Climate Risks in the Oil and Gas Sector

Unabated combustion of all the present fossil fuel reserves will emit three times more carbon dioxide (CO2 ) emissions than the remaining carbon budget for 2 C of global warming, pushing temperatures to potentially catastrophic levels (IEA, 2020). As the world moves towards the goal of net-zero emissions by 2050, the oil & gas sectors substantial contribution to global emissions means it has a vital part to play in the decarbonisation of the global economy. The world is already transitioning towards a low-carbon future. As this process accelerates, the oil & gas sector will have to seriously consider what role, if any, fossil fuels can justifiably play in such a scenario. The sector faces increasing pressure to reduce its global greenhouse gas (GHG) emissions and to evaluate the risks to its existing business model from the energy transition (IEA, 2020). These risks vary widely, ranging from increased policy pressures through to the implementation of carbon prices. Technological advances and decreasing costs for renewable energy will also impact the market share of the oil & gas sector. According to the latest calculation, 60% of global oil and gas reserves will need to remain unextracted by 2050 to meet the 1.5 C target (Welsby et al., 2021). This could see over US$1 trillion of oil & gas assets becoming stranded (Carbon Tracker, 2022). Without major changes to their current business models, companies in the sector are consequently expected to rapidly lose market value. The oil & gas sectors vulnerability to physical risks emphasises the urgent need to address climate change. The sectors reserves are widely distributed and are often located in regions that are subject to extreme climatic conditions. Extreme weather events predicted to become more frequent and severe, essential operations could be threatened and sectoral performance could consequently be affected. Below we explore in depth the key physical and transition risks faced by the oil & gas sector.