The COP28 UN Climate Change Conference, held in Dubai from 30 November to 13 December 2023, was significant as it marked the first ‘global stocktake’ of the world’s efforts to address climate change under the Paris Agreement (to pursue efforts “to limit the global average temperature increase to 1.5°C above pre-industrial levels”).
Having confirmed that progress was insufficient across all facets of climate action – including the reduction of greenhouse gas emissions, fortifying resilience against a shifting climate and providing financial and technological aid to vulnerable nations – countries reacted by formulating a strategy to accelerate progress in all domains by 2030.
Before COP28 Dr Fatih Birol, executive director, International Energy Agency (IEA), said that analysis conducted by the Agency showed that while the rapid deployment of clean energy technologies in recent years has made a major difference to the climate outlook – shaving about 1°C off projected global warming, based on policy settings by governments – a huge amount remains to be done.
“The 1°C reduction has moved the projected temperature rise in the year 2100 from a truly catastrophic 3.5°C to an only slightly less severe 2.4°C,” said Dr Birol. “Good news, but not nearly good enough. We are not on track to meet the Paris Agreement goal of keeping global warming well below 2°C – let alone below the threshold of 1.5 °C that science has shown is crucial to avoid the worst effects of climate change.”
ACTION PLAN
Dr Birol laid out five pillars for action between now and 2030: triple global renewable power capacity; double the rate of energy efficiency improvements; commitments from the fossil fuel industry – and oil and gas companies in particular – to align activities with the Paris Agreement, starting by cutting methane emissions from operations by 75%; establish large-scale financing mechanisms to triple clean energy investment in emerging and developing economies and to commit to measures that ensure an orderly decline in the use of fossil fuels, including an end to new approvals of unabated coal-fired power plants.
In his report, Dr Birol stated that fossil fuel companies were responsible for just 1% of global investment in renewable energy in 2022. “The uncomfortable truth that the industry needs to come to terms with is that successful clean energy transitions require much lower demand for oil and gas, which means scaling back oil and gas operations over time – not expanding them. There is no way around this,” he reasoned.
COP28 president, Sultan Al Jaber closed the Conference by saying: “We are what we do, we are not what we say. The UAE Consensus set a new direction and a clear course correction. We must now turn an unprecedented agreement into unprecedented action and results. And now is the time for all stakeholders – state and non-state actors – to step up.”
Italy’s ENI said a strong commitment to renewable energies and energy efficiency was crucial: “For the first time, the final agreement expresses the need to balance emission targets, energy security, access to energy, and competitive development.”
Majid Jafar, CEO at the UAE-based oil and gas company Crescent Petroleum, also welcomed the COP28 wording. “The UAE consensus is a historic step for the world that recognises the importance of achieving the energy trilemma of affordability and availability as well as sustainability,” Jafar commented. “Oil will still be needed to make everything the transition relies upon, from solar panels to wind turbines to electric cars.”
INDUSTRY REACTION
While the UAE consensus may be labelled “the beginning of the end of the fossil fuel era,” the onus will now fall on governments to act on these pledges. Alistair Buchan, COO at Viaro Energy says: “While it was good to see more open debate at COP28, there is still a fundamental gap in the expectation and what is realistically possible.”
Buchan adds that governments are not committing the necessary resources to achieve the accelerated goals in renewables projects. “There appears to be an expectation that industry will bear the weight of this commitment,” he says. “But the industries that could potentially fund this transition are being squeezed in such a manner on a regional basis that it will prevent them from having the ability to take those kinds of investment decisions.”
For example, the UK government has increased the duration of the windfall tax at 75% to 2029, with both Labour and SNP parties speaking out against new exploration projects overall, and Labour proposing to increase the tax to 78%. The windfall tax has already negatively impacted investments in the North Sea, with up to 90% of producers being reported to have decreased their planned spending, meaning the situation could deteriorate further.
This will detract from the UK government’s Net Zero targets when it comes to reducing methane emissions and accelerating energy efficiency progress, as it will not make economic sense for oil and gas sector players to keep investing in the basin and decarbonisation initiatives on the scale needed to achieve these targets.
“It would seem that there is an expectation but there has not been a fully thought through or even budgeted plan for achieving those expectations, at least in the context of the UK but also more broadly speaking,” explains Buchan. “The public needs to be more aware of what the total cost will be to achieve the revised targets and goals.”
TIME TO ACT
In the past three years, Viaro Energy has focused on building a portfolio that mostly consists of gas assets, as it has identified this as the transition fuel for the world economy that will need to be relied upon in the foreseeable future. It’s an approach that France’s TotalEnergies agrees on, with the company commenting: “This agreement reinforces our transition strategy, which aims, on the one hand, to contribute to the construction of a new, more efficient low-carbon energy system based on electricity and renewable energies, in which gas plays a useful role as flexible transition energy.”
Jafar also noted the importance of natural gas replacing coal and liquid fuels for power - and enabling intermittent renewables is the fastest way to reduce emissions from electricity in the developing world. His company is also diversifying its activities across the full energy spectrum, so that it is well positioned to transform its operations in the long term. As necessitated by the advancement of the transition.
To this end, Viaro Energy is in the final stages of completing the acquisition of a small independent company with assets in wind energy and has recently invested in Newcleo, which develops Small Modular Reactors (SMRs), as well as signed a memorandum of understanding to explore the most suitable assets within its portfolio for deploying the SMR technology to reduce the carbon footprint of hydrocarbon production and processing.
Cross-sector collaborations like the one between Viaro Energy and Newcleo will become more common in the energy sector where companies work together to find technical solutions to enable the energy transition.
“There are conversations happening in the sector to address gaps in funding on different levels, where the industry is exploring initiatives and different types of organised advocacy efforts, so I think 2024 will be an exciting time of change across the board,” reveals Buchan.
This is a pivotal moment to decide the future direction of the oil and gas industry. The current fiscal uncertainty could restrict opportunities for investing in the energy security and for contributing to its transition targets. This would have a knock-on effect in the medium and long term, as opportunities with a lead time of between five and seven years could not be developed in time to create a positive impact to the transition.
“The oil and gas industry is in a very good position to positively contribute to both energy security and the transition to carbon neutrality, if allowed to first put in place the building blocks towards that version of the future,” Buchan concludes. “The current regulatory and fiscal regimes are not conducive to this, but the unwelcome environment has led to some positive action across the industry and wider business community, which we hope will set us on the right course. Viaro has plans to take an active role in shaping some of these conversations.