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    Seize the day! [NGW Magazine]

Summary

Time is running out for pure hydrocarbon play companies, argues Equinor’s Tor Martin Anfinnsen, but consumers must also expect to pay up for clean energy. [NGW Magazine Volume 4, Issue 10]

by: William Powell

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NGW News Alert, Featured Articles, Premium, Gas Transitions, NGW Magazine Articles, Volume 4, Issue 10, Carbon, Environment

Seize the day! [NGW Magazine]

Norway’s state-run oil and gas company Equinor is gearing up its renewable power trading activity as the subsidies dry up. It is also investing in a range of projects that will help demonstrate to society at large that there is still a need for gas, especially if it has a low or zero carbon content, but oil and gas producers cannot take anything for granted in today’s political climate.

Its vice president for marketing and trading Tor Martin Anfinnsen told the Flame conference in Amsterdam that the gas industry has “between five and ten years to put forward credible decarbonisation goals.” If it pulls that off, he said, gas can be the “backbone of Europe’s energy system. There is momentum growing for gas.”

Along with the lower carbon, however, comes a higher cost: something that is often overlooked. “Achieving 95% decarbonisation will need incentives, whether punitive or encouraging. Green hydrogen, or what have you, will require support,” he told delegates.

After his presentation, he told NGW: “We embrace the goal of the Paris Treaty but whatever route you choose to decarbonise it will not come free. It makes no sense to say that it will be free. Most people see and acknowledge that fact. We have not got where we are today at no cost – look at the example of the German energiewende.”

Germany, depending on how fast the carbon price rises, could still be running some of its coal or lignite plants up until 2038. And subsidies for renewable energy have increased grid volatility and the need for firm back-up. Cheap coal has won the argument against gas there, although full conversion from coal to gas in the power sector could be achieved now, given the amount of idle capacity and today’s low gas prices.

Anfinnsen told NGW: “We need to mobilise all possible contributors to the effort, and gas can play a big role in this. There could be a 40% reduction in CO2 by replacing coal and oil with gas. But there is no single way of reaching the 95% goal, technically, economically or without jeopardising security of supply. Let’s consider all the options and try to encourage new ideas to be brought forward. Governments need to be prepared to syndicate the costs.

“The discussion about whether you can do it all with renewables and batteries or the competition between blue and green hydrogen – this is really surprising. We are facing a huge challenge. It is not about which solution is best and it is not a given that our proposals will be the winners; but we think we can deliver cost-competitive solutions.

“Of course, there will be some trial and error; but we are committed to seeing it through. Not by 2025 or possibly even 2030 – it will require a long gestation period. Many of the low-pressure grids in Europe will have to be modernised – we need CCS and new burners and cookers. It is a big thing,” he said.

While an all-electric world is feasible and the most obvious to benchmark alternatives against, he says that the costs this entails will be massive.

“All the constituent links of the chain have been technically proven, but they have not been pieced together at scale at a competitive cost relative to the alternatives. Energy consultancy Poyry last year published a report that showed an all-electric route would cost €1 trillion more than one without gas, and it would need a massive nuclear development programme.”

Equinor’s projects

Equinor is working on the H21 initiative, testing whether a UK local distribution network can run on hydrogen. The plan entails bringing gas to Easington on the UK east coast – the landing point of the Norwegian Langeled pipeline – removing the carbon and exporting it to an offshore field for injection. Then the hydrogen would be fed into the low-pressure, PVC grid serving Leeds.

“The UK government and the Climate Change Committee have both allocated space for the hydrogen solution and acknowledge it is a viable way to decarbonise but also the necessity for carbon capture and storage,” Anfinnsen said. “It is a breakthrough that the government so explicitly states its support for H2 and CCS as a solution. We can study it and see if we can move it forward for maturing.”

Indeed it is interesting that while many of those in favour of a speedy transition to zero carbon dismiss CCS as being too expensive, they do not dismiss electric heat pumps on the same grounds, although they cost many times more than gas heating would.

In the Netherlands, Equinor is working on converting one of the four turbines at the Magnum power plant at Emshaven to run on hydrogen. It is partnering Gasunie and Swedish Vattenfall. The CO2 would first be extracted from the gas and stored safely under the seabed off the west coast of Norway. This project is supported by the Dutch government.

And Equinor is working with Anglo-Dutch major Shell and French Total on the Northern Light project, offshore Norway.

Unlike the other two, this is based on post-combustion collection of CO2 from industrial plants – a cement factory and a waste incinerator in Norway. But it is much more efficient to take the out CO2 pre-combustion, Anfinssen says.

Expanding trade

Earlier this year Equinor completed its purchase of trading house Danske Commodities (DC), and this is helping Equinor to maximise margins from trade as it becomes a broader energy company, Anfinnsen said. “Before we had the oil and gas legs; now we have a renewable leg, too, and we trade all these commodities.

“Every renewable power project used to enjoy a government subsidy. There were no normal market mechanisms: it was a cost game. The lowest bid had to give a predictable revenue stream with the costs less than the rewards.

“Now the subsidies have melted away all across the EU. It is much harder to survive in that market without – for example – a fleet of lignite generation to call on. We had to build up scale so we could compete on the generation front: we have assets offshore and now we are moving onshore and building solar in places where there is a market. We could not leave any money on the table though.

“We have won some of the projects that came up in the bidding process, others we didn’t. But there are much higher risks of a renewable strategy failing, so we came to the conclusion we needed inorganic growth. The strategic rationale is to build a commercial renewable arm, one that also trades gas. DC does not have the full capability of our energy solutions strategy, but it has what it takes to develop a power and gas trading position in the markets  in the very short term, and to operate in the financial markets,” Anfinnsen said.

Eqquinor’s equity gas is 100% handled by the Equinor part of the business whereas DC does what it always did. There is a division between the two because “our two organisations are very complementary. DC is trying to take the last cent out of our flexibility, and it trades opportunistically. Our gas team and DC occupy different trading spaces.

“DC has proved clearly that it can make money by managing the output from renewable power plants. DC has 5.5 GW under management because it made the most competitive bids and still makes a decent profit. Thanks to Equinor, they can do longer term fixed price power purchase agreements, and there is a lot of demand for those in the UK power market, and not a lot of companies have the balance sheets to provide that,” he said.

“There is a lot of interruptible generation in the UK and more of the stable generation – CCGT, coal and nuclear – are coming off the system and there needs to be some mechanism to stimulate investment – whether the suspended capacity mechanism is the answer remains to be seen but unless there is a sudden, dramatic development in batteries, other power supply is needed. And since we have a growing leg in the power market is not inconceivable that we will invest in some form of thermal generation, such as OCGT or CCGT, provided this adds value to the gas and backs up renewable trading through the DC operation,” he said.