Traditional energy companies received the message that their future is CO2 free and are transforming themselves in a race to avoid their own decline.
The International Energy Agency (IEA) published its report Net Zero by 2050: A Roadmap for the Global Energy Sector on the 18th of May.
The report gives the Oil & Gas industry a glimpse of what could be its own demise, as the path designed by the IEA states that net zero means a huge decline in the use of fossil fuels. They fall from almost four‐fifths of total energy supply today to slightly over one‐fifth by 2050. Fossil fuels that remain in 2050 will be used in goods where the carbon is embodied in the product such as plastics, in facilities fitted with CCUS (Carbon Capture, Use and Storage), and in sectors where low‐emissions technology options are scarce”. The Agency also recommends governments to refuse approval of new O&G fields by the end of 2021.
A day later, the European Parliament approved its report on the European Commission’s hydrogen strategy by a large majority. The motion backs the use of low-carbon hydrogen, both blue and yellow hydrogen, produced by using natural gas combined with CCUS, and nuclear energy, respectively, as transition technologies in the path towards 100% clean production.
Only a month earlier, the European Commission published its first set of implementation rules for the EU taxonomy, a classification system, establishing a list of environmentally sustainable economic activities. The Commission postponed a decision on gas and nuclear that will be dealt on a separated delegated act.
These decisions at the European level send a political signal of uncertainty about the capability of renewables such as wind and solar, hydrogen, storage, and energy efficiency to achieve by themselves the decarbonization goals needed to fulfil the climate ambitions that Europe has set for 2030 and 2050, while assuring energy security, reliability, and affordability.
Green lawmakers and environmentalist furiously opposed leaving the door open to gas (and nuclear) being used as bridge energy sources while new technologies become mature enough. But they do not provide a realistic economically viable alternative.
There is a consensus that the transformation into a totally decarbonized economy will require the electrification of most of the uses of natural gas. Gas companies know are reinventing themselves to become clean energy companies in order not to repeat the Kodak story, when the film company decided not to embrace digitisation.
According to The Wall Street Journal, North American and European oil and gas companies wrote down assets for $145 billion in the first three quarters of 2020 only, equivalent to 10 percent of their market value. It is no doubt that the COVID-19 crisis triggered the decision, but the understanding by the O&G of the structural transformation of the way the World will generate and consume energy clearly lies behind the decision.
Natural gas has two main roles to play in an accelerated transition to net-zero carbon emission energy system, according to the 2020 BP Energy Outlook report:
According to the IEA, “after years of a declining investment pipeline, plans for more than 30 new integrated CCUS facilities have been announced since 2017. The vast majority are in the United States and Europe, but projects are also planned in Australia, China, Korea, the Middle East, and New Zealand. If all these projects were to proceed, the amount of global CO2 capture capacity would more than triple, to around 130 Mt per year”.
This momentum for building new CCUS facilities is the result of improved incentives and the ambitious climate targets. Many of these plans involve the development of industrial hubs which capture CO2 from a range of facilities with shared CO2 transport and storage infrastructure. Examples include the Alberta Carbon Trunk Line in Canada, which started operating in 2020, and the planned Longship project in Norway (IEA, April 2021).
Amid strong criticism and accusations of greenwashing, the O&G companies have decisively started the transformation process towards green energy companies, as the shift away from fossil fuels gains momentum due to climate change policies. European companies (BP, Eni, Equinor, Repsol and Royal Dutch Shell) lead the way and they are adding renewable assets to their portfolios, while their Asian and American peers are less focused on that. The number of big names setting specific net-zero targets is growing at a good pace.
Total intends to become a world leader in renewables. Since 2016, the French company has invested $8 billion in green power and has set a target of 35 GW of renewable capacity by 2025, and 100 GW in 2030, which would place it ahead of Iberdrola’s existing targets and more than three times ahead of Ørsted’s announced goals, two global green power companies.
Shell, BP, Eni and Repsol also announced double figure renewable capacity targets for 2030.
Among technologies that O&G companies seem particularly well-suited to capitalize on are geothermal, offshore wind, hydrogen, and CCS.
According to BloombergNEF, O&G companies invested almost $60 billion in clean technologies such as wind, solar, storage, hydrogen, CCSU, etc. over the past five years, a number too big to be spent on greenwashing, even it would account for about 6% of their total investments in annual terms.
Major energy companies are betting particularly big on hydrogen. On top on the necessary switch to green energies, O&G majors see in this technology an opportunity to prolong the lifespan of their multibillion investments in gas infrastructure, which represents a competitive advantage as well as another compelling incentive.
But utilities as Spain’s Iberdrola, Germany’s Uniper and US Nextra are not willing to stand aside in this race. Every week there are announcements by large utilities of billionaire projects, while hydrogen accounts for anshare of the proposals presented to attract European recovery funds.
Politicians across the world made it clear that the recovery will be green. The same can be said for the energy sector. Not only is their reputation at stake, but also their very survival.