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PHASING OUT OIL AND GAS - HOW REALISTIC? HOW FAST?

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The world collectively achieved at COP 28 in Dubai what has been considered extremely ambitious in the past - an agreement to gradually phase out fossil fuels in a just, orderly and equitable manner.

 

How should we implement this agreement? How fast can the phase-out be, realistically? All of these questions are being asked at a time when the issue of energy security has gained prominence, energy demand will continue to grow till 2050 and energy prices are expected to be higher for longer. Investments on new exploration and production are attractive. Investors and producer nations are reaping big financial gains and making new investments to replace Russian energy supplies to Europe.

 

There are four ways we can go about doing this.

 

Accelerate deployment of renewables, EVs and other new energies 2-4x faster to meet the energy needs: Reports by institutions like RMI and Energy Transitions Commission indicate that peaking of fossil fuel demand for Industry and Buildings has already occurred; it is likely to happen in the next few years for power, heat and transport. But overall reliance is still heavy and even if all current global policies on clean energy are adopted in full, it will edge towards 73% by 2030, down from 80% in 2022. We need a much faster pace of deployment of clean energy to bring this down further and faster. This requires faster permitting processes in developed countries, 3-4x rise in investment in clean energy in developing countries, and; reversing a slow-down in passenger electric vehicle sales especially in large markets such as Germany, Japan, China and India.

 

Focus on strategies adopted by the national oil majors: While attention often focuses on the seven large private sector oil and gas majors, they own less than 13% of global oil and gas production and reserves, as per the IEA. It is the National Oil Companies (NOCs) that produce about half of the world’s oil and gas. Some are among the industry’s most prosperous and technologically advanced companies. Actions by them will make a material impact on the pace and scale of phase-out. However, given their important and varied responsibilities, including generating revenue, safeguarding state resources, and ensuring energy security, they will need support from respective national governments in setting proactive climate policy against the use of fossil fuels. COP 28 in Dubai managed to initiate conversation on the topic and this must continue in Azerbaijan. The NOCs will also need to rebalance capital allocations between legacy business and new energies. For instance, Saudi Aramco, one of the most profitable companies of the world, intends to capitalize 10% of its investments in low carbon solutions. More companies need to follow this example, with higher ambitions. Lastly, NOCs will need to adjust their pricing strategies further for emerging economies. For instance, almost 28% of the oil demand growth through 2030 for OPEC nations will come from one country alone, which is India. Similarly, other emerging economies in Asia, Africa and Middle East will be largest drivers of demand for growth. Given this context, policies like “Asia Premium” charged by OPEC, will need to give way to more equitable pricing policies. Else, the emerging economies will not be able to allocate the requisite capital towards clean energy as they struggle to ensure energy security in an environment of growing demand.

 

Just transition planning for the oil and gas sector: The oil and gas sector employs approximately 11.5 million people globally, as per the IEA. This is similar to the size of a country like Belgium. Transition planning for this work-force must begin now. Denmark and Spain provide good templates, as they have begun this planning already as part of their announced plans for a production phase-out of both oil and gas. Transition will include both diversifying the skill sets of the work-force to contribute to other parts of the economy as well as re-orientation of the large set of specialized businesses that cater to the oil and gas sector. There are many similarities between offshore oil and offshore wind technology, so many of the workforce and businesses may benefit from this transferability.

 

 

Global policy coordination: ‘Equitable’ will need to be a key word for the phase out, to minimize its economic and social costs. More than forty nations are currently developing new oil and gas production sites. Each of them is trying to benefit from producing and selling their resources the longest. We need to build a stronger co-ordination mechanism to agree on a common approach for a collectively managed transition that is as cleanest, cheapest and fairest. Studies have identified that countries like Norway and those in the Middle East produce the cleanest and the cheapest oil and gas, whereas those like Libya, Iraq and Turkmenistan should be among the last countries producing oil and gas based on their ability to handle reduced oil revenues and climate equity. Numerous countries would need financial support to phase out earlier than the planned lifetimes of their resources. This will require the creation of financial mechanisms – with contributions from developed countries and other sources, including potentially from the fossil fuel industry, as proposed by the EU, or through a fossil fuel levy, as suggested by incoming COP29 presidency Azerbaijan.

 

 

To conclude, fossil fuel phase out is a necessity. It will need a comprehensive shift and well considered planning and co-ordination, both within countries and among them. We have made a start at COP28, and must make rapid progress to make it a reality.