That high-level, high-anxiety talks under way in Paris won't produce a binding international agreement on mitigation of climate changes offers the oil and gas industry some comfort. But an assessment of what an agreement would mean for the business, if adopted according to design, is useful.
According to new research from Barclays, achieving targets guiding the discussions would make the oil and gas business financially much smaller 25 years from now than it would be otherwise.
A shrunken industry
The 21st Conference of the Parties (COP21) seeks an international agreement limiting emissions of greenhouse gases (GHGs) enough to keep globally averaged temperature from rising more than 2° C. above preindustrial levels. The required GHG-concentration ceiling is assumed to be 450 ppm of carbon dioxide. In its research, Barclays calculates financial and other effects of meeting those goals, starting from recent estimates by the International Energy Agency of associated energy-use and investment changes.
"In its recently published World Energy Outlook 2015, the IEA estimates that under an energy-and-climate policy framework consistent with a 2° C. trajectory, investment in low-carbon energy sources and energy efficiency out to 2040 would be $14 trillion higher than under its base-case scenario," writes Mark Lewis of Barclays Power & Utilities Research in a summary of findings. "By contrast, required investments in fossil-fuel energy sources would be $6.4 trillion lower, as would the prices for, and volumes of, fossil fuels sold. On our calculations, the IEA data imply that the fossil fuel industry would stand to lose $34 trillion in revenues over 2014-40 under a 2° C. policy scenario, with the oil industry accounting for $22.4 trillion of this, gas for $5.5 trillion, and coal for $5.8 trillion."
According to Barclays, oil and gas investments during 2014-40 would be 28% lower under a 2° C. policy regime than they would in IEA's base-case scenario. Cumulative oil and gas revenue over the same period would be 23% lower.
Compared with base-case conditions, the oil and gas business would look much different in 2040 with $7 trillion less investment and $28 trillion lower revenue between now and then. To the disappointment of many in Paris, the industry won't shrink that much. But it won't grow to base-case proportions either.
COP21 has little chance of producing a binding agreement that caps emissions enough to meet the 450 ppm target. Commitments announced before the conference fall far short of that standard. And two probably irreconcilable conflicts undermine prospects for an agreement that's more than symbolic. One conflict is between developing countries demanding money in exchange for emission commitments and developed counterparts unwilling to oblige-at least at demanded levels. The other standoff is between countries insistent that any agreement be legally binding and resistant others-notably the US. Large questions loom, moreover, whether eager participants in COP21's heady deal-making will adhere to commitments once costs become political problems in their home countries.
Still, pressure is intense to produce an agreement. No matter what COP21 forges, moreover, pressure will remain intense, especially on the fossil-energy industry, to lower GHG emissions. Business as usual is history.
The fanciful impulse
That fact of future life in the energy industry is acceptable. Indeed, oil and gas companies already to accept it. In October, 10 large companies signed a declaration committed to progress toward 2° C. emissions goals. Other companies support carbon taxes. Voluntarily, signatories to the joint declaration have cut GHG emissions by 20% in the past 10 years. Other companies have made similar improvements. All seem to recognize that lowering GHG emissions is necessary and that the effort inevitably generates costs and constrains markets.
What's not acceptable is the fanciful impulse motivating climate activism-and nowadays too much policy-making-to abandon fossil energy precipitously as a frantic matter of political will, as though substitutes were available at acceptable scale and cost. COP21 will be a success, no matter what agreement it produces, if it shakes that wishful nonsense out of what should be serious discussion.
