The oil and gas sector is quick to flag up its commitment to reducing its carbon footprint, but its strategy for building a low-carbon future lacks scale and urgency
The hydrocarbon sector is keen to show that it is engaged on issues of climate change. Let’s make no mistake: that is in itself a notable advance. Ten years ago, many oil and gas companies were casting aspersions at climate science. Today, ExxonMobil, Chevron, Shell, BP and the sector’s other big players offer a deluge of material on the subject. But what lies behind the rhetoric?
The headlines offer little insight. Only recently, Anglo-Dutch energy firm Shell and Denmark’s Dong Energy were calling on the European Commission to bolster Europe’s flagging emissions trading scheme. Almost simultaneously, Greenpeace revealed US tax records that indicate widespread support from the hydrocarbon sector for climate-sceptic lobby groups.
If the plan is to obfuscate and delay, then it’s working. A new study by Chatham House finds that mixed messages on climate change are causing the public to tune out.[i] Parking the prospect of rising temperatures to one side obviously serves the immediate interests of the supermajors. It allows them to continuing doing what they do: that is, digging fossil fuels out of the ground to provide us with heat, power and mobility. The status quo serves our purposes, and their profits.
But failure to act now only means a shoring up of problems for later. A new research report by the International Institute of Applied Systems Analysis calculates that the recent Doha climate summit decision to kick climate change measures into the long grass for another seven years will cost about £3.1tn to remedy.[ii] If we delay much beyond that, the 2C increase, which most climate experts see as an irreversible tipping point, will have passed.
With policymakers dithering and the public dulled, at least oil and gas companies have a business case to impel them to act. For most of the past decade, energy scenarios looked increasingly bleak. Known hydrocarbon deposits were either running low, were too expensive or risky to access, or were falling into the hands of state operators. This sparked a commercial interest in the search for alternative, next-generation fuels.
And then it all changed. Technological advancements such as deepwater drilling expanded options for exploration. More importantly still, the discovery of unconventional hydrocarbons – most notably, shale gas – has quietened energy security fears. The International Energy Agency puts recoverable resources of gas at around 790tn cubic metres – enough to last for about 230 years at current consumption rates.
On top of that has been the virtual collapse of the EU emissions trading scheme in the wake of the 2008 economic crisis. Today’s rock-bottom carbon price offers little by way of commercial incentive to invest in cleaner technologies. The situation could be helped if the European commission’s proposed “backloading” of ETS Phase III allowance goes ahead. Even if it does (which is by no means certain) industry insiders still describe the measure as a “minimum”. Backloading is the process through which the EU would withhold carbon credits until a later date to prop up prices now.
Should it wish to, the hydrocarbon sector could feasibly afford to put the brakes on its carbon management efforts. The fact that oil and gas firms have not done so – at least, not entirely – is interesting. A variety of motivations are at play: from environmental responsibility and public relations, to production-related cost efficiencies and the possible market opportunities that technological advances could present in the future.
Without major business drivers, however, are such motivations enough to push the sector towards a low-carbon future?
From well to tank…
One thing is certain. When oil and gas companies discuss climate change, they like to keep the issue close to home.
For the sector’s dominant players, it’s all about energy efficiency. BP, for example, points to its aromatics and acetyls businesses, where it has been working for the past seven years to reduce emissions. Its new Zhuhai 2 purified terephthalic acid (PTA) unit in China demonstrates how far it has come. The facility produces around two-thirds less in CO2 emissions than the sector average.
Chevron, for its part, concentrates its efforts on reducing fuel use in its production facilities. Operational emissions at the US-based oil major have dropped by one third since 1992, according to its own calculations. Much of that cut comes from cogeneration. Chevron currently produces around 3,500 megawatts of power through combined heat and power units at its global network of refineries and other sites.
Another key intervention is reducing levels of flaring and venting. When oil is extracted from the ground, hydrocarbon gases often emerge with it. Finding commercial alternatives for these extraneous gases, such as conversion to liquefied natural gas, is a popular solution. Few upstream facilities have access to available markets or appropriate infrastructure, however. ExxonMobil, for example, concedes that its flaring activities actually increased during 2011 by 16% on the previous year, despite sustained efforts at upstream gas management.
Fugitive emissions are of particular concern to the gas industry, most notably in the case of methane leaks in unconventional gas operations. To limit such emissions, UK-based BG Group has installed a leak detection and repair programme at its gas project in Queensland, Australia. It is also installing so-called “green completion” technology (essentially, portable equipment to process and condense gas after a well’s closure) at its US shale gas businesses.
“We need to ensure that as a sector, we are minimising any methane losses across the entire value chain,” says Lisa Walker, head of climate change strategy at BG Group. In that vein, BG – still known as British Gas in the UK – and others are engaging with the US state department-led Climate and Clean Air Coalition, which aims to promote best practice in methane mitigation. Mandatory standards, however, remain beyond its brief.
Carbon capture and sequestration (CCS) is where many industry experts feel real efficiencies could be gleaned. The base technology is already there, with Europe, Canada and Australia leading the way on large-scale demonstration projects. The current imperative focuses on making existing technology more cost-efficient. Bill Spence, head of CCS at oil major Shell, is confident that the cost of CCS is already “very competitive”.
With forward planning on CO2 infrastructure and an acceleration of knowledge sharing, it can fall further, he insists. The emphasis right now should be on leading companies building their internal competences “for the day if or when CCS is required”, he says. (See box.)
Alongside their energy efficiency efforts, oil and gas companies are increasingly integrating future carbon prices into long-term project considerations. Commercial confidentiality means these so-called “shadow carbon price assumptions” remain undisclosed. However, current figures average around $40 per tonne allowance of CO2, according to Matthias Beer, a senior analyst at F&C Asset Management. “Given the very low level of carbon prices at present [around $5.20/tonne], this gives some assurance that they can absorb potentially rising carbon costs in the long term,” he adds.
…and tank to wheel
Welcome though efforts are to mitigate production-side emissions, that isn’t where the bulk of greenhouse gases lie. The burning of fossil fuels, whether in a combustion engine for transport or a power plant for electricity, is where the sector’s major footprint lies – indirect though this may be.
In this respect, natural gas providers have a winning hand. Gas has one quarter the carbon content of coal and less than half the lifecycle emissions, according to the industry’s own figures. Burning gas, meanwhile, produces 40% lower carbon emissions than coal use (and 22% lower than oil). Some are less sure. As mentioned, serious questions revolve around methane leakage in the production process. Furthermore, while gas may be lower in carbon intensity than coal, its widespread use in power generation isn’t without serious climate impacts.
That said, many analysts still see gas – and especially shale gas – as a valid option for “transitioning” to a lower-carbon future. “Shale gas could be something to bridge from now to a more sustainable energy system,” argues Dr Oliver Inderwildi, head of the low-carbon energy centre at Oxford University’s Smith School of Enterprise and the Environment. “If we are replacing coal with shale gas, it may well help us achieve the closest emission reduction targets.”
F&C’s Beer is among those who question the “simplistic, optimist” view of shale gas as a transition fuel. Indeed, the boom in unconventional gas could be a step backward, not forward, he argues. “With the rapid increase of shale gas, instead of displacing coal-based power generation, it’s actually replaced to some extent renewable power generation,” says Beer. (See p32 for a detailed critique of shale gas’s apparent limitations.)
Even before the arrival of shale gas, the fate of renewable fuels was already looking shaky. For much of the past decade, the big hope of the supermajors focused on first-generation biofuels. Land-use disputes and the alleged link to food price hikes (due to edible crops being redirected as feedstocks for biofuel) have effectively closed that door.
Some are now looking into second-generation options, instead. Exxon’s work on algae-based biofuel is a case in point. The road to scale and potential commercialisation is a long one, however.
As for other renewable alternatives, such as wind, solar and geothermal, the sector has dabbled liberally in the recent past. Back in 2011, for instance, France’s Total sank $1.38bn into buying a controlling stake in US solar panel maker SunPower. In the same year, BP invested $1.6bn in renewables through its Alternative Energy business, which it set up in 2005. Its portfolio includes interests in 13 wind farms with a generating capacity of 1,955MW.
Two major hurdles face conventional renewables, though. The first is infrastructure.
Biofuels are attractive because, with a few tweaks, the process for production and refining is broadly similar to oil. Solar, wind and the like all require a wholesale reinvestment in infrastructure, the capital costs for which are colossal. Then there’s the risk of infrastructure lock-in to consider. If policymakers and companies were to overhaul our energy matrix, what happens if you had already bet on the wrong horse?
The lack of a compelling return on investment in the short term represents a second, even more serious barrier. “There was serious investment in low-carbon energies before 2008, but with the financial crisis … most of the energy companies went back to their roots and invested in fossil fuels,” says Inderwildi. Without a “complete policy toolbox” from government to re-incentivise investment in renewable energies, that scenario is unlikely to change soon.
Of course, on the energy supply side, there’s always the hope that a radical new alternative to fossil fuels will come along. The Global Climate and Energy Project (GCEP), which is led by Stanford University and whose backers include oil firms ExxonMobil and Schlumberger, is founded on this premise.
GCEP has opted for a “portfolio approach” over the past decade (it currently boasts more than 30 active work streams), in the hope that it will strike lucky. It hasn’t so far. Richard Sassoon, the centre’s managing director, points to a long list of high-potential technologies: from all-carbon photovoltaic cells and photon enhance thermionic emission for solar concentrator systems, to lignin-based biofuels and carbon-based sorbents for selective carbon capture.
None, however, will be emerging from the lab any time soon. Developing breakthrough energy technologies is a “long-term thing” he admits. “The energy supply technologies that we and many others are trying to develop will take decades to transform the energy sector.”
Long horizons, immediate problems
Is the carbon footprint of the hydrocarbon sector going to shrink? The twin strategy of short-term energy efficiencies in production and long-term investments in alternative supply is certainly better than no strategy at all.
But the sector is hardly racing towards a low-carbon future. Fossil fuels will still be meeting at least two-thirds of world energy demand in 2050, calculates Shell representative Spence. Nor are demand levels standing still. ExxonMobil’s most recent Outlook for Energy report anticipates demand in developing countries jumping by two-thirds by 2040, compared with 2010.
Such a scenario holds out little hope of the planet remaining within a carbon dioxide atmospheric concentration of 450 parts per million. Presuming the scientists are right and our hydrocarbon habit stays the same, the result will be a temperature rise of more than 2C. It’s difficult to change the science. Time to kick the habit, perhaps.
Carbon capture and sequestration: Shell’s view
Carbon capture and sequestration has the potential to meet about one fifth of greenhouse gas emissions mitigation targets by 2050, says Bill Spence, head of CCS at oil major Shell. The calculations come with a caveat: they presuppose that “CCS demonstration projects are started quickly”.
Shell is among those in the vanguard, having taken “firm steps” towards several major CCS initiatives, such as the Gorgon project in Australia and the CO2 Technology Centre in Mongstad, Norway.
Other projects at Canadian Quest and Peterhead gas-fired power station in the UK are also in the offing. Moving from a demonstration to a commercial phase is “costly”, Spence states. Furthermore, it requires public support and an “enabling legal framework” – both of which remain in the balance.
Spence says: “In the near-term demonstration phase, the industry needs support with the upfront capital and operating cost while the technology matures. Different governments are finding creative solutions to fund CCS demonstration [such as] the European Economic Recovery Plan and NER300 in Europe … The key is to deliver the demonstration projects, which in turn will allow costs to fall further ahead of widespread CCS deployment beyond 2020.”
BG Group: public positioning on climate change
In March, BG Group will unveil its first formal climate change strategy. The company’s Climate Change Principles focus on improving its internal energy efficiency and emissions performance.
At the heart of the policy is a new target to reduce overall GHG emissions intensity by 10% over the next five years. Over the same period, it is also pledging to reduce the greenhouse gas emissions intensity of LNG liquefaction by 15% and that of its exploration and production activities by 8%.
By the end of 2017, the company expects these measures will help it recover an additional one million barrels of oil equivalent per year. “This takes it away from just talking about carbon and climate change and making this part of the core business operations for our assets,” says Lisa Walker, head of climate change strategy for BG Group.
BG’s carbon reduction strategy revolves around the application of the “best available techniques and practices” in its exploration, production and shipping operations. Its main interventions will concentrate on:
- more efficient design of new assets and facilities;
- emissions reduction projects, including for fugitive methane emissions, waste heat recovery, reduction in venting and flashing liquid expanders;
- promotion of a new culture of energy management.
BG Group’s new public position builds on a $20m investment over the past five years in energy efficiency measures, which have resulted in a saving of over one million tonnes of greenhouse gas emissions.
Useful linkscarbon footprint Environment Fossil Oil Oliver Balch