CARBON CAPTURE ONLY A PARTIAL LIFELINE

Philippe Roos, Strasbourg - Jan 21, 2022

Some in the oil sector suggest carbon capture and storage (CCS) could save fossil fuels in a net-zero world. Carbon dioxide emissions are the problem — not fossil fuels — and can be suppressed with CCS, they argue. CCS could indeed become a sizable business where oil companies have cards to play, particularly in the storage part. But the CO2 volumes involved are way too large to all be handled with CCS, and fossil fuel use will have to shrink a lot to reach net-zero targets.

Fossil fuels are currently responsible for 32 billion tons of CO2 emissions, including 17 billion tons for oil and gas alone. It is hard to fathom that a still-emerging industry would ever be able to handle such a gigantic amount of matter.

By comparison, the oil and gas sector currently manages — by weight — around 4.5 billion tons of oil and 2.5 billion tons of gas per year, and the global agriculture sector is harvesting 10 billion tons of crops annually. Shrinking fossil fuel usage therefore looks unavoidable, but by how much?

Net-Zero Scenarios

Net-zero scenarios, such as those produced by the International Energy Agency (IEA), BP and the UN Intergovernmental Panel on Climate Change (IPCC) assume some 4 billion-5 billion tons per year of CO2 are captured from fossil fuels in 2050. While smaller than current oil- and gas-related emissions, the amount of CO2 captured would be about the size of today's oil production in tonnage terms, and can reasonably be considered the upper limit of what a future CCS industry can handle.

The IEA's base-case scenario meanwhile assumes just 200 million tons/yr of CCS in 2050.

Net-zero scenarios imply that fossil fuel supply and/or demand would need to shrink by 55%-75% over 2010-50. But while coal almost disappears in every one of them, they show substantial disparities in how oil and gas evolve.

Oil, for example, falls by around 75% in BP and the IEA scenarios, versus only 40% in the average of the IPCC's 1.5°C scenarios. Most of the difference comes from how much negative emissions are factored in, primarily from bioenergy with CCS (BECCS), which is highly controversial because of the volume of energy crops it involves and the sustainability issues it raises.

The IPCC assumes over 7 billion tons/yr in 2050 of negative emissions technologies, which remove CO2 from the atmosphere, versus around 2 billion tons for BP and the IEA.

This is not realistic and more of a modeling trick than an actual technology forecast, says the Science Based Targets initiative's Alberto Carrillo Pineda. "Somewhere in the economy, some emissions are not being reduced, so climate modelers need to have negative emissions and the way to model negative emissions is by adding BECCS."

Plain CCS

Plain industrial CCS is much less controversial. Industrial gases giant Linde's Tilman Weide recently told Energy Intelligence he considers it a relatively cheap and easy transitional technology between current carbon-intensive processes and the hypothetical fully electrified industry of the future. The technology is known, it takes two-three years to build a CCS plant and the gap between capture costs and European CO2 prices is "not so big," says Weide.

Carrillo Pineda concurs. "For sectors like cement or steel it's not that straightforward whether they should electrify, use hydrogen or use CCS, and it depends a lot on local conditions." In terms of volume, Weide expects the global need for CCS will steadily decline over time as processes decarbonize and fossil fuel consumption diminishes.

The IEA's net-zero scenario sees CCS amounting to 5 billion tons of CO2 per year by 2050, including 2.5 billion tons from industry, 1.5 billion tons from blue hydrogen production and 1 billion tons from power generation.

Direct Air Capture

Direct air capture (DAC), another negative emissions technology, is a different story. While it does not involve the same kind of environmental and social issues as BECCS, it remains an unproven and therefore risky technology to rely on for large-scale removal of CO2 from the atmosphere, according to Carrillo Pineda. "We cannot assume that a company can continue to release carbon and then plan to remove it at some point in the future," he warns.

This could change in just a few years, though, as Canada's Carbon Engineering is working with Occidental Petroleum on the first large-scale DAC plant in the US' Permian Basin. It is expected to be commissioned in 2024 and capture 500,000 tons of CO2/yr at $300 per ton.

This is expensive but Carbon Engineering CEO Steve Oldham told Energy Intelligence he expects to reach the $100 threshold later this decade if enough projects are being launched to generate cost savings.

Philippe Roos is a senior reporter at Energy Intelligence based in Strasbourg, France. This article appeared initially in EI New Energy.

Russia’s limitation on gas supply to Europe, aimed at coercing EU countries into consuming greater amounts of gas and essentially abandoning the “Fit for 55” program, constitutes aggression. The effort has not been subtle.

Oil producers also contributed to Europe’s economic pain in 2021, by holding production back to boost prices. Those efforts were led by Russia and Saudi Arabia and caused crude prices to rise almost 80% in dollar terms for all EU nations. Again, the Russian actions seem aimed at pushing European economies into recession and fanning resistance to “Fit for 55.” As noted, policymakers in Moscow knew that the price increase would cut economic growth in the EU, as it has.

Good Demand for Non-Energy Goods

While policymakers in energy-exporting countries expect the price boosts to depress growth rates in the targeted nations from previously projected levels, the magnitude of the impact of higher energy prices on economic activity is highly uncertain. The economic literature on the issue is a muddle. Many academic studies suggest that the Russian efforts to slow European economies by pushing up regional gas prices could fail if governments and central banks act to sustain consumer demand for goods outside the energy sector.

This strategy would have been almost unimaginable in the past. However, governments and central banks worked to maintain economic activity through the Covid-19 crisis that began in March 2020. Financial support came via increased government spending, the continuation of low interest rates, and central bank purchases of government and company bonds.

Such actions are being taken today. Italy, guided by Prime Minister Mario Draghi, a Massachusetts Institute of Technology-trained economist and former head of the European Central Bank (ECB), is leading the effort. The Italian government has agreed to compensate companies that will work to limit energy price increases. To back up this pact, the Italian state budget enacted at the end of 2021 allocated more than €3.5 billion ($4 billion) to help moderate energy price rises. Germany, Sweden and Norway are taking steps, as well.

Perhaps the most significant move, though, was by the ECB. On Jan. 8, ECB board member Isabel Schnabel spoke on the issue to an American Finance Association gathering. Press reports focused on Schnabel’s inflation concerns. Ignored was Schnabel’s firm statement that the transition from fossil fuels needed to be “pushed forward” and that governments need to protect those most vulnerable to “energy poverty.” While central banks should assess where the transition threatens price stability, they should also consider where those risks “are tolerable and consistent with their price stability mandates.”

In an earlier presentation, Schnabel had asserted that the ECB was not only allowed but required to take climate change into account in its actions. Her view confirms a belief that Europe will not capitulate to the increase in fossil fuel prices but rather intensify its efforts to eliminate emissions from burning oil, gas and coal.

The EU will likely also accelerate its efforts to force other countries seeking to export goods or services into Europe to reduce fossil fuel consumption by quickly imposing and then gradually raising the CBAM. This action will make exports of goods from Russia, China and other countries uncompetitive with products produced inside the EU unless these nations follow the example of the EU and cut carbon emissions. Fossil fuel producers will be the losers.

Europe might not be alone in this approach. In the US, one survey indicated that as as many as 80% of those questioned saw CBAM mechanisms as a good idea if they were described as a tax on Chinese imports.

Abandoning Fossil Fuels

The fossil fuel industry is confronted with a problem that ultimately threatens its long-term survival. Warnings about how high energy prices threaten economic growth are no longer accepted by key economic policymakers. Instead, high prices are welcomed because they will accelerate the move to a world that has abandoned fossil fuels. Russia’s actions limiting gas exports to Europe may have hastened this shift in attitude.

Here, two effects of the EU approach should be of concern for oil and natural gas producers. First, the ECB and European governments are challenging the view that energy price volatility harms economic activity.

This position, put forward by serious and important economic policymakers, was captured succinctly in the following statements made by the International Energy Forum (IEF) at the World Petroleum Conference: “Prolonged cycles of energy price volatility are detrimental to economic growth. On the microlevel, it can affect individuals’ and companies’ costs and revenue streams, making planning difficult. At the macroeconomic level, volatile oil prices fan inflation, hinder investment, delay consumption of durable goods, reduce total economic output, dent equity returns, and entrench energy poverty.”

Beyond asserting that the IEF authors’ views are economic rubbish, the EU policymakers seem to have concluded that Europe’s energy security is best achieved by eliminating fossil energy use altogether and thus relieving themselves of the need to deal with Opec or other energy-exporting nations. While EU officials have not directly accused Russia and Opec of trying to frustrate the community’s effort to reduce fossil fuel use, the actions of the ECB and various countries suggest this is their belief. Rather than capitulate to energy producers, the EU intends to ramp up its effort to minimize the burning of hydrocarbons.

Philip Verleger is an economist who has written about energy markets for over 40 years. A graduate of MIT, he has served two presidents, taught at Yale and helped develop energy commodity markets since 1980. Kim Pederson is editorial director of PKVerleger LLC.

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