Oil and gas in the age of climate change

Rising sea levels, wildfires, heat waves and extreme weather events are already wreaking havoc across the globe and can cost the global economy hundreds of billions of dollars by collapsing infrastructure, reduced crop yields, health problems and lost labor. When most people think about climate change, they tend to think of the oil and gas industry as being most responsible because of their high emissions of carbon dioxide and greenhouse gases. Yet few stop to consider that the ecological impacts that are hurting communities are also having an impact on the fossil fuel industry.

Climate change is making it increasingly expensive for oil and gas companies to operate. In fact, supply threats to the oil and gas industry related to climate change are already beginning to emerge, with more than 600 billion barrels of commercially recoverable oil and gas reserves worldwide (40% of total reserves) at high or extreme risk. According to data published by VeriskMaplecroft, a UK-based global risk and strategy consultancy, climate-related events have disrupted the flow of oil to global markets, with the impact particularly severe in Saudi Arabia, Iraq and Nigeria.

This news is worrying given the growing number of signals that oil supplies are peaking. A growing number of U.S. industry executives expect the U.S. economy to grow. With rising costs and limited supplies of labor and equipment constraining U.S. shale producers' efforts to quickly ramp up output, expectations for a renewed shale boom are rapidly being dashed.

Thankfully, the oil and gas industry is working to mitigate climate change.

Opportunities for carbon capture

While trees and other plants naturally remove carbon dioxide from the atmosphere, most climate change experts now agree that we don't have the ability to plant enough and grow fast enough to limit the damage.

Carbon capture is a proposed technology to limit global warming and climate change. Both the Intergovernmental Panel on Climate Change (IPCC) and the International Energy Agency (IEA) have identified carbon capture, utilization, and storage (CCUS) technology as an ideal solution for many industries that struggle to reduce emissions, such as aviation, hydrogen production, and cement from fossil fuels.

Unfortunately, when it comes to investing in CCUS, the world is woefully short: According to data published by the International Energy Agency (IEA), only 35 commercial facilities worldwide apply CCUS to industrial processes, fuel conversion, and power generation, with a total annual capture capacity of about 4.5 billion tons of CO2. However, McKinsey & Company estimates that global CCUS CO2 uptake needs to increase 120-fold, to at least 4.2 gigatons of CO2 per year, to meet the net zero emissions commitment by 2050.

Nevertheless, the oil majors have begun to act with great fanfare, though ultimately more to extend the life of oil and gas fields than to mitigate the effects of climate change.

Over the past few years, oil majors have begun investing heavily in CCUS, which many see as just a way for oil majors to extend the life of oil fields because the captured CO2 is used in enhanced oil recovery (EOR).

Two weeks ago, ExxonMobil CEO Darren Woods told investors that the company's low-carbon business has the potential to surpass its traditional oil and gas business within a decade and generate hundreds of billions of dollars in revenue. Woods outlined a forecast that the company could reach billions of dollars in revenue over the next five years. Tens of billions of dollars in 5 to 10 years, hundreds of billions of dollars after the initial 10 years of growth. Woods, however, said whether ExxonMobil can meet its goals will depend on regulatory and policy support for carbon pricing and the cost of reducing greenhouse gas emissions, among other changes.

Exxonmobil believes that by entering into predictable, long-term contracts with customers aiming to reduce their own carbon footprint, this will lead to "more stability or less cyclicality" and less vulnerability to fluctuations in commodity prices. Exxonmobil, for example, recently signed a long-term contract with industrial gases company Linde for carbon dioxide emissions related to Linde's planned Clean hydrogen project in Beaumont, Texas. Exxonmobil will transport and permanently store up to 2.2 million tons of CO2 per year from Linde's plant. Back in February, Linde unveiled a comprehensive $1.8 billion plan that would include a self-thermal reforming unit with carbon capture and a large air separation plant to supply clean hydrogen and nitrogen.

Schlumberger New Energy

In February, oilfield services giant Schlumberger discussed its new Schlumberger New Energy with Bloomberg New Energy Finance (BNEF). According to Gavin Rennick, president of Schlumberger New Energy, New Energy is expected to reach $3 billion in revenue by the end of this decade and at least $10 billion by the end of the next decade. Schlumberger will focus on five key market segments, including carbon emission solutions, hydrogen, geothermal and geothermal energy, energy storage, and critically important minerals, with a minimum target market of $10 billion for each segment.

Of these segments, carbon capture, utilization and storage (CCUS) is the fastest growing opportunity, thanks to a big boost from the US Inflation Reduction Act (IRA), Rennick said.

Occidental Petroleum Corporation (Oxy) is seen as a strong contender for the CCUS project

To achieve climate goals, McKinsey & Company proposes the creation of CCUS centers, essentially a cluster of facilities that share the same infrastructure for the transportation, storage, or utilization of carbon dioxide. Currently, there are only 15 CCUS centers worldwide; McKinsey estimates that as many as 700 CCUS centers could be established worldwide, which would be located at or near potential CO2 storage sites and enhanced oil and gas recovery sites.

The U.S. government currently supports four CCUS centers, with Occidental Petroleum Corp. 's (Oxy) two major CCUS projects seen as strong contenders. The U.S. government will provide three levels of funding, from $3 million in the initial feasibility study phase, to $12.5 million in the engineering design study phase, and up to $500 million for projects nearing completion of the procurement, construction and operation phase.

Swiss startup Climeworks has raised more than $800 million to date and is one of the most active CCUS companies in the world to date.

McKinsey & Company estimates that the world will need to invest $120 billion to $150 billion annually in CCUS technologies by 2035 to achieve net zero emissions. In order to scale this technology effectively, McKinsey notes that there is a need for greater coordination across the value chain. Thankfully, as demand for fossil fuels cools, the existing big energy giants seem keen to position themselves in what could be a multi-trillion dollar industry.