It is a cruel irony that in any other industry the market fundamentals that drive the oil & gas industry would point to a booming future if it wasn’t for climate change. Indeed, investors would be positively queuing up to be involved and customers would be delighted with the service that they would receive.
The key market driver for this industry is global population. As Figure 1 to the right shows, the world’s population has risen inexorably for well over 50 years – from below 3 billion people in 1950 to nearly 8 billion today. Projections vary, but even the “low” forecast anticipates a high of nearly 10 billion people before declining late in this century, while the “high” forecast reaches over 12 billion by the end of the century. Regardless of the actual trajectory of global population, these statistics prove that there will be many more people demanding energy over the next 25-50 years.
The other market key driver of the market is human aspiration; as Figure 2 above shows, wealthier people consume more energy per capita. Globally, people aspire to improved standards of living – TV’s, refrigerators, heating, air conditioning and, of course, mobile phones – all of which increase per capita energy demand.
This confluence of continued growth in the number of people on the planet and the growing demand for energy by all those people has driven an extraordinary rise in global energy consumption. Figure 3 to the right clearly shows this rise; apart from the impact of the 2008 financial crisis, it shows that global energy consumption has risen at a rate of 3-5% per annum for the last 30 years.
Driven by this demand, the world’s oil and gas companies have explored, appraised, developed and decommissioned oil and gas fields around the world with increasing effectiveness. Technology developments such as 3D and 4D seismic, the horizontal well and massive hydraulic fracturing have enabled us to find more oil and to produce more of the oil we find. The impact of technology has been remarkable; counterintuitively, although we consume nearly 100 million barrels of oil per day, global reserves have increased substantially over the last 30 years (see Figures 4a & b overleaf.)
For many years now, climate change scientists have been pointing to the impact of CO2 emissions on the global climate. As most readers will appreciate, this CO2 derives from the process of combustion of coal, oil, gas and rainforests, all contributing to the problem.
The effect is now becoming increasingly apparent, with so-called 1 in 100-year storms now happening every few years, with ever larger wildfires in California and Australia, with “before and after” photos of glaciers showing huge losses of ice mass and with extensive evidence of the planet getting warmer being published through a variety of different global media.
Sadly, the oil & gas industry has created a poor image for itself during this process. Not only is its product driving much of this climate change, but some companies have actively supported climate-denying science. The overall impression held by many outside the industry is of an entire industry in denial.
Meanwhile, in the last few years there has been a seismic shift in political and financial markets to the challenge of climate change. Activists such as Greta Thunberg and Extinction Rebellion have raised public awareness, and politicians the world over have responded. Some have declared “net-zero” targets – the UK’s is 2050, while China's is 2060. Many have also set aggressive intermediate objectives – for instance, the EU is targeting a 50% reduction in carbon emissions by 2030.
What this all means is that the global energy system is being upended. The well-understood flows of oil, gas and coal from fields and mines around the world, through pipelines and tankers to refineries near to the consuming markets, will either disappear or must change radically. The oil and gas industries Scope 1 emissions – those directly linked to production operations - are a big enough challenge, with tens of thousands of diesel engines, gas turbines and ship engines throughout the value chain to be decarbonised. But Scope 3 emissions – those created using the oil and gas – are the dominant issue facing the industry today.
Attending events outside the oil and gas sector illustrates public attitudes starkly. Oil and gas is seen to be the problem itself rather than as part of the solution, as many in the oil and gas industry would prefer to believe. All the talk is of a wholesale switch to renewable energy, with energy storage in batteries and in the form of hydrogen acting to provide the buffer that manages in-day and season-to-season energy demand fluctuations.
This profound shift in the political climate has had a substantial impact on the finance and insurance markets. Businesses seeking to grow in oil & gas are finding access to finance challenging, with investors either unwilling to invest (for example, the recent withdrawal of the Norwegian “Sovereign Pension Fund – Foreign” from hydrocarbon investments) or demanding that clear decarbonisation plans are a part of the investment. Insurers are increasingly concerned by the risks that go with climate change – as many readers will be aware, Lloyd’s of London recently asked its members to stop insuring thermal coal mines, coal-fired power plants, Canadian oil sands and new Arctic energy exploration, and undertook to phase out such cover by January 20221.
So, as Bob Dylan famously sang at a time long ago when the oil & gas industry was going from strength to strength: The Times They Are a-Changin'.
Governments around the world have, for many years, been funding research into a wide array of low-carbon technologies, in the hope that a solution to climate change would emerge. The more promising technologies, such as wind, solar and wave power, have received explicit financial support for industrial scale deployment; for example, the UK government has used the contract-for-difference mechanism to support the emergence of an offshore wind market.
As Figure 5 above shows, this has been hugely successful, with offshore wind no longer requiring any subsidy as the market cost is now below wholesale electricity market prices. This has been achieved with the industrialisation of the wind turbine manufacturing market – factories are now producing turbines, turbine blades and tower sections on production lines rather than piecemeal. Similarly, the cost of solar energy has plummeted; in California, the cost of solar electricity is now below that of gas-turbine generated electricity2.
These simple economic realities have driven a rapid rise in the use of renewable energy worldwide – the bp Statistical Review of World Energy shows it to rising to nearly 10% of global energy supply - and with over 20% of energy in Europe being provided by renewable sources in 2019 (see Figure 5 to the left).
Harvesting the energy of the oceans is less mature but is nevertheless developing quickly. At the European Marine Energy Centre on Orkney, underwater “windmills” and wave energy systems are being trailed, harvesting tidal energy while small-scale wave energy devices are already commercially available.
The major challenge associated with renewable energy is intermittency – if the wind doesn’t blow then a wind turbine cannot generate, and if the sun doesn’t shine (e.g. at night) then a solar panel cannot create electricity.
This means that considerable attention is now focussed on energy storage. Tesla has supplied a 100MW battery facility at the Hornsdale Power Reserve in Australia that stores wind and solar energy to manage the fluctuations in supply and demand3. Pumped storage schemes also offer the same capability, using water pumped up a hillside to generate power when required.
Probably the greatest hopes are being pinned on the use of hydrogen, both as an energy storage medium and as a fuel. Like natural gas, it can be compressed and stored, although its lower density means larger storage facilities are required – salt caverns and depleted natural gas fields are being considered.
However, energy storage, both “in day” and between the seasons, remains a major challenge. Demand on a typical day can vary by 300% between early morning low and dinner time peaks. Figure 6 above illustrates the issue: here in the UK, the peak winter demand for gas is typically 5 times the demand on a warm summer’s day, while the “Beast from the East” cold spell in 2018 pushed that to peak to 7 times the summer demand low. The natural gas supply system can cope with this by a mix of summer maintenance, gas storage, system line pack and interruptible supply to major gas users and Hydrogen will have to replicate this flexibility.
A wide range of smaller scale technologies are now emerging. The UK government is promoting the concept of domestic heat pumps to extract low grade heat from the air or the ground to heat homes. UK company Ryse is offering stand-alone onsite hydrogen generation systems – a motorway service station in the future could generate and sell the hydrogen to fuel trucks on site, with no supply chain required, while large scale insulation programmes are being considered. All of this will reduce the overall requirement for bulk energy supply, making it more likely that the seasonal flexibility can be achieved.
All the talk in the political circles and in the media of “an energy transition” and “net-zero targets” doesn’t really convey the magnitude of the climate change challenge that we collectively face.
The International Energy Agency (IEA) estimates global energy consumption in 2019 to have been 14,282 million tonnes of oil equivalent – which translates to 1724 TWh or 172,449,640 million KWh. Of this, approximately 80% originates from a hydrocarbon – coal, oil or gas – and directly creates much of the 33.3 gigatonnes of CO2 emitted the same year (that is 33,200,000,000 tonnes – and rising - every year)4.
This energy is consumed in an estimated 62,500 power stations5, an estimated 1.4 billion road vehicles6, 39,000 aeroplanes, 53,000 ships and the heating and cooling of the 1.2 billion homes in the world7.
This energy is supplied by a sophisticated physical supply chain – ships and pipelines transporting the bulk raw materials (oil, gas and coal) to refineries, storage tanks and power stations, with final distribution to consumers by road and rail tankers, distribution pipes and cables. The supporting commercial and financial infrastructure is also vast, with millions of barrels of crude traded every day, and sophisticated forward contracts, swaps and derivatives driving substantial market activity.
“Net-zero” means reinventing our energy system – largely eliminating emissions whilst preserving our civilisation as we know it. An example of the scale of the challenge is an estimate by the Offshore Renewables Catapult that 240 GW of wind energy could be built offshore the UK by 2050 just to manufacture “green” hydrogen (hydrogen produced by electrolysing water). To put this into perspective, the UK’s largest offshore windfarm – Hornsea 1 - involves 174 turbines covering over 400 square kilometres and generating 1.2GW.
What this means is that there will be a long period of transition to some future where energy is decarbonised. A net-zero target of 2050 means we have just 30 years to profoundly change how we create and use energy.
We need to act now to limit the rise in our planet’s temperature and the associated impact of climate change.
As one of the largest industries in the world, oil & gas certainly has the technical capability and the financial muscle to tackle the climate change challenge.
To illustrate, Oil and Gas UK, the leading trade association for the United Kingdom offshore oil and gas industry, has set ambitious goals for the UK industry. Their “Roadmap 2035”8 articulates an ambition to decarbonise production operations first, before trying to decarbonise the product.
De-carbonising production is challenging – platforms consume 10-30 MW of energy to drive power generation, compressors and pumps. Equinor, with their “HYWind Tampen” project, aims to deploy a floating wind farm to provide decarbonised power a cluster of Northern North Sea platforms in the Snorre and Gulfaks fields. Others have considered carbon capture on their existing natural gas turbines, only to find that the scale of the required amine plants would necessitate a prohibitively expensive additional platform.
Studies are under way to decarbonise shipping – perhaps with hydrogen fuel or small-scale CCS on the vessel to capture emissions. It is possible that offshore production will achieve “net-zero” by continuing to emit at the point of production whilst extracting CO2 from the atmosphere elsewhere, using Direct Air Capture and other negative emissions technology.
Decarbonising the use of the hydrocarbon is the holy grail for the industry – potentially allowing us to continue to use this plentiful source of energy whilst eliminating the damaging effects of CO2 emissions.
Key to this is the technology of CCS - sometimes portrayed as carbon capture, utilisation and storage (CCUS). CCS involves three critical steps:
The technology currently available to capture CO2 emissions from industrial processes is a long established and well understood process, known as amine capture. On large industrial plants emitting 200,000-2 million tonnes of CO2 per annum, the amine units will be large (hence costly) and the process is energy intensive, which is why the operational expenditure involved is high.
Companies such as Shell (with their “Cansolve” technology), Aker Clean Carbon and Carbon Clean have improved on the long-established amine chemistry, and their technologies are starting to be deployed. Other more novel technologies such as nano-scale filtration, are emerging, offering the prospect of lower-cost carbon capture.
Transporting CO2 is also well understood, with over 6,500km of CO2 pipelines worldwide, primarily in the USA where CO2 is used for enhanced oil recovery (EOR)9.
Injecting CO2 into the ground is again a well-established process, which has been going on for many years in EOR projects in the USA. Although the CO2 injected for EOR is removed from the atmosphere, it involves significant additional oil production which many regard as inappropriate10.
Injection of CO2 for long term storage is less well established, but there are now 26 operational CCS projects around the world injecting approximately 40 million tonnes per annum of CO2, including projects such as the Equinor Sleipner West platform that has been operating since 1996 and BP’s In Salah project that has been injecting in Algeria since 2004 (although this programme is now closed).
CCS enables the continued use of hydrocarbon in several different ways. Existing facilities can be decarbonised by capturing the CO2 from the exhaust gases. This can work on the flue gases from coal and gas fired power stations, major emitters such as iron and steel production and major industrial processes such as chemical production, cement manufacture and other energy-intensive industries. Industrial clusters such as those emerging in the UK at Teesside, Humberside, South Wales, north west England and around Grangemouth in Scotland can make such systems more efficient by sharing CO2 gathering and transportation costs. Furthermore, new large scale “blue” hydrogen facilities are now being developed, in which natural gas is processed to manufacture hydrogen, with the resulting CO2 being extracted and stored in a carbon store. When hydrogen burns, the only by-product is water.
Another interesting emerging technology is the Allam Cycle. This is a completely novel “hydrocarbon to electricity” cycle that uses CO2 as the power fluid and captures all the CO2 generated in the process. Developer NetPower has a 50MW demonstration plant is in operation in Texas, and a 300MW plant is scheduled for completion in 202211. If this technology scales up effectively, it could be the silver bullet that enables us to keep using hydrocarbons whilst capturing the CO2 and storing it at a CO2 storage site.
Furthermore, early-stage technology offers considerable potential for further large-scale decarbonisation. Biotechnology is already used to manufacture biodiesel, and patents exist on processes to break down the long-chain hydrocarbons to manufacture lighter oil and hydrogen. However, such technology is at a very early stage and is unlikely to be in widespread use for many years.
Oil & gas companies sometimes don’t realise that they are in the energy business – not just in oil and gas. This means that they understand the flow of energy (consciously or not), the day-to-day and seasonal fluctuations in demand, the needs of large consumers such as power stations (as well as smaller consumers such as car drivers) and the systemic resilience that can cope when problems arise.
Recognising the imperative of decarbonisation, some companies have now started to pivot into the wider energy supply, embracing the energy transition. Shell have consciously refocussed their core business and are now predominantly a gas production company that is now actively investing in electricity generation and hydrogen. French energy giant Total has just announced a rebranding to “TOTAL Energy”, and the Spanish oil company Iberdrola is now investing in wind-generated green hydrogen.
We will need hydrocarbons for some time yet, but the winds of change are clearly already starting to blow.
The oil and gas sector has numerous capabilities and attributes that mean it is well positioned to contribute mightily to the energy transition:
Given the strong market position currently held by the oil and gas sector, some might find it easier to try and maintain the status quo.
But in my view, this would be fatal. After all, Kodak’s film business didn’t die because people stopped taking photographs - they just changed the way they took them. In the same way, energy demand is unlikely to be going anywhere – but how it will be delivered will change dramatically. In any event, the “do nothing” stance is already difficult to sustain, with finance and essential insurance capital increasingly difficult to secure without evidence of change, as many readers of this Review will already be all too aware.
My view is that oil and gas companies should work with governments and with others to deliver much needed energy whilst reducing emissions sharply. Conventional economic wisdom suggests that an evaluation of an oil and gas project will look very unappetising if carbon capture is added, and some might conclude that decarbonisation is just unworkable. However, governments around the world are increasingly determined to shift the paradigm:
Conventional oil and gas economics are predicated on significant rates of return. Discount rates often start at 15%, and rates of return in excess of 30% might be needed to meet internal company hurdles. CCS and low carbon energy is more of a utility business, and government support means that rates of return of 6-10% are more likely to be all that is acceptable to government in the future. In the UK, the government is going further, with current proposals making the transport and storage aspects of CCS a regulated business. This paradigm shift will be difficult unless companies are clear that such investments are increasingly a “licence to operate” issue.
My final point is one about attitudes. It is completely unclear how decarbonisation will play out, and no one organisation has the solution; collaboration between governments and different companies with many different skillsets will therefore be crucial. Although oil and gas companies collaborate on licences and field development to spread risk, in the future they will need to work together on projects involving a different form of collaboration, one where a series of interlinked and interdependent projects rely on one another to deliver the solution to climate change. This will require significant changes to existing deeply entrenched attitudes to collaboration and co-operation.
As we’ve just seen, we are at the start of the energy transition. The destination is clear – we need to decarbonise our civilisation one way or another, by meeting zero-carbon energy targets and by de-carbonising the energy and processes that have driven the development of our civilisation since the industrial revolution. However, exactly what that decarbonised future looks like is not clear – it could be entirely renewables-driven, or it could involve some changed use for the hydrocarbons that power society today. Most likely, it will be a combination of the two.
Unfortunately, the roadmap to this “net-zero” future is unclear. Exactly what technologies will end up as the dominant ones is unlikely to be clear for 20 years as there are many potential game-changers emerging.
For the oil and gas industry, this energy transition could be an existential threat – or an enormous opportunity that should be embraced.
Ian Phillips has over 25 years’ experience in the oil and gas industry, having worked for oil majors such as Shell and bp, oil minnows such as Ramco Energy and in the service sector (Halliburton). In 2007, he and three colleagues established the world’s first company focussed purely on CCS, and he has been involved in the climate change and technology business since that time. He is a UK Chartered Engineer and holds an M.Sc. in Petroleum Engineering and an MBA. He is the Development Director with Pale Blue Dot Energy Limited, developer of one of the UK’s first CCS projects – although he has written this article in a private capacity.
1 https://ieefa.org/lloyds-of-london-to-stop-issuing-new-insurance-for-coal-projects-oil-sands-and-arctic-energy-exploration/#:~:text=The%20Lloyd's%20Corporation%20and%20its,Lloyd's%20said%20in%20a%20statement.&text=1%2C%202022%2C%20with%20a%20target,the%20renewal%20of%20existing%20cover. 2 https://solarfeeds.com/solar-vs-natural-gas/ 3 https://www.pv-magazine-australia.com/2020/04/14/tesla-big-battery-expansion-reaches-milestone/ 4 https://www.iea.org/reports/key-world-energy-statistics-2020 5 https://www.washingtonpost.com/news/wonk/wp/2012/12/08/all-of-the-worlds-power-plants-in-one-handy-map/ 6 https://www.carsguide.com.au/car-advice/how-many-cars-are-there-in-the-world-70629 7 https://theconversation.com/the-world-needs-to-build-more-than-two-billion-new-homes-over-the-next-80-years-91794#:~:text=Taking%20an%20average%20global%20three,end%20of%20the%2021st%20century. 8 https://roadmap2035.co.uk/ 9 http://documents.ieaghg.org/index.php/s/zEoohbzeT7cDx38 10 https://www.globalccsinstitute.com/resources/global-status-report/ 11 https://gasturbineworld.com/first-fire-for-la-porte-carbon-capture-demo/
