March 2023

The last barrel

Striking a balance
Craig Fleming / World Oil

Governmental authorities have finally realized that a hard push to quickly convert to renewables is not technically feasible or a realistic solution to satisfy the world’s energy requirements. Our industry is working to develop viable, real-world technologies to overcome the daunting engineering and operational challenges to deliver the dependable energy we require while reducing GHG emissions.  

Since the launch of the energy transition initiative, the actual cost and technological complexities of moving towards net-zero are better-defined. And many energy companies have made meaningful changes to their business models to help achieve carbon reduction goals, utilizing a multifaceted approach. However, producers must balance revenue output to sustain oil and gas operations, while also pursuing carbon reduction initiatives.  

Shell CEO says back to basics. Shell’s plans to reduce CO2 emissions are being sidelined, as the company increases its spend to maintain and develop its oil and gas reserves. Shell reported a 10% reduction in GHG emissions across its business and the energy that it sold in 2022. However, the reduction was accomplished by divesting carbon-intensive assets. But future cuts won’t be able to rely on selling undesirable assets, as new CEO Wael Sawan plans to focus on delivering value for shareholders and sees the company’s core business in oil and natural gas as key to driving returns. 

Shell has a target to cut emissions in half, known as Scope 1 and 2, by 2030, compared to 2016 levels. So far, the company has achieved a 30% reduction. But emissions will start to climb if the company increases expenditures for producing hydrocarbons without scaling up new tools to cut carbon. In its annual report, Shell said the company expects “new investments across our portfolio will increase our Scope 1 and 2 emissions between 2023 and 2030 and that they will exceed reductions associated with planned divestments and natural decline.” 

The biggest part of Shell’s carbon footprint comes from emissions created when customers burn the fuels it sells, known as Scope 3, which account for 90% of Shell’s total emissions. The company has a goal to cut the carbon intensity of the energy it sells 20% by 2030, compared to 2016. Shell has primarily cut its Scope 1 and 2 emissions by selling refineries, including the Deer Park and Puget Sound facilities in the U.S. Since 2016, divestments have lowered Shell’s Scope 1 and 2 emissions by 22.9 MM tons of CO2, out of a total net-reduction of 25.3 MM tons in that period. However, as Shell moves forward, there is less low-hanging fruit, and it requires significant investment in new technologies to continue to further reduce carbon output.  

Shell’s carbon reduction plan. In its Energy Transition Progress Report 2022, Shell shows it has again met its climate targets as part of its energy transition strategy. “We have documented the progress we have made towards becoming a net-zero emissions energy business by 2050, as we continue to supply the vital energy the world needs during a time of great volatility," says CEO Wael Sawan. "I am especially proud of the progress we have made in reducing carbon emissions from our operations, with a 30% reduction by the end of 2022, compared with 2016 on a net basis." By the end of 2022, the net carbon intensity of the energy products sold by Shell had also fallen 3.8%, compared with 2016. The analysis, using data from the IEA, shows the net carbon intensity of the global energy system fell by around 2% over that time. 

Shell has also increased its LNG footprint and invested $1.6 billion in Indian renewable power developer Sprng Energy. They also have reached a final investment decision on the Holland Hydrogen 1 project in the Netherlands, which will be Europe’s largest renewable hydrogen plant. In 2023, Shell acquired Denmark's Nature Energy, which produces renewable natural gas for $2 billion. Shell also plans to increase investment in carbon capture technologies. In 2022, Shell spent $220 million on CCS, which sequestered 0.4 MM tons of CO2. 

BP reinforces change mindset. The oil industry focused “too much” on decarbonization in 2022, says BP’s Chief U.S. Economist Michael Cohen. “The oil industry focused too much on reducing greenhouse gasses last year, eroding its ability to keep pace with demand.” The resources expended on reducing carbon in 2022 taught us that excessive focus on the decarbonization agenda led to a mismatch between supply and demand.” Cohen said the energy mix should resemble a three-legged stool balancing energy security, affordability and a low-carbon future. “If you focus too much on one leg of the stool, you end up throwing the others out of balance.” 

Ukraine war exposes vulnerability. Efforts by the European Union, UK and U.S. to reduce reliance on Russian oil and gas following the invasion of Ukraine laid bare the lack of affordable energy alternatives. While President Biden implored companies to produce more oil to bring down surging prices, many European countries burned more coal, due to the lack of affordable natural gas supply. BP reported record profits in 2022 after oil prices surged. Formerly considered a flag-bearer for transitioning to cleaner energy, BP has subsequently scaled back plans to reduce oil production to meet its net zero targets, a considerable about-face after announcing ambitious emissions reduction plans. In February, BP changes its goal to reduce oil and gas output by 2030 to 20%-30%, from 35%-40%. 

Investment requirements. According to the IEA, oil consumption will reach a new record level this year. But supply is being restricted by sanctions on Russian crude and a slowdown in U.S. shale growth, combined with a lingering reduction of investment in oil and gas to pursue alternative energy sources. OPEC has forecast that $12.1 trillion will be required to satisfy demand up to 2045. BP anticipates that the sector will require approximately $400 billion per year until 2050. Although OPEC, the IEA and BP’s estimates “vary widely,” BP’s Cohen said, “it’s not sensible to get bogged down in the details. What is clear is we need to keep investing, as we have been in the past.”  

To help balance its energy portfolio, BP is also investing in green hydrogen and biofuels in Latin America, says Angelica Ruiz, BP’s senior vice president for Latin America. “We are doing more, and have acquired new companies that underpin this new growth engine that we believe is critical.” 

UK CCS ventures. Britain’s Chancellor of the Exchequer, Jeremy Hunt, committed to invest $24 billion over the next two decades for local carbon capture and storage projects, which Hunt says are crucial to achieve the UK’s net zero emissions target and will help expand green jobs. The vow comes as competition in the race for clean technology heats up after President Biden’s $370 billion climate plank passed in the IRA bill, which raised tax credits for capturing carbon dioxide. The UK response is intended to ensure that the UK will not lose investment opportunities to the U.S. and attract green start-ups. Hunt said new CCS projects will add 50,000 jobs and help the UK to meet its net-zero goals. 

The UK investment will go to projects that aim to store 20 MMt to 30 MMt of CO2 annually by 2030. That would benefit utilities that own natural gas-fired plants, where the technology will be applied. Natural gas now fuels roughly 40% of Britain’s electricity requirements. Low-carbon generation from stations run on biomass or natural gas/hydrogen with carbon capture could make up 10% of Britain’s power capacity by 2035. 

Carbon capture is gaining momentum in Europe, where extensive subsidies already exist. European industrial company Ineos Energy injected CO2 below Denmark’s seabed for the first time in early March. Ineos Chairman Brian Gilvary said that the “U.S. will dominate investment in CCS technology and that Europe needs to do more.” 

Several countries are starting to strengthen their support for CCS policies to compete with the U.S. and keep industry from relocating, said Bloomberg analyst Brenna Casey. “The UK could have been more ambitious, allocating more funding. But $24 billion is likely enough to at least keep many investments domestic,” Casey concluded. “The U.S. has surged ahead with carbon-removal funding at a time when the UK hasn’t done much at all,” says Ted Christie-Miller, head of carbon removal at ratings agency BeZero Carbon. “I would like some of this new funding to go to negative-emissions technology, as well as CCS for power plants.” 

Common sense strategy. Despite the IEA’s net-zero “solution,” the world’s largest producers continue to reject this call for a rapid shift away from oil and gas, warning that starving the industry of investment will harm the global economy. Oil prices have been high, and Goldman Sachs forecasts Brent will reach $94/bbl in 2023 and $97/bbl in in the second half of 2024. The surge in prices is partially caused by a supply gap created by increased demand in China, disruptions in Russian output and geopolitical unrest despite the threat of a global recession.  

A major contributor to the lack of surplus production capacity has been caused by excessive pressure applied by short-sighted politicians caving into demands from environmental groups. This created an unprecedented reduction of investment in hydrocarbon-based energy, in favor of developing unproven and unreliable green resources. Fortunately, energy producers are providing valuable leadership and pushback by defining how the energy transition will be implemented and increasing investment in hydrocarbon-based energy.   


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Craig Fleming
World Oil
Craig Fleming
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