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    Keeping the lights on affordably and sustainably in a transition


The energy transition and decarbonisation may pose a real threat to investors in the oil and gas sectors, but some companies are moving quickly.

by: William Powell

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Natural Gas & LNG News, World, Liquefied Natural Gas (LNG), Premium, Energy Transition, Hydrogen, Carbon, Renewables, Gas to Power, Petrochemicals, Corporate, Political, Regulation, Supply/Demand, Gas for Transport, Technology, Infrastructure, Storage, Carbon Capture and Storage (CCS)

Keeping the lights on affordably and sustainably in a transition

Decarbonising can mean both eliminating and reducing the amount of carbon in the atmosphere, but the insistence on the former threatens to block the many small but affordable steps along what will be necessarily a long and winding road. Given the size of the problem that governments have posed themselves by setting carbon targets, it is pragmatism, not dogmatism, that is needed.

There are plenty of examples, from the World Bank’s rejection of LNG in the marine transport sector, to Germany’s more reasonable insistence on green hydrogen owing to a natural reluctance to store CO2 – the by-product of blue hydrogen production – underground inland. A leak could be deadly so a home must be found elsewhere for the CO2. Pyrolysis and graphene is one possibility.

But companies actively promoting gas and blue hydrogen are often given short shrift in the EU, even though there is no way that the bloc will be able to function economically in an electrons-driven environment. Even the European Commission's chosen methodology for calculating emissions is heavily stacked against the use of gas in vehicles argued scientists pleading for a technology-neutral approach. 

There is, as has been pointed out several times in the past months, a widening gap between today's reality and the dream of a net-zero world by 2o5o – even as raising financing for oil and gas projects becomes harder and harder and investors in companies withdraw their capital. Why leave money in an entity whose stock in trade is in terminal decline?

But the International Energy Agency’s headline-grabbing report a month ago did not say that there is no need to invest upstream, the dean of the Columbia Climate School Jason Bordoff told a June 24 webinar organised by Saudi Arabian think-tank Kapsarc. Rather, what it said was that if the world were indeed on that pathway, then there would be no need for new investment. 

But there is no prospect of reaching net zero carbon by 2050, “as the reality gap is enormous,” he said, having earlier pointed out that fossil fuels account for four fifths of energy demand, and so far the world had only ever seen energy additions, not transitions.

He said: “We need the reality of binding policies to catch up with the growing number of pledges.” Rising energy prices, caused by under-investment upstream, bear the risk of turning the public off support for climate policies, he said.

The chief economist of the International Energy Forum Leila Benali told the event that the huge drop-off in investment upstream in the past few years – from almost $1 trillion/year in the decade to 2015 to a few hundred billion now – would ripple out and lead to supply crunches and volatility for years to come.

On the other hand, for companies who had ridden out the storm through consolidation and capital discipline, the reward is a much higher return on investment, doubling in percentage terms from utility rates of about 8%-12% to 15%-25% since that period – as they had been before it.

She pointed to the very wide range in global oil forecast demand, from a high-low variation of 30mn barrels/day to 50mn b/d – or from a third to over half – as indicative of the uncertainty facing producers. She also pointed out the risk to investments posed by the plans of Qatar for its LNG expansion which is poised to deliver a few dozen million metric tons/year of zero carbon and low-cost gas to world markets from 2025. That could stifle investment elsewhere, she said.

However, if media reports are correct, it will be doing so with US or European partners, meaning that a slice of the profits would be shared with its competitors.

Another speaker, the Oxford Institute of Energy Studies director Bassam Fattouh, who kicked off the proceedings, however, suggested that a solution to the problem facing oil dependent countries – to sell as much as possible as soon as possible and trash the price, or to hold off and risk not producing much of their resources – might instead be to co-operate more with OECD countries.

They could work together upstream and downstream with oil companies in decarbonising and so enjoy a greater share of the rent from their sales. Otherwise too much of the money would end up in the pockets of importers who would decarbonise the gas at home for onward sale at higher prices.

He also said that in any case those oil-dependent states should play to their strengths: oil production offered higher margins than renewables, and their focus should be on keeping down their costs and raising their efficiency. Trying to diversify without credible alternatives would worsen their balance of payments, slow down economic reform and trigger or in some cases worsen the social tensions.


IOCs vs NOCs

The international oil companies however can straddle both camps, using their now highly profitable traditional hydrocarbons businesses to fund forays into renewables and zero and even negative-carbon oil and gas. Biofuels and synfuels are two new developments that could threaten crude if scaled up sufficiently, while the circular economy will also dent petrochemicals – the promised land for oil rich countries who are pinning their hopes on demand for plastics and so on even if transport needs less oil.

Anglo-Dutch major Shell, looking for ways to extract higher prices from lower carbon products, has already supplied airline operator KLM with synthetic jet fuel. Bonding captured carbon with hydrogen can form long molecules that may be blended with conventional kerosene.

The resulting liquid has been used to fuel several flights, Shell’s president of technologies and catalysts, Andy Gosse, told another webinar the same day. The company has developed several gas to liquids projects using the Fischer-Tropsch process although it has ruled out further greenfield plants after Pearl, in Qatar. Direct air capture is a still-nascent technology which will become cheaper with time, Shell believes.

Blue steel, blue hydrogen and blue cement should also be sold at higher prices, while their conventional equivalents are discounted or discontinued, the company’s head of CCS Syrie Crouch said. Wind farms are very carbon intensive to make and install owing to the amount of steel, cement and copper wire. They should be developed in conjunction with blue hydrogen and CCS, or greener sources of energy.

While Shell has some CCS projects in operation in Canada and Australia, Crouch said they are “one-dimensional”, being based around production at one site or tied to enhanced recovery. The aim has to be to aggregate supply of carbon from many different sources and inject into one reservoir. This is the attraction for Shell of the Acorn and Humberside projects in the UK and Northern Lights in Norway where the shared costs will come down further through a mix of scale, modularisation and integration. 

But key has been the UK government's generosity in priming the pumps. The Italian energy company Eni has also been tempted by the incentives to develop CCS off the west coast of Britain. Like Shell, it has depleted gas fields ready for use as CCS sites.

Government quotas could also set demand which would drive prices up for green products, while competitive forces would create an environment that drove down costs, Gosse said. This would apply also to CCS, where the company is looking at other technologies for capturing CO2, including solid solvents. for use at the industrial site or power generator. They would replace amine solutions.