Oil and gas industry carbon reduction path

In the opening article of our series "China Accelerating towards Carbon Neutrality", we imagined a carbon-neutral world in 2050 dominated by new energy elements such as electric vehicles, hydrogen steelmaking, photovoltaic power generation, and green energy storage. Achieving this vision also means that the world needs to reduce net man-made carbon dioxide emissions by about 45% by 2030 compared with 2010. To achieve "net zero emissions" by 2050. In the face of the dual challenges of target and time, the road to carbon neutral transition needs to be started. While countries are competing to carry out specific research and implementation work, China also took the lead in proposing the goal of "carbon peak and carbon neutrality" in the general debate of the seventy-fifth session of the United Nations General Assembly. The United Nations Sustainable Development Goal 13 "Climate action" is also one of McKinsey's social responsibility priorities in China. At this key juncture, McKinsey officially launched China's large-scale carbon neutral transition research project in China. With the help of McKinsey's rich experience in global sustainable development research, combined with comprehensive understanding and profound insight into Chinese society, industries and enterprises, Mobilize the knowledge of more than 100 people around the world to carry out research on carbon neutral transition trends, countermeasures and technologies across major industrial sectors, hoping to make a small contribution to China's early achievement of carbon neutrality goals.

As the fifth article in this series, this paper will continue to study the carbon neutral transition using the oil and gas industry as a sample. Subsequently, we will publish a series of articles covering many topics such as power industry carbon emission reduction path analysis, emerging technology discussion, investment cost forecast, international practice sharing, and explore the latest trends of traditional carbon emission reduction process innovation, carbon capture utilization and storage (CCUS), hydrogen energy and other new carbon emission reduction technologies. In the process of continuing to promote this research, we are very welcome experts from all walks of life colleagues, you can put forward valuable comments in the message area, you can also directly contact the team. We look forward to working with all sectors of society to advance the path of carbon neutral transition in a green China.

The need for carbon reduction in China's oil and gas industry

As a traditional fossil energy source, oil and natural gas have always been "big" carbon emissions. International Energy Agency (IEA) statistics show that in 2019, global carbon dioxide emissions were 33 billion tons, mainly from the use of primary energy sources such as coal, oil and natural gas, of which oil and natural gas carbon emissions reached 18.2 billion tons, accounting for 55%. The entire value chain of the oil and gas industry, from extraction, transportation, storage to end-use applications, generates a large amount of carbon emissions, accounting for more than 40% of the global total greenhouse gas emissions - of which production stage emissions account for 20%, and use stage emissions account for 80%. To achieve the goal of carbon neutrality, the oil and gas industry must be the main emission reduction.

In the long term, global electrification and renewable energy will further reduce oil and gas demand (see Figure 2). According to McKinsey Global analysis, the share of oil and gas in total energy demand would need to fall from 55 per cent today to 15 per cent by 2050 under the 1.5C target scenario, which would have a significant impact on the oil and gas sector. The picture is similar in China, where both the National Energy Institute and McKinsey analysis say oil demand is expected to fall by 70-85% by 2050. As a result, the energy transition has become an irreversible trend and a race to win, and the oil and gas industry needs to have the courage to break the rock and seek a late force to leverage the transition in the context of carbon neutrality.

In addition, capital markets will put pressure on oil and gas companies to reduce emissions. Investors are increasingly sensitive to environmental issues, and there have been cases in foreign countries where shareholders have asked oil giants to strengthen the disclosure of environmental and climate-related data and risks in ways such as rights protection and divestment, and to develop targeted energy transformation and emission reduction plans. In 2018, the Global Sustainable Investment Alliance (GSIA) survey showed that sustainable investment assets in the world's five largest markets reached $30.7 trillion, accounting for one-third of total assets under management. As of 2019, more than 1,000 investment funds with a total asset management scale of $12 trillion have announced varying degrees of divestment from the traditional fossil energy industry. In China, 32 banks, funds and insurance companies have joined the United Nations Principles for Responsible Investment (PRI), which requires that environmental, social and governance (ESG) factors be taken into account in investment processes and that climate change-related risks be disclosed in a timely manner.