Executive viewpoint

Over the next three decades, the race to evolve the global energy market into a broader ecosystem of cleaner, greener energy producers and suppliers must intensify. Without greater efforts to decarbonize, we envisage a future in which the world misses the 2°C limit for global warming under the Paris Agreement.

DNV GL’s 2020 Energy Transition Outlook predicts the current 1.5°C carbon budget will be exhausted in 2028, with the 2°C budget exhausted in 2051. This points to a 2.3°C warming of the planet by 2100, compared to pre-industrial levels.

While rapid electrification of energy and growth in renewables will significantly reduce emissions in coming decades, our study shows that fossil fuels will still supply half of the world’s energy in 2050. Where there is demand for oil and gas, the industry will have a future, but it needs to be more diverse and dynamic.

Oil demand slides. The Outlook forecasts global primary oil demand will fall 13% in 2020, reaching a level not seen since the early 2000s. It will rebound somewhat to 2023, before declining gradually to half of its 2018 level (in real terms) by 2050. The pace and nature of that change differs from region to region. For instance, there will be increased demand on the Indian subcontinent, while in Europe, North America and OECD Pacific, there will be a rapid drop. Just two years ago, these areas accounted for 43% of oil demand but, but by 2050, only a fifth (20%).

Notably, the impact of Covid-19 restrictions on transport sector oil demand is clear, falling 17% from 2019’s level.

Passenger vehicle electrification will lead the way—half of all passenger vehicles sold in 2032 will be electric. This is followed by natural gas, biogas, and later hydrogen, which should increasingly supply larger forms of road transport and shipping.

Hydrocarbon decarbonizer. So, will the oil and gas industry become a fossil like the fuel it seeks? It must adapt now to survive, thrive, and play its part in positively addressing climate change.

DNV GL predicts that greenhouse gas levels will remain stubbornly high until the mid-2030s and that deep decarbonization of the world’s energy system is still 15 years away. Intentions to reduce it are outpacing action.

The technologies needed to accelerate the energy transition are available today, but they need to scale, and sooner. Greater use of renewables and battery storage will enable further electrification of sectors such as transport, manufacturing and heating in the home, while natural gas, which will be the world’s largest energy source by mid-century, has yet to see the technologies to decarbonize take off.

After 2035, hydrogen and carbon capture and storage (CCS) will become catalysts for a lower-carbon future. This could transform the O&G industry into the “decarbonizer” of hydrocarbons and the world’s supplier of CCS. Rather than lag behind in altering the climate, it could become an essential contributor to realizing international net-zero ambitions.

The problem is that CCS won’t move down the cost learning curve unless the industry significantly increases the technology’s rollout. We don’t foresee this happening until costs have come down or a carbon price exceeds the technology price. If a major country or region sets a carbon price high enough to make large-scale CCS a reality, others will follow. Hydrogen faces a similar conundrum. It relies on CCS for blue hydrogen, and on the falling cost of electrolyzers to produce green hydrogen at scale. It will, according to our model, be at least 20 years until a hydrogen economy becomes reality.

Decarbonized and green gasses would have a bright future following such a transformation, with hydrogen and CCS complementing renewable electricity, battery technology and alternative low-carbon fuels. Crucially, there will be several, interrelated energy transitions to 2050. These include conversions from fossil fuels to renewables, from coal and oil to natural gas, and from fossil fuels to decarbonized gas.

Policy and partnerships will power the energy mix. Working together to make hydrogen and CCS safe, effective, and commercially viable will give the O&G industry the certainty it needs to manage new risks and accelerate its transformation toward a low-carbon future.

Public energy policies—at all levels—are key, not just in setting out the roadmap, but also in deciding how quickly that journey can be accelerated. From the Paris Agreement to the local level, some of these will affect demand for existing O&G products, and drive companies to reduce their carbon footprint; others may completely transform the sector.

North America’s patchwork of policy targets and incentives at state and federal levels will drive decarbonization through increases in renewables and electrification, and by lowering the carbon intensity of fuels. The region is also investing in, and incentivizing uptake of, CCS and, to a lesser degree, hydrogen. However, policies are not set to address emissions throughout the O&G value chain, including consumption, to the same degree as in Europe.

Net-zero policies in Europe; China’s direct interventions; and incentives in North America are needed to create the impetus to begin scaling clean production of hydrogen and other low-carbon fuels. It’s a balancing act of supply, security and sustainability.

Ultimately, a bright gas future requires quicker transformation of the O&G industry. While reducing emissions and moving to green gas will help to significantly reduce emissions in our forecast, it comes too late to have a significant impact in meeting the Paris Agreement targets. As pressure mounts to decarbonize, such a delay may challenge the O&G industry’s license to operate.