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COP26: Catalyzing the end of oil and gas

Christopher Robinson, Research Director
January 18, 2022

The energy industry has long been the bull's-eye of any discussions around climate change, as the production of energy is responsible for roughly three-quarters of global emissions. The energy transition poses a direct threat to oil and gas companies, while also placing significant challenges on utilities generating electricity and maintaining the grid. While generally there was an increase in engagements at COP26 with industry in a broader sense, such as the decarbonization of steel and cement or with the agriculture industry, energy was front and center in Glasgow. The oil and gas industry alone had more delegates representing it than any single country. In this Insight, we summarize the key points coming out of COP26 for the energy industry.

A push for electric vehicles

The conversation around most parts of climate tech is no longer a matter of "if" but of "when," and electric vehicles (EVs) arguably best embody that change over the last decade. All major automakers have EV programs today, and thus far government incentives have played a key role in dictating which regions see rapid growth in EV sales. The oil and gas industry should be concerned about vehicle electrification eating into demand for petroleum fuels — a key market for the industry that proved not resilient to a drop in demand that arose from COVID. At COP26, two important agreements were signed: one aiming to transition to zero-emission vehicles globally by 2040 and leading markets by 2035, and another pledge to move toward zero-emission trucks and buses by 2040.

While these targets align with many existing targets to ban combustion engines, signatories representing the largest automakers and markets for vehicle sales were conspicuous no-shows, weakening the announcements. Countries failing to sign these agreements include China, Germany, Japan, South Korea, and the U.S. (though specific states and cities within those countries did sign), while the two largest automakers — Toyota and Volkswagen — also failed to sign. Ultimately, whether or not countries sign these declarations doesn’t change the breakneck pace at which new-vehicle sales are electrifying. Despite only minor changes in EV policies, Europe has seen a dramatic uptick in adoption of electric vehicles. Consumer acceptance of EVs continues to grow absent significant changes in national EV policy.

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"Phasing down" coal

To many observers (and maybe some participants), the most disappointing outcome of the conference was a lack of clear action on moving away from coal as an energy source. There was some evidence of progress, as 23 countries (including five of the world’s top-20 coal consumers) signed an agreement to stop permitting and building coal-fired generation plants. However, as with electric vehicles, the world's largest coal consumers, such as China, India, and the U.S., failed to sign. The Glasgow Climate Pact itself was delayed as India pushed, successfully, for language softening the world's transition away from coal to "phase down" instead of "phase out" coal. This more ambiguous term shelters developing countries' access to affordable power as coal is the cheapest form of power generation in some regions, without setting clear deadlines or even an end point for eliminating or reducing reliance on coal. The U.K., which aggressively phased out coal, has seen natural gas costs rise dramatically, in part due to its reliance on natural gas for power generation — a trend that could be replayed elsewhere if a sweeping push to phase out coal were enacted. So, while coal is likely to continue to be used heavily in China and India, where other fossil fuels are less available, it also will continue to fall out of favor in Europe and North America due to a combination of high prices relative to other energy sources and emissions regulations.

The end of exploration is in sight

Decarbonization is a one-way train; as the industry charts a course to reduce emissions, we can't expect any regions to walk back regulations around emissions. The timelines will only become shorter and the target deadlines closer. For the oil and gas industry, the part of the value chain that will be impacted first is exploration — looking for new oil and gas deposits. In what now likely feels like a familiar refrain, a handful of countries that form a small portion of the oil and gas industry formed the Beyond Oil and Gas Alliance, which focuses on reducing emissions by limiting exploration activities. The clock is ticking for the first oil and gas supermajor to pull up the drills and announce an end to exploration activities, which would be a major signpost in the energy transition. Even before that happens, service companies catering to exploration activities will feel impacts from reduced demand and must urgently pursue alternative business models like providing services to renewables companies.

The Lux Take

COP26's main goal was to secure enough commitments to reach the new primary target of limiting global average temperature rise to 1.5 °C. Putting aside debates about whether it was successful in doing so, it clearly pressed the accelerator on the energy transition — and the oil and gas industry will be first to feel its effects. Two clear opportunities exist. First, invest in areas where solutions aren’t available. The weakening language on coal was ultimately due to concern that without it, India's energy security needs couldn't be met. Additionally, adaptation solutions, which make communities more resilient to the impacts of climate change, were a focal point at the conference. Second, the push for 1.5 °C as the primary maximum global temperature rise forces strategic planning changes. It puts a greater emphasis on carbon capture solutions, while teams should adopt planning scenarios that focus on the most aggressive decarbonization scenarios. As noted above, the timelines for decarbonization policy will only get more aggressive. Ultimately, most of the real policy change will occur after the event as countries prepare more aggressive nationally determined contributions, but oil and gas companies need to take action today.

This blog post is part of a series focusing on key decisions made at COP26 and their impacts on corporate innovation and sustainability. Check back tomorrow for the next post in the series!

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