TRANSITION TODAY, NOT TOMORROW

Sarah Miller - Oct 6,2021

Speed in slashing carbon emissions is vital to limiting climate change. That’s the message from United Nations experts, reinforced by this year’s worldwide proliferation of floods, droughts and wildfires. For the energy transition, that means picking the low-hanging fruit — fast — fruit that is copious in the form of efficiency gains, renewable power and electric vehicles (EVs). All three present a clear and present danger to fossil fuel demand growth. The hydrogen and carbon capture that many in the oil industry are focusing on may or may not develop in quantity at some future point, but oil companies don’t have the luxury of waiting. Investors have made that clear. For oil companies that want to live into the new energy era, the imperative for speed means embracing electrification now, despite potentially-slim profit margins. Nor is there time, or cause, to clean up carbon offset trading.   

The whole concept of “net zero” by 2050 is of questionable practical value when speed is the priority. Cumulative levels of greenhouse gases (GHGs) in the atmosphere are the key determinate of the severity of climate change, and even zero emissions by 2050 won’t keep temperature change below 1.5° C if it’s back-end loaded — much less if it’s “net zero” in a sense that doesn’t actually equate to zero.

As Energy Intelligence’s Philippe Roos recently pointed out , climate-sensitive investors know this and are demanding not just that oil companies make vague promises to reach net zero by 2050, but that they have hard interim targets for 2025 and 2030, including accepting responsibility for emissions from the oil products they sell. “Such demands are making it increasingly difficult for oil companies to justify future growth in oil production,” Roos wrote.

Meanwhile, the business press is putting out a regular drumbeat of reports on abuses of the carbon offset trade, which many oil companies have placed at the center of their planning for “net” zero. Paying for the right to go on emitting carbon dioxide, rather than simply using less fossil fuel, buys time for oil companies. But it will no longer pacify climate-conscious investors, much less environmentalists or, ultimately, governments. The International Energy Agency showed real foresight when it ruled out reliance on offsets in its “road map” to Net Zero by 2050 .

There are many definitions for “net-zero emissions.” One provided by the World Resources Institute is notably clear and useful: “First and foremost, human-caused emissions … should be reduced as close to zero as possible. Any remaining GHGs should then be balanced with an equivalent amount of carbon removal, which can happen through things like restoring forests or using direct air capture and storage (DACS) technology.”

This definition is useful because it splits the energy transition into two phases: First, just stop whatever results in emissions, and only in a distant and smaller second phase, develop ways to “offset” remaining emissions that prove too difficult to halt. The first phase is nowhere near complete, so that’s where the attention needs to be for now. And that basically boils down to efficiency gains, renewable power generation and EVs — well-understood technologies that could easily eliminate two-thirds of CO2 emissions. That’s gross, not net.

Today’s Big Three

Start with efficiency gains. These run the gamut from insulating houses and other buildings, to driving less and walking and biking more, to less energy-intensive manufacturing, to making more stuff closer to markets. For individuals, the up-front cost isn’t great in most cases, and subsidies are increasingly available. For manufacturers, regulations may soon allow few alternatives. For oil and gas, it means slower demand growth. Quantifying that is difficult, but the impact will be big.

Then comes renewable power generation. Making electricity accounts for 40% of all CO2 emissions worldwide, by US Energy Dept. calculations. Solar and/or wind now provide cheaper electricity in most places in new power plants than does coal or gas. The higher the fossil fuel price — as with Europe’s ongoing “energy crisis” — the more evident renewables’ economic advantage becomes. Battery and other methods of storing electricity are required by these intermittent power sources, but battery costs are plunging, too, and longer duration storage is rapidly being developed.

Oil’s biggest use is for transportation, which accounts for another nearly 25% of CO2 emissions. EVs already account for nearly 20% of the passenger vehicle market in Europe, 15% in China and 4% in the US. The number of EVs sold is expected to roughly double this year, and within one to three years, EVs should be cheaper to buy up-front than conventional passenger vehicles. By some reckonings, they’re already cheaper to operate, given lower maintenance and fuel costs. That means cost-sensitive owners of delivery trucks, small buses and other fleet vehicles will electrify quickly, too.

Many countries are already targeting massive increases in renewable electricity and EV sales by 2035 or 2040. As climate costs become more evident, those targets can — and likely will — again be advanced by another 5-10 years. That’s the thinking behind the push to “upgrade ambitions” under the Paris climate accords. In combination with efficiency gains, getting fossil fuels out of power generation and transport would slash CO2 emissions by roughly two-thirds, and much more if efficiency gains prove as effective as many expect.

Efficiency doesn’t hold out a lot of positive promise for the oil and gas industry. Electricity generation and EVs could. However, the idea of shifting in those directions hasn’t been popular with many oil companies because they don’t see it as profitable enough or compatible enough with their corporate skill sets. There may be some truth to this and, to the extent there is, some oil companies may simply fade away.

But many an investment bank and even some energy companies have managed to thrive on low-margin, high-volume commodity activities, and some oil companies may find they can do the same.

Too Little and Too Late

Instead of acting quickly to become part of the solution and shake off the oil industry’s image as being the problem, too much industry attention is going into trying to sell the idea of hydrogen and carbon capture as the answers for the “difficult” and distant last 10%-25% of the transition off carbon. Yes, it’s important that somebody start working now on tricky problems such as making concrete and steel, and crossing the ocean on large cargo ships or planes, without emitting CO2. And it’s good if oil companies contribute to this technological effort.

But these problems are too small, and too distant, to provide the lifeline that the global oil industry needs right now. Too distant, because share prices for oil companies aren‘t keeping up with oil and gas prices, signaling shareholder discontent, and legal pressure keeps building. Too small because there simply isn’t enough demand for oil and gas for these uses to support an oil industry at anything like its current scale. What’s more, heavy R&D is also going into finding ways to do these things with electricity, or to do with less of them.

Why isn’t the industry putting more effort into capturing methane leakage and selling that gas in undersupplied markets? Or into installing high-speed EV charge points at gasoline service stations? The return on such investments might be low, but the PR value would be high.

Why aren’t more oil companies responding to calls to build more solar panel and other component manufacturing close to markets, more battery factories, more wind mills? The skill sets needed for such manufacturing may not align exactly with oil extraction and refining, but oil majors initially said the same about “manufacturing-style” shale oil and gas production.

Renewables aren’t going to end up taking the blame for recent regional shortages in oil, gas and coal. Fossil fuels will. The time for oil companies to find a new future is now. Otherwise, they won’t have a future.

Sarah Miller is a former editor of Petroleum Intelligence Weekly, World Gas Intelligence and Energy Compass.

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