We expect the upcoming COP28 summit to focus on operational emissions – and not those that relate to oil and gas products – despite the latter having a significant impact on emissions and the United Nations' (UN) climate goals. So a big question looms: Can alternative technologies aid a credible oil and gas transition?

The summit will be hosted by the fossil-fuel rich United Arab Emirates, and chaired by President Designate, Sultan Al Jaber, the Chief Executive Officer of Abu Dhabi National Oil Company. Al Jaber has highlighted that a phase-down of fossil fuels will be critical (notably, not a phase-out) and plans to announce a Global Decarbonization Alliance for the energy sector. We expect the summit to focus on operational emissions and not those that relate to oil and gas products – despite the latter having a significant impact on emissions and the United Nations' (UN) climate goals. So a big question looms over COP: can alternative technologies aid a credible oil and gas transition?

Reducing the demand for oil and gas

If we are going to meet the UN’s target of 1.5°C warming by 2050, then we need to reduce the demand for oil and gas. As customers shift to cleaner alternatives, energy producers need to embrace competing technologies if they are to maintain their market share.

Many oil and gas companies are already addressing operational emissions like methane leakage and flaring. But a viable transition plan also needs to address how oil and gas products are used – such as in long-haul transportation, chemicals and buildings. Approximately 75% of oil and gas emissions come from the use of fossil-fuel products. For example, chart 1 shows that road transport (specifically passenger vehicles) accounts for over a quarter of the demand on one barrel of oil.

Options for the oil and gas industry

Options for the oil and gas industry

The net-zero transition is underway in the power and road-transport sectors, but progress is lagging in the industrial and energy sectors. While there is no silver bullet to solve this, there are four technologies that will help the energy sector to move away from oil and gas production.

  • 1.       Carbon capture and storage

    Carbon capture and storage (CCS) is a process where carbon dioxide (CO2) is captured from industrial processes or power generation and then stored underground. This means that CO2 is not released into the atmosphere. Investing in improving the scope and capabilities of CCS is essential, and it provides opportunities for the energy sector. But while there is growth potential and suitable locations to expand CCS, it also has limitations. For example, CCS can only be used where there are high concentrations of CO2 emissions (such as in industrial clusters). And the industries must be close to CO2 storage facilities to reduce transportation. CCS can’t be used to capture the emissions generated from transport (which accounts for more than 50% of the demand for oil and gas) or from buildings.

  • 1.       Direct electrification

    Direct electrification refers to oil and gas companies producing electricity, rather than producing fossil fuels. Oil and gas companies achieved record profits in 2022, while the renewable power sector struggled with burgeoning costs. This has meant that some oil and gas firms have reduced their focus on renewable assets. This backdrop has weakened the economic case for oil and gas firms to transition into solar and wind markets.

    In our view, the oil and gas industry must innovate and generate electricity to create competitive returns.

  • 1.       Hydrogen

    Hydrogen can provide an alternative molecular-fuel source for long-haul transport and chemical processes in the industrial sector. But, hydrogen production currently equates to just 3% of fossil fuel production. That said, hydrogen is still carbon intensive and derived from natural gas (known as grey hydrogen). It is not derived from renewables (known as green hydrogen or low-carbon hydrogen) or from CCS (known as blue hydrogen).

    Most of the current pipeline of low-carbon hydrogen is still intended for ammonia production, not new markets, such as long-haul transport. Hydrogen use in iron and steel production is likely to be a growth area. But for heating and transportation, hydrogen will face fierce competition with direct electrification.

    In addition, there are many competitors in the hydrogen market. These include electricity utilities, construction and engineering firms, and some industrial companies. This means that oil and gas firms are involved in only 19% of new projects. Hydrogen has an important role to play in the transition, but investors will expect innovation into new market segments.

  • 1.       Biofuels

    Biofuels are made from biomass, such as animal waste or plant material. Biodiesel, for example, can provide a solution to mitigate emissions in trucking, as well as marine and aviation transport. However, sustainable feedstock supply is a major limitation to growth. At the moment, approximately 161 billion litres of biofuel are needed to produce about 1% of the energy from oil and gas. However, this is dependent on there being 7-8% of agricultural land available for creating biofuels. In some areas, this presents challenges in terms of space and scalability, given competition for land from traditional agriculture. Using more land for biofuels may also affect food prices.

Final thoughts

This year's COP summit must tackle technology and the policies that will help to transform the energy sector. A president designate from within the sector is a unique opportunity to see concrete progress for the phase-out (or at least a phase-down) of unabated fossil fuels. To address this, he must focus on reducing demand for oil and gas and set targets for reducing oil and gas products.

As electrification makes up a greater proportion of the energy system, oil and gas companies are at risk of losing market share. Investors will be looking for credible transition plans that explicitly address that risk. They will be looking for clear strategies in these four technologies to help reduce emissions. This would also support the UN’s long-term net-zero ambition.