IEA Energy Outlook

We reference two energy scenarios from the International Energy Agency (IEA) 2022 World Energy Outlook that illustrate future demand and track the Paris Agreement goal of reducing global GHG emissions to limit the global temperature increase to 2 degrees Celsius while pursuing efforts to limit warming to 1.5 degrees. These scenarios reflect changes in total energy demand in 2050 as compared to 2021: 

  • Announced Pledges: Total energy demand increases by just over 1%. 
  • Net Zero Emissions: Total energy demand declines by more than 14%. 

Total demand stays flat compared to 2021 in the Announced Pledges scenario but declines in the Net-Zero Emissions scenario. Demand for natural gas and oil has different outcomes across the IEA scenarios. 

chart for IEA World energyEven in the Net-Zero Emissions scenario, 2050 oil demand remains at 19 MMBBL per day and natural gas at 20 MMBOE/day and, despite a reallocation of capital to renewables, significant investment in upstream natural gas and oil is still required. IEA estimates this to average $394 billion each year from 2022 to 2050 globally in the Announced Pledges scenario and $255 billion per year from 2022 to 2050 in the Net-Zero Emissions scenario, a total of approximately $11.4 trillion globally and $7.4 trillion respectively for the period 2022 to 2050. 

Achieving the IEA’s Announced Pledges Scenario (APS; limiting temperature increase to 1.7 degrees Celsius) requires significant progress on several fronts:1 

  • Improving energy efficiency of power generation, transportation and industrial processes.  
  • Reducing emissions from fossil fuels or capturing and storing or utilizing those emissions. 
  • Increasing clean energy electricity, innovation and investment. 

The APS requires achieving all major national emissions reduction targets made by governments around the world, as well as meeting all country-level targets in full for access to energy/electricity. This includes supporting policies that could reduce the need for coal-fired capacity or even halt new coal investment through cost-effective, low-emissions electricity deployment. Even with these changes and requirements, APS will still require flexibility to use existing infrastructure while new options are being developed to replicate natural gas services. Such flexibility requirements in the power sector may be met with low-carbon hydrogen and hydrogen-based fuels. Oil and gas resources will still be needed in the APS but will be consolidated to include a smaller number of low-cost, responsible producers. Changes in the energy system will take time, as energy infrastructure components have long asset lives and require cross-sector, system-wide changes and retrofits to meet new specifications.  

The Net-Zero Emissions Scenario provides useful hypothetical data to inform the decisions to be made by policymakers, who have the greatest scope to move the world closer to its climate goals. The assumptions used in the scenario are challenging. For example: 

  • Reducing energy demand by almost 14% from 2021 levels would require reverting energy demand back to 2010 levels, while supporting 3 billion more people with three times the economic activity.  
  • Increasing the share of renewable electricity supply to the level assumed in 2050 would require annual capacity additions four times the record capacity achieved in 2020. The electricity market in 2050 is assumed to be 150% greater than the market in 2021, the equivalent of adding an electricity market the size of India every year between now and then.  
  • Of 400 milestones needed to achieve net-zero emissions described in the Net-Zero Emissions Scenario, 85% are demand-side actions that would require government intervention. It will continue to be important for policymakers to address the imperatives of energy security and affordability alongside climate risk. 

These widely varying factors are the reason scenario planning is important. There is not just one pathway to a low-carbon future; there are numerous ways in which government action and technology development could interact with consumer behavior to bring about a low-carbon future. Performance on climate-related risk and opportunity is driven by planning across a range of widely varying scenarios and having the financial strength and asset flexibility to adapt to different outcomes. 

Scenario Planning at ConocoPhillips

Surmont workers

The scenarios we have developed describe possible pathways leading to a particular outcome. Scenarios are hypothetical constructs and are not predictions or forecasts of what we think is going to happen; they are used to illustrate which factors drive future developments. We use scenarios in our strategic planning process to: 

  • Gain better understanding of external factors that impact our business to assist in the identification of major risks and opportunities and inform mitigating actions. 
  • Identify leading indicators and trends. 
  • Test the robustness of our strategy across different business environments. 
  • Communicate risks appropriately. 
  • Inform how we position our business, as technologies and markets evolve, to capitalize on opportunities that meet risk and return criteria. 

Using scenarios enables us to understand a range of risks around potential commodity market prices associated with various GHG emissions reduction scenarios. To assist our capital allocation decisions, we can test our current portfolio of assets and investment opportunities against these future possibilities and identify where strengths and weaknesses may exist. 

We use a range of analyses, input and information when developing our strategy. The detail of our scenarios gives insight into the analysis we use to inform our strategic decision making and reinforces to stakeholders and shareholders that we are both preparing for reductions in GHG emissions consistent with the Paris Climate Agreement and developing resilient strategies that reflect the complex and uncertain range of energy futures. 

We use four main energy transition scenarios in our global energy model: Pre-Pandemic Trend, Moderate Transition, Accelerated Transition and 1.5 Net Zero. The four scenarios incorporate a wide range of possible outcomes for energy and carbon emissions.  

While these scenarios extend to 2050, well beyond our near-term operational planning period, they give insights on trends that could have an implication for near- and medium-term decisions and enable choices on the creation or preservation of future options. 

Each scenario models the full energy system including coal, oil, natural gas, solar, wind and nuclear, as well as their related GHG emissions and pricing policies. Each of these plausible pathways is designed to stretch our thinking about potential rates of new technology adoption, policy development and consumer behavior.   

The scenarios describe four pathways out of the myriad that are possible, given the uncertainty surrounding the development of future energy markets out to 2050. They do not describe all possible future outcomes and are not used as a reliable indicator of the actual impact of climate change on ConocoPhillips’ portfolio or business. 

In addition to using the four scenarios to analyze potential outcomes, we regularly monitor key signposts as we work to track the pace and direction of the energy transition and identify potential leading indicators of change in the demand for hydrocarbons. In this way we aim to establish not just which scenario we are moving toward, but also to identify emerging disruptive scenarios. This analysis is presented to executive management and the Board of Directors to assist in strategic decision making.   

The thoughtful application of scenarios in strategic planning is core to our ability to navigate future uncertainty and is a practical way of conveying this information in a decision-useful manner. The key to scenario planning is the use of a wide-enough range to characterize uncertainty, rather than trying to correctly guess specific future variables or parameters.  

Scenario Descriptions

Global Energy Related CO2 Emissions graphic

The scenarios reflect differing economic activity, technology developments, public policy developments and consumer choices. A common thread across all four scenarios is that GDP becomes less energy intense as the global economy requires less incremental energy-intensive manufacturing and industrial activity relative to service-oriented activity.  The outcome for global energy-related CO2 emissions from our four scenarios is shown in the “Global Energy-Related CO2 Emissions by Scenario” chart. 

Pre-Pandemic Trends Scenario

This scenario is built on the assumption that trends established from 2010 to 2019 in energy production and consumption continue. Government policies for carbon emissions remain globally uncoordinated. Technologies evolve at a gradual pace and current modes of transportation and power generation remain the lowest cost, most efficient avenues for energy consumption and generation. Carbon taxes are introduced at a moderate rate in Organisation for Economic Co-operation and Development (OECD) countries, rising to only $30/tonne of CO2equivalent (TeCO2e) in 2050. It is assumed that non-OECD countries have not implemented carbon pricing by 2050 in this scenario1. Consequently, fossil fuels continue to deliver roughly 80% of global energy needs in 2050, and energy-related carbon emissions continue to increase.  

The global oil market grows by 20% over 2019’s 100 MMB/D level, driven by solid economic growth and a lack of competitive alternatives. Transportation’s share of total oil demand expands from ~60% today to 65% in 2050. The automotive sector continues to evolve gradually, and the global share of electric vehicle sales increases from 1-2% today to 20% in 2050. The global average internal combustion engine efficiency modestly improves by around 15%, and petroleum remains the most prevalent fuel for all modes of transportation. Production from all regions and resource types is developed. 

The natural gas market expands at a faster rate than oil over the long term. By 2050, natural gas demand is ~75% larger (2021), reaching just under 700 billion cubic feet per day (BCF/D) as growing economies utilize more natural gas. The volume of natural gas consumed in power demand more than doubles by 2050. The focal point of global demand shifts away from North America and Europe to Asia and the Middle East. 

Moderate Transition Scenario

This scenario assumes moderate advances in national level carbon pricing policies and alternative energy technologies, with incremental shifts in consumer preferences for low-carbon products. Fossil fuels remain at roughly 81% of the primary energy mix in 2050. Carbon taxes go into effect across OECD countries during the mid-2020s and are $25/TeCO2e in 2030, rising to $60 in 2050. It is assumed that China implements its proposed national carbon pricing policy at 50% of the OECD carbon fee and that no other non-OECD country implements a carbon pricing policy prior to 2050. Global energy-related carbon emissions stabilize by 2050. 

Global oil demand plateaus in the late 2030’s at around 110 MMB/D and then declines very slowly. Average internal combustion engine efficiency improves by one-third. Electric vehicle penetration is slow in the early years but accelerates in the 2030s and 2040s, reaching 30% of the passenger auto fleet in 2050 (compared to 1% in 2021). Regional policies also influence the outcome for electrification in transportation. Global oil production benefits from technology advances which improve productivity and enable global demand to be satisfied. U.S. crude oil production grows through 2030 then falls as incremental productivity improvements slow and high-quality acreage is exhausted. Russia and OPEC grow to take a larger share of global supply which increases geopolitical risk to supply. 

By 2050, the global gas market expands by 40% from 2021 levels. The primary driver for natural gas demand growth is power generation. Natural gas consumed in power generation increases from 155 BCF/D in 2021 to 240 in 2050. Improvements in energy storage enable wind and solar to be available throughout the day, increasing their contribution to power generation. As in the Pre-Pandemic Trend scenario, global demand shifts east to Asia and the Middle East. Global supplies remain heavily weighted to North America. U.S. shale gas and Permian associated gas drive North American growth until the 2030s, after which Canada leads North America’s production growth. 

In this scenario, hydrogen and Carbon Capture Utilization and Storage (CCUS) move to become viable, standalone business lines. Moderate progression toward national net-zero targets increases availability of capital funding which paves the way for these technologies to take hold. CCUS grows to 2.1 gigatonnes captured in 2050, while the total hydrogen market expands to 250 million metric tons in 2050. 

Accelerated Transition Scenario

This is a scenario with more aggressive changes in technologies, consumer preferences and government policies relative to Moderate Transition. Technology is vital to limiting growth in energy demand as the global population and economy expand. Social trends that are prevalent today in specific regions or municipalities spread because technological advances make these choices universally economic. For example, individual auto ownership gives way to shared mobility. Mass transit and ridesharing are accessible and cost effective for more people in more regions. Consumers shift purchases toward products and services with lower carbon footprints, and society demands more transparent environmental stewardship from businesses they patronize. Governments target aggressive policies toward GHG emissions, fossil fuel production and consumption. Economy-wide carbon pricing goes into effect across OECD countries during the mid-2020s and is $30 per TeCO2e in 2030, rising to $80 in 2050. Again, China implements an economy-wide carbon pricing policy at 50% of the OECD price. Other non-OECD countries impose a very low $5 per TeCO2e price by 2030. 

The global oil market peaks in size by 2028 and remains near that level until tapering more quickly after 2035. The combination of internal combustion engine efficiencies and faster adoption of electric vehicles, which reach a 40% share of the passenger vehicle fleet by 2050, reduces oil demand in the transportation sector. Oil demand from the industrial sector grows for plastics and chemicals. 

The global natural gas market grows at an average annual rate of 0.6% into the 2040s, peaking near 450 BCF/D in 2045 and slowly declining thereafter. Natural gas remains a prominent fuel in electricity generation but starts to yield market share to wind and solar as energy storage technology allows renewables to contribute a larger share of power generation. North America’s gas production increases 15% over today’s level, plateauing in about 2040 before declining. 

Faster progression toward net-zero targets and higher carbon prices increase capital available to new technologies, with hydrogen and CCUS remaining the frontrunners. Captured carbon increases to 3.4 gigatonnes by 2050, and advances in renewables-powered hydrogen technology expand the hydrogen market to around 300 million metric tons.

1.5 Net Zero Scenario  

This scenario assumes technology breakthroughs, rapid global policy coordination to price GHG emissions at a level that materially reduces fossil fuel use and emissions and shifts in consumer preferences towards lower GHG products and services. In this pathway, OECD countries and China implement a transparent economy-wide carbon price2 mechanism by 2025 which rises from $50/TeCO2e in 2030 to $190 by 2050. Other non-OECD nations follow by imposing economy-wide carbon prices of $10/TeCO2e in 2030 rising to $50 by 2050. The scenario assumes significant technological advances which reduce battery, wind and solar generation costs, improve fuel efficiencies for internal combustion engines (80% more fuel efficient by 2050), improve energy efficiency in buildings and lighting, and impact energy production, delivery and consumption. Technology and efficiencies allow total energy demand in 2050 to be only about 2% below 2021’s level with about 70% of energy provided by non-fossil fuels.  

Global oil demand peaks in 2023 and declines to 40 MMBD in 2050. Energy storage improvements lead to EVs achieving parity with internal combustion engine vehicles by the mid-2020s, thus incentivizing consumers to purchase EVs. Consequently, 70% of the passenger automobile fleet is electric in 2050, and transportation sector demand falls to 25% of total oil demand. Oil supply dynamics evolve as most production occurs in OPEC countries and Russia, and geopolitics play an even larger role in oil prices and the supply of oil. 

The natural gas market is much more resilient in this scenario in comparison to oil as natural gas is needed as a lower-carbon fuel for reliable, dispatchable electricity generation. Global natural gas demand peaks in 2030. Natural gas generates only 4% of global electricity in 2050, while wind and solar grow to produce 73% of electricity in 2050. Global gas demand shifts to emerging markets in Asia, the Middle East, CIS and Africa. Only 26% of global gas demand remains in North America and Europe.  

In this scenario, countries and companies push for accelerated progression along net-zero pathways and implement supportive policies along with capital funding to progress new technologies. Hydrogen remains a front-runner, with blue (using CCS) and green hydrogen supporting increased petrochemical and industrial activities. Over time, electrolysis costs fall sharply. Green hydrogen accelerates along with other new technologies, pushing out blue and grey (Steam Methane Reforming) hydrogen production. The hydrogen market grows to around 400 million metric tons in 2050.  CCUS plays a critical role in emissions reduction, expanding to 7.0 gigatonnes by 2050. 

ConocoPhillips Scenarios Energy Mix

Our scenarios have a wide range of assumptions regarding technological advances, government policies (e.g., carbon prices) and consumer behaviors leading to a range of oil and natural gas prices. We take this future price uncertainty into account in our strategy by using a fully burdened cost of supply as our primary criteria for capital allocation. Of the ~20 billion barrels of resources with a cost of supply at $40 per barrel and below held in our portfolio, resources at the average cost of supply can be produced at $32 per barrel.3 This compares favorably to the expected commodity prices detailed in our own scenarios as well as external scenarios such as the IEA’s Net Zero Emissions scenario. 

The scenarios are designed to address transitional risks. A separate scenario process addresses physical climate-related risk using consultant scenarios based on the Intergovernmental Panel on Climate Change (IPCC) modeling. 

Key Strategic Linkages to our Scenario Planning

Our corporate strategy reflects several findings from our scenario analysis process. We have acted to: 

  • Use a fully burdened cost of supply, including cost of carbon aligned with our current probability-weighted energy scenario, as an important metric in our project authorization process. In 2023, we had a resource base of ~20 billion barrels of oil equivalent (BOE) with $40 per barrel (or lower) cost of supply and an average cost of supply of $32 per barrel. Our strategic objective is to provide resilience in lower price environments, with any oil price above our cost of supply generating an after-tax fully burdened rate of return greater than 10%.

  • Prepare for diverse policy environments by maintaining a less than $40 per BOE sustaining price to generate the cash to fund capital expenditure to keep production flat over time and generate competitive returns to shareholders.

  • Maintain diversification in our portfolio to balance our production and capital expenditures as commodity prices become more volatile.

  • Provide competitive distributions from cash flows to investors.

  • Identify and fund emissions reduction projects to reduce the impact of any future regulations, carbon prices or taxes, and to help maintain a low life-cycle cost of supply. We have upgraded the use of a marginal abatement cost curve (MACC) in long-range planning to identify emissions reduction opportunities available to the company globally. These process upgrades have resulted in more efficient collection, recording, sharing and funding of emissions reduction projects.

  • Task each business unit with developing potential options to achieve our operational net-zero emissions ambition.

  • Introduce a proxy cost of carbon into qualifying project economics to help us be more resilient to climate-related risk in the short- to medium-term and provide the flexibility to remain resilient in the long-term.

  • Focus near-term technology investments on reducing both our costs and our emissions where economically feasible.

  • Monitor for potential disruptive technologies that might impact the market for natural gas or oil, enabling us to take advantage of our capital flexibility and reduce our exposure to lower commodity prices at an early point in time.

  • Focus on the carbon and cost competitive supply of natural gas and oil while continuing to utilize our scenario planning system to monitor and assess additional business opportunities within the evolving energy transition.

  • Pursue hydrogen production and carbon sequestration as potentially attractive investments in meeting transition demand for low carbon energy.

  • Monitor global regulatory and legislative developments and engage in development of pragmatic policies aligned with the climate policy principles outlined in our Global Climate Change Position.

Note

1. All carbon taxes are in 2021 dollars.
2. All carbon taxes are in 2019 dollars.
3. Costs assume a mid-cycle price environment of $60/BBL WTI.