Oil, gas and thermal coal face varying challenges and degrees of risk in a climate-constrained future. This report looks at each of these fuels in turn with a focus on the upstream end of the value chain, comparing potential supply to a selection of different demand scenarios that result in varying global warming outcomes.

The three scenarios used are drawn from those published annually by the International Energy Agency (IEA). These are the Beyond 2 Degrees Scenario (B2DS, aligned with a 1.75°C global warming outcome); the Sustainable Development Scenario (SDS, aligned with 2°C); and the New Policies Scenario (NPS, aligned with 2.7°C). Each of the scenarios assumes a 50% probability of success in achieving its respective level of warming.

Oil

Meeting demand in any of the three scenarios will require significant investment in oil developments. Capital expenditure (capex) on existing and new projects in the period 2018-2025 amounts to $2tr in the B2DS, $2.6t in the SDS and $3.3tr in the NPs.

Material investment in new oil projects is required even in low demand scenarios: $0.9tr in the B2DS and $1.2tr in the SDS. However, given the multitude of project options available, they also carry the greatest risk. Nearly a third of investment dollars in new projects that go ahead in the NPS don’t fit in the SDS, and over half of potential capex is surplus to requirements in the B2DS.

Natural gas

Natural gas is frequently touted as a ‘bridge’ fuel as it can help put economies on the path to decarbonisation. As such, there is less variation in demand between scenarios for gas than other fossil fuels, but each will require significant investment. Capital expenditure in the period 2018-2025 amounts to $1.2tr in the B2DS, $1.3tr in the SDS and $1.4tr in the NPS.

Gas is proportionately more reliant on new investment than other fuels, but not all projects options go ahead. Capital investment in new gas projects amounts to $0.8tr in the B2DS and $0.9tr in the SDS (2018-2025). While there is less of a gap to NPS investment than in other fuels (19% of NPS investment doesn’t fit in B2DS, and 7% in the SDS), there is a substantial overhang of project options available beyond NPS demand that should not be ignored.

Thermal coal

Thermal coal is generally accepted to be the most carbon-intensive fuel on average. As such, in the SDS and B2DS, thermal coal use declines CAGRs of -3.3% and -5.2% respectively. The absolute capex dollars are low compared to oil and gas, with $63bn and $75bn of capex invested in thermal coal projects in the B2DS and SDS respectively in the period 2018-2025. Further, no new thermal coal mines go ahead in the US or China, or to supply the international seaborne export market in either SDS or B2DS.

It is important to note that assumptions of future Indian thermal coal imports carry considerable uncertainty and could dry up entirely within the next decade under the B2DS and SDS.

1. The NPS is the central scenario published in the World Energy Outlook. It is “designed to show where existing policies, as well as announced policy intentions, might lead the energy sector”. “It incorporates not just the policies and measures that governments around the world have already put in place, but also the likely effects of announced policies, as expressed in official targets or plans."
2. The SDS replaces the previous 450 Scenario in the 2017 World Energy Outlook as the main decarbonisation scenario. It is “consistent with the direction needed to achieve the objectives of the Paris Agreement”, and further incorporates ambitions relating to universal energy access and improvements in air quality.
3. The B2DS was published for the first time in the 2017 Energy Technology Perspectives. Like the SDS, it is driven by outcomes rather
   than inputs; that is, the demand pathway results from the ultimate goal, in this case limiting global warming to 1.75°C by 2100, “the midpoint of the Paris Agreement’s ambition range.”
4. Thermal coal is dominated by state-controlled domestic supply (Chinese and to a lesser degree Indian). However nearly half of the capex of private sector companies falls into the gap between NPS and B2DS demand levels.
5. Coal has an outsized influence on CO2 emissions, producing around 50% CO2 per unit of energy more than oil and over 60% more than gas.
6. For oil & gas, it is clear that private sector companies and part-listed NOCs have the greatest exposure to the tranches of capex/production lying in the higher risk categories. State-controlled entities that aren’t publicly listed account for just 12% of oil & gas capex in the gap between B2DS and NPS. Oil & gas demand destruction is therefore disproportionately an issue for private investors in capex terms, despite the majority of global reserves being held by national oil companies.