Aug-2021

Towards 2030

The oil and gas industry strives to balance fossil fuel market challenges during the transition to sustainable fuels and energy.

Rene G Gonzalez
Consultant

Article Summary

The 2015 Paris Agreement calls for keeping global average temperature increases less than 2°C (3.6ËšF) above pre-industrial levels. Against this backdrop, oil and gas industry programmes to curtail greenhouse gas (GHG) emissions are taking on more urgency. More capital is needed, but environmental, social and corporate governance (ESG) focused investors are cautious about the industry’s ability to meet impending 2030 targets (let alone net-zero emissions by 2050).

In this decade, moderate investments can deliver the capabilities needed to meet near-term improvements, such as upgrading refinery diesel hydrotreaters with reactor and catalyst technology for converting biomass into biofuels. Meanwhile, strategic reviews conducted by oil and gas companies emphasise the urgency to begin the multibillion-dollar transition into LNG, hydrogen, solar-PV, wind, and more.

Double-digit pre-pandemic returns from hydrocarbon extraction and processing projects have sunken into the low single digits. Meanwhile, capital constraints make it challenging to invest in the complexity necessary to ensure sustainable operations. The low returns are driving up the cost of capital for drillers, refiners, and so on, further complicating the transition to decarbonisation.

Predictions
The World Economic Forum predicts that by 2030 there could be over $1.2 trillion invested annually in global renewables, more than five times the investment in fossil fuels. Some companies are exiting their oil and gas role altogether to focus on clean areas of the energy system. Other oil and gas companies continue building their hydrocarbon value chain while making renewables just a fraction of their portfolio.

Most population growth is occurring in non-OECD countries; their energy consumption will predicate ramping up oil production above 100 million bpd. Demand is also increasing from expanding petrochemical production. Just as concerning, some regions are meeting electrical demand by building new coal-fired power plants, which is why a global consensus is needed to move away from fossil fuels.

Financing
Just as science and engineering know-how provide options for reducing GHG emissions, new sources of financing, such as private equity, are equally important. Novel financial strategies create value by driving transformation more efficiently across geographies and industry sectors. Money is flowing into ESG funds, with climate impact metrics (for example, global carbon pricing by 2030) as a high priority.

Companies demonstrating stewardship on a range of ‘Paris-compliant’ strategies will have clearer access to financing. For example, achieving 100% net-zero emissions by 2050 may not seem achievable to many without access to a deep pool of capital needed for decarbonisation. Much of the technology needed to achieve 2030 emissions targets is already integrated into industry processes at varying degrees (see Table 1).

To name just a few, decarbonisation technologies include carbon capture and storage (CCS) for enhanced oil recovery (i.e., CO2 injection), hydrogen (H2) generation from methane and third-generation biofuels. The real challenge is acquiring financing for these nascent technologies. United Nations data collected between 2013-2019 show that companies with consistently high ESG performance enjoyed 4.7 times higher operating margins and lower volatility than low ESG performers over the same period.

Commitments
Based on 2050 net-zero emissions targets, the need for carbon mitigation may be much more complex than estimated, often involving technology yet to be commercialised. In the spirit of cooperation, members of the Oil and Gas Climate Initiative (OGCI) are involved in the development of low-carbon solutions. Often  these companies build $30 to $50 per tonne of carbon into the cost of new projects.

Global oil and gas companies like Repsol, Total, BP and Shell are part of OGCI and committed to sustainable ‘net-zero’ operations by 2050. This commitment requires exponential growth in environmental innovation. They could benefit from the input of innovators from other ESG-driven industries towards the elimination of emission sources (such as flaring) and selling hydrogen at scale by 2030.

In the transition from a fossil fuel-based market to renewables, innovative technology suppliers are dually serving the ‘integration’ of the fossil fuel and renewable energy industry. For many operators and the markets they compete in, fossil fuels’ high energy-to-volume ratio cannot be overlooked, especially as much of the world struggles to find ways to recover from an unprecedented pandemic.

The cost of renewable fuels and energy (such as wind and solar-PV) is becoming competitive with fossil fuels. However, end-users prefer energy sources that are continuous, not intermittent. Significant capital investment is going into electric vehicles, green hydrogen (currently just 0.1% of global H2 production), and so on, but markets favour fossil fuels in the near term. When will this balance shift towards renewables?

The rate at which renewables will replace fossil fuels to achieve decarbonisation goals varies among regions. For example, the goal in some countries like Saudi Arabia is not to replace fossil fuels, but to create a balanced approach that will reduce the amount of oil burned domestically, safeguarding this important resource for generations to come.

Safeguarding important resources requires increased complexity, such as investing in the ability to recover hydrogen from refinery fuel gas. In other cases, complexity can be avoided. For example, the World Economic Forum noted that individual and community power generation would contribute to more than 50% of the energy mix in developed countries by 2030, up from less than 5% in 2016.

Scale-up
Green hydrogen’s ability to plug the intermittency of solar and wind while burning like natural gas and serving as feedstock in industrial chemical processes has captured the interest of businesses, government and investors. Half of Fortune 500 companies, many of which produce significant CO2 emissions, have now made net-zero or carbon-reduction commitments.

These commitments require scale-up of H2 purification technology, expected to increase ten-fold by 2050 as companies accelerate investments in renewable power and technologies capable of meeting clean fuel standards. Driving development of lower-carbon products include hydrotreated vegetable oil (HVO) to produce renewable diesel (chemically identical to petroleum-based diesel).

Meanwhile, GHG emissions disclosures will be required for many industry sectors, further increasing pressure to align investments along sustainable strategies.

With the days of the internal combustion engine in doubt (GM will only sell zero-emission vehicles by 2035), transition scenarios to full sustainability in power, heat and transport sectors are emerging. Otherwise, businesses could do poorly.