Humanity has set itself a goal. As global temperatures post record highs year after year, we have chosen to reduce the carbon emissions that scientists overwhelmingly agree are behind the trend. At the center of this movement are the world’s energy companies. They are recasting their activities not only to reduce their own carbon emissions, but to diversify into forms of renewable energy that don’t produce emissions at all. Rather than fading into the background, these companies are critical to energy transition and green energy solutions.
Energy demand will keep growing
When it comes to meeting the ambitions of the Paris Climate Accord, the biggest challenge is mankind’s rising prosperity. The International Energy Agency expects energy demand to increase by around 27 per cent between 2017 and 2040 - about 3.7 billion tons of oil equivalent.1 Falling demand from rich countries will be more than offset by rising demand from poorer ones, as the latter become more affluent. This will be particularly marked in Asia-Pacific, a region expected to consume nearly half the world’s energy by 2040. Demand in India, for example, will double or even triple.2
Demand for clean, renewable forms of energy will rise exponentially, but it’s important to note that the consumption of natural gas, oil and even coal is also projected to grow. Coal dominates the landscape for power generation in Southeast Asia – home to some of the fastest-growing economies in the world - and there, coal consumption is not expected to peak until 2027.3 Even by 2040, coal is likely to fuel more than one-third of the region’s electricity output.
While all this makes the prospects for de-carbonisation seem a little bleak, the picture is changing rapidly. In 2019, the International Energy Agency predicted that renewables would expand by 50 per cent to 2024, an upward revision of 14 per cent from the previous year’s forecast, reflecting rapid gains in competitiveness and policy support. Nevertheless, it appears likely that oil, gas and coal are with us for the rest of the 21st Century.
Can the energy majors clean up?
With this backdrop, a vital question remains - what can conventional hydrocarbon-based companies do to bridge the transition to clean energy? This question is particularly germane in Asia-Pacific, where the regulatory, economic and cultural forces propelling the move to clean energy are less prevalent than they are in the US and Europe, placing greater onus on multinational businesses to set higher sustainability standards, particularly in the energy sector.
Step one is to de-carbonise their day-to-day operations. This plays to the companies’ chief strength, namely their knowledge of their own processes. Reducing methane leakage from drilling sites and pipelines is of key importance, because methane is one of the most potent greenhouse gases, as well as being the main component of natural gas and thus an important fuel source in its own right. One recent study found that the US alone leaks 13 million metric tons of methane each year, erasing many of the gains from lower-carbon technologies.4 In September, BP announced that henceforth, it would continuously monitor methane emissions at all new major projects worldwide.
Another way that oil and gas producers can limit their carbon footprint is to build clean energy into their own operations. Aera Energy, co-owned by Shell and Exxon Mobil, has turned to solar arrays to produce the electricity needed to power its Belridge oil field in California. Aera expects this investment, in part prompted by California’s increasingly tough environmental controls, to eliminate emissions equivalent to 80,000 cars a year when it comes online in 2020.5
Solar’s flexibility makes it well-suited to this kind of emissions take-out. The technology is overtaking wind power as the main renewable growth play, with commercial and industrial uptake driving its performance. China has made huge inroads into optimising the production of photovoltaic (PV) panels, reducing costs and expediting lead times. Solar costs are expected to fall further by 2024, perhaps by as much as 35 per cent, with distributed solar making huge gains in China and the United States.6 In Southeast Asia, costs are falling so fast that solar is undercutting the price of gas-fired power, shifting the energy strategy of regional governments.
Renewables have now attained the critical mass to be commercially viable in their own right. To avail themselves of this growth opportunity, and to mitigate the rising regulatory costs associated with hydrocarbons in the post-Paris era, the oil and gas majors are beginning to consolidate and diversify downstream, including into green power generation. In 2018, for instance, Norway’s Statoil changed its name to Equinor, to signal that oil was no longer central to its purpose. Shortly afterwards it bought a stake in Scatec Solar, which generates 357MW from its solar plants worldwide.7
Re-balancing towards gas is another way that energy majors can navigate the transition. Natural gas is by no means carbon neutral, but it is cleaner than other hydrocarbons. Given the intermittency of sunlight and wind as feedstocks for electricity generation - and current lack of commercially-viable battery storage options - gas-fired power stations can offer reliable baseload power that complements renewables, at a fraction of the cost and lead-times of nuclear.
We’re committed to helping our clients as they move into this new era. This is reflected in our position statements for doing business in the energy sector, which reflect our commitment to support the achievement of the Paris Climate Accord. Our support for renewable energy and gas projects in our footprint markets is steadfast – and we’re proud to see that such efforts helped us in being named ‘Best Bank for Sustainable Finance’ in the Global Finance World’s Best Bank Awards 2019.
Capturing carbon remains vital
However, new energy sources are not sufficient to decarbonise the global economy by themselves. Technology needs to reduce the impact of the hydrocarbons we will keep on using, and that means carbon capture and storage (CCS). As the Asian Development Bank argues, CCS is currently the only near-commercial technology capable of making deep cuts into hydrocarbon-related power plants and industries. The Intergovernmental Panel for Climate Change predicts that the cost of the process could fall by 20 to 30 per cent over the next decade.8 It estimates that while the world likely has enough geological storage capacity for the captured carbon, this may not be the case at a regional level.
Finding uses for the waste carbon is thus a task for the industry as a whole, rather than for energy companies alone. CCS systems are already in service. Between 2015-19, the Shell-operated Quest facility in Canada captured and stored 4 million tons of CO2 underground.9 China is storing carbon in saline aquifers in Inner Mongolia. Other CCS facilities now exist in the United States, Norway, Brazil, Saudi Arabia and the United Arab Emirates. However, the technology faces resistance from climate activists, who see it as slowing the shift away from hydrocarbons.
This opposition may be misguided. The Paris Accord commits the world’s governments to limiting anthropomorphic increases in global temperatures to no more than 2 degrees centigrade. For this to be achieved, the world must pursue what US presidents Bush and Obama called an “all of the above” energy strategy. Renewables will grow rapidly, but hydrocarbons cannot be wished away - they are fuelling rising living-standards across Asia and much of the Global South.
But more needs to be done, and quickly. The oil and gas majors are at only the beginning of a journey. To bridge the transition, they must transform into composite energy companies that are as expert with new energy sources as they are with legacy fuels, combining the two in order to maximise efficiencies, harmonise with the regulatory environment and minimise their – and our – carbon emissions.
1 Stephen Eule, "A Look at IEA’s New Global Energy Forecast", Global Energy Institute, U.S. Chamber of Commerce, November 2018 https://www.globalenergyinstitute.org/look-ieas-new-global-energy-forecast
2 IANS, "India's energy consumption to nearly triple by 2040: Pradhan", Business Standard, 13 November 2018, https://www.business-standard.com/article/news-ians/india-s-energy-consumption-to-nearly-triple-by-2040-pradhan-118111301196_1.html
3 Huileng Tan, "‘Coal is still king’ in Southeast Asia even as countries work toward cleaner energy", CNBC, 30 September 2019, https://www.cnbc.com/2019/10/01/coal-is-still-king-in-southeast-asia-despite-clean-energy-efforts.html
4 Anthony J. Marchese and Dan Zimmerle, "The U.S. natural gas industry is leaking way more methane than previously thought", PBS, 4 July 2018 https://www.pbs.org/newshour/science/the-u-s-natural-gas-industry-is-leaking-way-more-methane-than-previously-thought
5 Peter Ashton, Interim Vice President – Environment, Health and Safety and Regulatory Affairs, "Californians gain with Aera’s environmentalperformance", Aera, 17 October 2019 https://www.aeraenergy.com/californians-gain-with-aeras-environmental-performance/
6 Matt Egan, "Renewable energy is booming. But it's not growing fast enough to fight climate change", CNN, 21 October 2019 https://edition.cnn.com/2019/10/21/business/renewable-energy-solar-iea/index.html
7 Anmar Frangoul, "Energy powerhouse Equinor buys minority stake in Scatec Solar", CNBC, 16 November 2018 https://www.cnbc.com/2018/11/16/energy-powerhouse-equinor-buys-minority-stake-in-scatec-solar.html
8 P11-12, “Carbon Capture: Summary for Policymakers”, IPCC, https://www.ipcc.ch/site/assets/uploads/2018/03/srccs_summaryforpolicymakers-1.pdf
9 The Canadian Press, "Shell Quest carbon capture and storage project reaches milestone of 4M tonnes", CBC, 23 Mat 2019 https://www.cbc.ca/news/canada/calgary/carbon-storage-cnrl-shell-quest-1.5146857