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Fossil fuel company valuations set to take a hit

Crude oil drips from a well Taqa Kurdistan oil Reuters
Capital expenditure stood at AED5.1 billion for 2023, 34 percent higher year on year
  • IEA predicts 60% drop in value
  • Peak oil and gas demand by 2030
  • Fossil fuel revenues $3.5trn a year

The International Energy Agency (IEA) has urged the oil and gas industry to actively participate in the fight against climate change by investing more in clean energy, despite the fact the declining demand for fossil fuels will lead company valuations to decrease by up to 60 percent.

The IEA predicts that global demand for oil and gas will peak by 2030.

However, if governments successfully pursue a 1.5C trajectory and emissions from the global energy sector reach net zero by mid-century, the Paris-based agency believes that oil and gas use will fall by 75 percent by 2050. 

If all national energy and climate change goals are reached, the IEA says the current valuation of private fossil fuel companies could fall by 25 percent from $6 trillion today.

The drop will be much steeper, at up to 60 percent, if the world gets on track to limit global warming to 1.5C.

Since 2018, the annual revenues generated by the oil and gas industry have averaged close to $3.5 trillion. 

But as the net zero transition accelerates, the IEA warns that oil and gas is set to become a less profitable and more risky business.

In 2040, more than 7 million barrels per day of oil production will be pushed out of operation before the end of its technical lifetime in a 1.5C scenario, said the IEA. 

The IEA, an OECD-funded energy watchdog, has published detailed directives for the sector to achieve a net zero ahead of the Cop28 climate summit, which starts in Dubai next week.

“To escape the narrowing walls of their businesses based on traditional fuels, producers need to embrace the clean energy economy,” said the IEA. 

Yet the hydrocarbons sector, which provides more than half of the global energy supply and employs nearly 12 million people, has played a marginal role in the energy transition.

Investment effort

The IEA said that while global clean energy investments rose to $1.8 trillion, the oil and gas industry accounts for only 1 percent of the figure, and 60 percent of that comes from just four companies.

In the report, the IEA estimates that while the industry invests some $800 billion annually in fossil fuels, only about 2.5 percent of the capital spent goes towards clean energy.

That should rise to 50 percent to get the industry on track of 1.5 °C.

“With the world suffering the impacts of a worsening climate crisis, continuing with business as usual is neither socially nor environmentally responsible,” said Fatih Birol, IEA executive director.

The IEA believes the sector can make major investment efforts in technologies such as wind, hydrogen, biofuels, biomethane, carbon capture and storage, and EV charging.

Speaking at the presentation of the report on Thursday, Birol said: “Cop28 will be a moment of truth for the oil and gas industry. It will show if the sector will be a partner of climate change or not.”

About 30 percent of the energy consumed in a net zero energy system in 2050 comes from low-emissions fuels and technologies that could benefit from the skills and resources of the oil and gas industry.

Yet companies that have announced a target to diversify their activities into clean energy account for just under one-fifth of current oil and gas production.

“The IEA report specifically notes that all sectors must be part of the solution,” Cop28 chief executive officer Adnan Amin said.

“I have consistently called on oil and gas to aim for the highest possible ambitions and deliver urgent action through decarbonisation. We believe the oil and gas industry can do more.”

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