How Is Expanding Oil and Gas Production Consistent with Addressing Climate Change?

Last month the International Energy Agency (IEA) reported that the amount of carbon dioxide emitted for each unit of global energy use was essentially unchanged between 1990 and 2010, despite the implementation of global climate agreements and the expenditure of hundreds of billions of dollars for renewable energy projects and incentives. Just a few days earlier, the US Environmental Protection Agency released its annual inventory of US greenhouse gas (GHG) emissions, showing a 1.6% reduction from 2010 to 2011. US emissions were up 8% since 1990 but have fallen 5% since 2000 and nearly 8% from their pre-recession peak in 2007. Much of the US's recent divergence from the global trend is attributable to the displacement of coal from the power sector by shale gas.

As unwelcome as the IEA's finding was, it is unlikely to have shocked anyone who understands the scale of global energy systems and the continued reliance of many developed and developing countries on coal for power generation. The transition to lower-carbon energy systems is underway, as reflected in the details of the IEA report. However, it will take additional decades to reach targets consistent with limiting the projected global temperature increase to 2° C, which the IEA indicates would require a 60% reduction in the carbon intensity of energy by 2050 from current levels. That implies that energy companies still need to develop additional oil and gas resources in the interim, in order to support the economic activity that--among other things--will be necessary to fund the recommended investments in cleaner energy and energy efficiency.

At first glance that might seem paradoxical. After all, oil and gas account for 55% of US GHG emissions and around 40% of global emissions today. However, when gas displaces a higher-emitting fuel like coal, global emissions fall. This has been a matter of some controversy, due to uncertainty about the contribution of fugitive methane emissions from shale gas wells. Yet the estimates in the EPA inventory indicate that methane emissions from US natural gas systems actually fell by 9% between 2005 and 2011, even though US natural gas production grew by 27% over that interval, with shale gas output increasing by 950%. A new analysis from ExxonMobil indicates that on a lifecycle basis, replacing coal with shale gas in power generation reduces GHG emissions by an average of 53%, while also reducing overall freshwater consumption by half.

Assessing the role of oil in the decarbonization of global energy is more complicated. Oil exploration and development must continue, even in a static or eventually shrinking market, because reserves that have been produced must be replaced, by either new discoveries or further development of existing fields. Simply allowing today's oil fields to decline and hoping to make up their energy contribution from other sources would be very risky, particularly for the transportation sector with its extremely high reliance on oil. Moreover, four-fifths of the emissions from petroleum occur during end-use combustion. That means that most emission reductions from petroleum must come about through reduced demand, via some combination of increased fuel efficiency, fuel substitution--particularly in those markets where oil is still used in electricity generation--and/or reductions in transportation metrics such as vehicle miles traveled.

In a recent Bloomberg op-ed, Michael Levi of the Council on Foreign Relations considered the impact of increasing US oil production from the standpoint of both the "social cost of carbon" and its incremental contribution to global emissions. He concluded that even at a high estimated environmental cost, the climate impact of an extra barrel of US oil would come in under $10 per barrel, well below its economic value. He also concluded that significantly higher US oil production would add little to global emissions. Its impact would be even smaller if OPEC producers reduced output to try to preserve high oil prices. Mr. Levi addressed that scenario in an earlier op-ed.

Last month's IEA report concluded that the world is not yet on track to reduce emissions by enough to limit temperature increases to 2° C, and more must be done. Yet even if we were on that track, the IEA forecasts upon which the report was based suggest that combined oil and gas consumption in 2035 would still be about 2% higher in 2035 than in 2010, with a bit of a shift from oil to gas. On today's trajectory, both oil and gas will grow, even as renewable energy and energy efficiency expand significantly. On either basis, an all-of-the-above approach to energy encompassing oil and gas, along with renewables, carbon sequestration, nuclear power and efficiency is fully consistent with addressing climate change.

A slightly different version of this posting was previously published on the website of Pacific Energy Development Corporation.