…meaning that a very low oil price becomes less likely the longer it lasts

A situation where large resource holders prioritise market share would have strong implications for energy markets and energy transitions.

With an oil price remaining below USD 35/barrel, most non-OPEC producers – as well as many of the higher-cost members of OPEC – would struggle to develop new upstream projects.

This would increasingly concentrate production in the lowest-cost producers: in the LOP-SDS, the members of OPEC and Russia would make up well over 55% of global oil production by 2030, a level not seen since the early 1980s. Production from members of OPEC and Russia in this case is 2 mb/d higher in 2030 than in 2018 even though global oil demand is 10 mb/d lower.

Such a drop in the oil price would make oil consumption more attractive to consumers, creating a dilemma for policy makers pursuing rapid energy transitions. On the other hand, it could also facilitate the removal of fossil fuel consumption subsidies and the introduction of an effective or actual price on CO2 emissions, two measures that are widely implemented in the SDS.

It would also imply huge strains on the fiscal balances of many of the major producers, as the collapse in the oil price would bring hydrocarbon income in these countries down to near-historic lows.

In the wake of the oil price fall in 2014, the net income from oil sold by NOCs and INOCs (before tax and other transfers to governments) fell to less than USD 430 billion. In this LOP case, net income drops to a low of USD 210 billion and it averages only around USD 370 billion for the duration of the 2020s. In other words, the significant strains that were felt by producer economies in the immediate aftermath of the 2014 oil price crash would be much more severe and last for much longer.

The World Energy Model does find an equilibrium at these price levels, with sufficient supply available to meet the projected levels of demand.

However, this outcome quickly runs into difficulties when considering its real-world implications.

The main one is that it would rely on very rapid and successful implementation of reforms to the producer economies in question (IEA, 2018). Without much more diversified economies and sources of tax revenue, revenue from hydrocarbons in such a low-price world would not be sufficient to finance essential areas such as education, health care, public sector employment and so on. This would make it unlikely in practice for prices at these low levels to be maintained. These social pressures could also mean much more limited funding available for continued investment in the upstream.

As a result, while periods of very low prices in the SDS cannot be ruled out, it is difficult see how they could be sustained for very long periods. If production from low-cost resource holders were to start to fall, this would inevitably place upward pressure on the oil price. An alternative case – as posited in the SDS – is for the major resource holders to restrict production by design, even as demand falls, to provide a higher floor under the oil price. This would be very challenging to realise in practice but could avoid some of the more disruptive economic and social impacts of a prolonged period of low oil prices.

Efforts to diversify and reform hydrocarbon-dependent economies are essential to the SDS. But a measured assessment of how quickly these can be achieved is a key reason why the oil price in the SDS remains in a higher band around USD 60/barrel.

Rising concentrations of GHGs in the atmosphere, changing energy dynamics, and growing social and environmental pressures represent huge challenges for the oil and gas industry.

The twin threats are a loss of financial profitability and a loss of social acceptability. There are already signs of both, whether in financial markets or in the reflexive antipathy towards fossil fuels that is increasingly visible in the public debate, at least in parts of Europe and North America.

Either of these threats would be sufficient to fundamentally change the relationship of oil and gas companies with the societies in which they operate. Together, they require a rethink of the way that the industry conducts its business. Climate change is not a problem that can be solved in the existing oil and gas paradigm.

This section examines some of the risks facing the industry in more detail, focusing on four issues:

•Investment strategies and the risk of overand/or underinvestment in ways that would have strong implications for markets and public policy. This report examines three possibilities:

i.The industry overinvests in oil and/or natural gas.

ii.It underinvests in oil or gas.

iii.It underinvests in low-carbon alternatives to oil and gas.

•The risk of stranded oil and gas assets due to climate policy. This topic is also divided into three separate strands:

i.stranded volumes (when resources slated for development remain in the ground)

ii.stranded capital (when oil and gas projects don’t recover the capital invested in them)

iii.stranded value (a reduction in company revenue from both lower production and lower prices).

•The financial performance of NOCs and INOCs. There are specific considerations that apply to these companies, given their critical roles in the economic life of their host states and the overreliance, in many cases, of these states on revenues from hydrocarbons.

•The financial performance of publicly traded companies. Here we bring together different aspects of the debate for publicly traded companies, asking whether and how they can deliver the returns that the markets demand while also transforming themselves.

There are additional risks facing the industry that are not examined here, such as litigation related to its activities in some jurisdictions, or increased difficulty in recruiting new talent. This report has also not made an assessment of the physical risks that oil and gas companies might face in the coming decades, for example from extreme weather events. These risks are real, but for the next two decades they are already locked in; they do not vary by scenario over the period to 2040; longer-term physical risks will of course be shaped much more by the speed and depth of energy transitions.

Increased evidence and incidence of physical risks is nonetheless relevant to this discussion, as they may well prompt additional climate policy actions, thereby increasing the “transition risks” facing traditional oil and gas actors and others.