely limit their freedom to initiate significant new E&P projects.

Even ExxonMobil is having its wings clipped. Up to now the company has been unembarrassed about its intention to remain focused on the oil business. It has not yet followed the example of its European counterparts who are busy distancing themselves from hydrocarbons by referring to themselves as energy companies. Now two directors (and possibly three when voting is complete) have been elected onto the ExxonMobil board of 12 proposed by the hedge fund Engine No. 1. Supported by some of the most important institutional investors in the US, Engine No. 1 claimed that the company’s current board was ill-equipped and not doing enough to handle the transformations that are reshaping the energy sector.

In Europe a warning shot across the bows of international oil companies was delivered recently by a judgement in a Dutch district court ordering Shell to cut its absolute carbon emissions by 45% by 2030 compared to 2019 levels, in line with the Paris 2015 agreement. As in similar litigation brought by climate change and human rights activists, the case was based on a ‘duty of care’ clause in the Dutch legal system. This is said to have provided judges some liberty consider links to human rights and the effect climate change has on the right to a healthy environment.

The ruling landmark may not be as consequential as it seems, and is certainly destined to an appeal process that could last for years. Shell is already aiming to reduce the ‘carbon intensity’ of products it sells by 20% up to 2030 from a 2016 baseline. This sets up a problem of how to define reduction of greenhouse gases and, further down the road, how to measure compliance. In addition Shell will argue that the reference target on emissions was something agreed internationally by countries and not by company entities.

Leaving aside its improbable oil price scenarios, what is admirable about IEA’s analysis is that it brings out into the open what is really needed to meet the 2050 net zero target. As Fatih Birol, IEA executive director, says, ‘Governments must close the gap between net zero rhetoric and reality’.

Unsurprisingly everything IEA suggests in its roadmap is subject to criticism. The timelines for adopting renewable energy are said to be unrealistic. It admits that a significant part of its estimates are based on the contribution of yet-unproven technology (e.g., carbon capture and bioenergy). Behavioural changes are another issue. People will need to be buying electric cars exclusively by 2035, retrofitting their homes, avoiding long-haul flights, driving no faster than 100 km an hour, and maybe line-drying laundry, as someone has written. Then there is the huge problem of engineering a global equitable energy transition. This only starts by providing electricity to around 785 million people who have no access to it and clean cooking solutions to 2.6 billion people.

Alice of Alice in Wonderland remarks at some point, ‘It would be so nice if something made sense for a change.’ So far the terms of the energy transition have not got there yet.

‘None of this adverse comment is entirely fair to the IEA’

‘Governments must close the gap between net zero rhetoric and reality’