Climate Change vs Oil and Gas Sector

The oil and gas sector are highly vulnerable to the impacts of the inevitable climate changes. It is an industry with large fixed assets and long asset life times that requires significant capital investment with high operational costs. The industry operates in extreme conditions and at the boundaries of technical knowledge and engineering capability. The increasing demand for oil and gas and with the rise in prices, the industry is looking to exploit the reserves in the areas which were previously considered to be inaccessible. The rise in new technologies is providing opportunities better opportunities in the market. Across the globe, the ease of access to better energy has changed with greater benefits including from lighting, heating and cooling, refrigeration, to computers and many others. However, the accelerating climate change requires the global community to transform its ways to meet the energy. It needs a system that provides affordable and accessible energy for all without generating greenhouse gas emissions (GHG). Climate change and a number of other environmental problems are partly or mostly, caused by the legitimate activities of large corporations. Climate change has already caused global temperatures to rise roughly 1.2°C above pre-industrial levels. The current rise in temperature trends could rise 1.5°C by 2040, 2°C by 2065 and 4°C by 2100 having a devastating impact on nature and people. According to the Intergovernmental Panel on Climate Change (IPCC), every half degree of the global warming is a major concern. Exceeding a specific level of global warming even temporarily may result in irreversible impacts on various ecosystems and their functions. For instance, in the Arctic region, climate change is already impacting numerous species including polar bears, caribou, wild reindeer, and ice-associated whales. This impact will worsen, even if we manage to limit global warming from climate change to 1.5°C. If the world reached to 2°C or higher, then by the end of the century 25% of the plants, animals and others species would face extinction. According to the International Energy Agency, 15% of global energy-related GHG emissions come from the process of getting oil and gas out of the ground and to consumers. The reduction of methane usage or leaks in the air is one of the most important and cost-effective solutions for improving the effect of emission.

a) The carbon emissions from oil and gas in the operating fields and in the mines across the world can push the temperature beyond 1.5°C of warming which can make it difficult to meet the global obligations towards the Paris Agreement.

b) The oil and gas companies, 2020 to 2024, are set to invest around US$ 1.4 trillion in new oil and gas extraction projects. The majority of this investment will be in the shale and in the offshore oil and gas sectors.

c) The new financial investments decisions over the span of five year will expose over 148 GtCO2 from the undeveloped reserves by 2050, which will be equivalent to building around 1200 new U.S. coal-fired power plants.

d) Major International Oil Company (IOC) has sanctioned new oil and gas projects that are not compliant with the Paris Agreement.

According to the Global Gas & Oil Network (GGON), carbon emissions from the oil and gas in operating fields globally would push the temperatures above 1.5°C and make it impossible to meet the global obligations under the Paris Agreement. In 2019, the developed oil and gas fields contain around 510 billion tonnes of carbon dioxide (GtCO2) out of 540 GtCO2 of the carbon footprint.

Extracting oil and gas from the ground, processing it, and bringing it to consumers is an important component of global energy demand today. The process of getting these fuels to consumers is also an important source of global GHG emissions. These can be CO2 emissions from the energy consumed along the oil and natural gas value chains as well as leaks of CO2 and methane to the atmosphere. These emissions associated with oil and natural gas are often divided into three different parts.

Part 1: Emissions that come directly from the oil and gas industry itself. This includes, for example, emissions from powering the engines of drilling rigs, or from leaks of methane in the upstream or midstream, or emissions from ships used to transport oil or gas overseas.

Part 2: Emissions arise from the generation of energy that is purchased by the oil and gas industry; for example, from the generation of electricity taken from a centralised grid to power auxiliary services, or from the production of hydrogen purchased from an external supplier to be used in a refinery.

Part 3: Emissions occur during combustion of the fuel by end users. Part 3 emissions from oil products can vary substantially. This includes liquefied petroleum gases (LPGs) which emit around 360 kg CO2/boe while heavy fuel oil emits around 440 kg CO2/boe. The global average array of oil products produced from a barrel of crude oil equivalent in 2018 results in around 405 kg CO2 when combusted. There is a smaller degree of fluctuation in the CO2 emissions during the combustion of natural gas, however on an average, the emissions are 320 kg CO2/boe. Thus, creating major impact in the climate and are three times the impact of part 1 & 2 combined.

The oil and gas companies are segmented into four categories mainly NOCs, INOCs, Majors and Independents. Majors grouping includes seven companies: BP, Chevron, ExxonMobil, Shell, Total, ConocoPhillips and Eni. Independent companies include Russian companies such as Lukoil, Repsol in Europe, North American players such as Marathon, Apache and Hess, and diversified conglomerates with upstream activities such as Mitsubishi Corporation.

  

The above-mentioned part 1+2 type of emission from the oil and gas sector are around 5,300 million tonnes of CO2 equivalent (Mt CO2-eq), which is 15% of global energy sector GHG emissions. A number of companies are looking to reduce its emissions and are announcing various targets and plans. For instance, individual company such as BP aims to reduce its part 1+2 emissions by 3.5 Mt CO2-eq between 2015 and 2025. Similarly, Equinor aims to reduce emissions from its domestic operations by 40% by 2030, and to near-zero by 2050. Eni is targeting a reduction of 43% in its upstream GHG emissions intensity between 2014 and 2025 while Chevron has set a goal to cut its GHG emission intensity of oil production by 5-10% and gas production by 2-5% from 2016 to 2023. Additionally, globally, part 3 (mentioned above) emissions are around 16 billion tonnes of CO2 equivalent which three times the level of part 1+2 emissions. Emission 3 is from the combustion of oil and natural gas that are typically accredited to end-use sectors including automotive, aerospace or other industries. Inclined to this the companies are taking major steps to reduce the impact. For instance, Repsol announced an aim to reduce its full emissions intensity from 2016 levels by 10% by 2025, 40% by 2040, and 100% by 2050. Shell aims to reduce its full emissions intensity by 20% by 2035 and around 50% by 2050 and Total aims to reduce its full emissions intensity from 2015 by 15% by 2030 and by 25%- 40% by 2040. Thus, control in consumption of the fuels and gases will positively impact the climate in coming years.

Fossil fuels are made by the decomposition of carbon-based organisms that had died billions of years ago. They create carbon-rich deposits that can be burned or extracted for energy purpose. Global CO2 emissions from fossil fuels have risen steadily during the last decades and were 61% more in 2019 compared to 1990. In 2019, oil contributed 33%, gas 21%, and coal 39% of the world’s 36.4 Gt of CO2 emissions. Fossil fuels are non-renewable and currently supply around 80% of the world’s energy. They are used to make steel, plastics, and a wide variety of other products. Coal, oil, and gas are the three major types of fossil fuel. When fossil fuels are burned, they release large amounts of carbon dioxide, a greenhouse gas, into the air. The greenhouse gases trap the heat in the atmosphere which causes global warming. The average global temperature has increased by 1°C currently. If the temperatures go beyond 1.5°C there is risks for rise in sea level, life-threatening weather, loos to the biodiversity and extinction of species which will be coupled with scarcity of food, health and poverty issues for around millions of people globally. Oil contributes to approximately one-third of the total carbon emissions globally. The recent oil spills had a severe impact in the ocean’s ecosystem. Natural gas is endorsed as a cleaner energy source when compared to coal or oil. However, natural gas is yet sourced from fossil fuels which accounts to a fifth of the total carbon emissions globally.

The signing of the Paris Agreement, has allowed the major oil and gas producing countries to agree to the limits of global warming to keep it well below 2°C, and follow a 1.5°C goal, which is recognized to significantly reduce the irreversible impacts of climate change. According to the Intergovernmental Panel on Climate Change (IPCC), the planned fossil fuel production by countries by 2030 will lead to the emission of 39 billion tonnes (gigatonnes) of carbon dioxide (GtCO2). This is 53% more than would be consistent with a 2°C pathway, and 120% more than would be consistent with a 1.5°C pathway. This gap widens significantly by 2040. Oil & gas has also exceeded the carbon budgets, as countries are continuously investing in fossil fuel infrastructure. These investments thus widen the production gap over time with the concerns to meet the pathway goals for 1.5°C and 2°C. Thus, production of 43% (36 million barrels per day) more oil and 47% (1,800 billion cubic meters) more gas by 2040 by the major countries would make them inconsistent towards its 2°C pathway. Thus, the increasing demand is causing a major impact in the climatic changes globally, as fossil fuel contribute to around 70% share in total towards its impact on the environment.

Oil and gas are natural products which are created by the degradation of organic materials in the geological deposits within the earth’s surface. They are mixtures of various organic substances, which once processed can provide a variety of petrochemical products. The oil and gas sector are majorly spilt into upstream and downstream activities. The upstream activities include exploration and production and transfer of oil and gas for the refining process or in the processing facilities. The downstream activities involve the production, distribution and sale of refined products such as hydrocarbon. Oil and gas projects can be onshore or offshore or a combination of both at numerous scales and may transact across various international boundaries.

Figure 3.1- UPSTREAM

 

Thus, proper framework of policies and regulations is required to lower the impacts of oil and sector into the environmental and promote sustainability.

The shutdown of all the economies in 2020 due to the pandemic caused by the novel coronavirus have highlighted the environmental pollution and damage across the globe. In China and India, for example, the skies cleared over industrial centres for the first time in years. For instance, China’s decarbonization progress received an unexpected boost, according to Carbon Brief, estimated that the coronavirus shutdown from December 2019 to February 2020 has cut down China’s carbon emissions by 25%. Similarly, the COVID-19 lockdowns across U.S., have helped to drop in emissions helped the country to meet its 2020 targets under the Copenhagen Accord. The emissions projections for 2020 are 20% below 2005 levels, which is 2 to 6% lower than the 2020 target. This was because the entire ecosystem had come to a halt, putting a break to the production and sale of oil and gas around the world due to COVID 19. However, the oil market has recovered from the demand setback that was triggered by the pandemic. According to IEA, the world’s oil production capacity is projected to increase by 5 mb/d by 2026 and Asia will continue to dominate growth in global oil demand, amounting to an 90% increase between 2019 and 2026. On the demand side, economic containment measures have led to slowdown of production and logistics, thus reducing the footprint. This drop in production has however positively impacted the climate around. The International Energy Agency (IEA), in 2020, estimated that the demand had decreased by 30% when compared to 2019, which reached its lowest since 1995. In the pandemic's peak time in Asia, during March 2020, OPEC started to offer cheap oil which continued till April as OPEC amplified its production by over 2.3 million bpd. This production scenario accumulated towards effecting the environment.

However, latest investment towards products and projects are likely to come alive as growth trends are likely to fall short of the projections which will boost overcapacity and low prices across the globally. This would however impact the environment and other livelihoods. Thus, future investments will require the producers to adopt newer technologies by the major oil and gas industry players in the market to overcome both the covid impact by reducing its impact on the climate.

The key countries with the top fossil fuel producers include China, the U.S., Russia, India, Australia, Indonesia, and Canada along with the three significant producers with strict climate ambitions include Germany, Norway, and UK. Many countries are banking on the export market to defend its major increase in production for example countries such as US, Russia, and Canada; while others are limiting its imports with scaled-up production such as India and China. This has however strayed the countries from the 1.5°C and 2°C goals.

According to the Climate Action Tracker, in 2020–2021, China began to decrease its coal output as the country aims for strict control over coal consumption until 2025 and then start gradually and phase it down in the following years. China has announced ambitious plan towards carbon-reduction goals, having set 2030 as a target for peak emissions as part of the Paris Agreement. Renewable energy is expected to be a priority parallelly. Currently, the installed capacity for renewables has exceeded 1,000 GW in 2021. In China, energy from non-fossil sources, needs to increase by 13% by 2025 and 52% by 2030 to achieve its NDC and FYP targets. In 2021, The Long-term Low Greenhouse Gas Emission Development Strategy (LT-LEDS/LTS) of China was submitted to the United Nations Framework Convention on Climate Change (UNFCCC) that strongly implies that the carbon neutrality target covers carbon dioxide. However, to improve and become compatible with Paris Agreement’s 1.5°C limit, China would require to reduce emissions before 2030, by decreasing the consumption of coal and other fossil fuel at a faster rate by setting set clear phase-out timelines.

Similarly, U.S. 2030 domestic emissions reduction target (NDC) is consistent with 2°C of warming when compared to modelled domestic emissions pathways, but not yet consistent with the Paris Agreement’s 1.5°C temperature limit. The current policies don’t lead to falling of emission pathways and would result in emissions above its set targets. The country would require implementation of additional policies to reach its targets. Under the Copenhagen Accord, COVID-19 has induced drop in emissions that has helped U.S. to meet its 2020 targets with emissions projections for 2020 at 20% below 2005 levels, which is 2 to 6% lower than the 2020 target. The current administration has set to decarbonise the power sector by 2035, which will make it consistent with the pathway of the Paris Agreement. 

The European Union (EU), for instance, aims to be climate neutral by 2050. The EU is pursuing an economy with net-zero greenhouse gas (GHG) emissions and aligning to the European Green Deal and the Paris Agreement. According to the Climate Action Tracker, the EU’s climate policies and commitments need substantial improvements to be consistent with the Paris Agreement’s 1.5°C temperature limit. The EU’s emissions reduction target of 2030 and its policies are consistent with only the 2°C when compared with its domestic pathways. The policies and actions that are currently in place will not be enough to meet the EU’s emissions reduction target of at least 55% by 2030 below than the 1990 levels as submitted in December 2020 which will eventually help to meet the Paris Agreement goals. The renewable energy and energy efficiency targets tabled by the Commission in May 2022 with the REPowerEU Plan has created a viable opportunity for meeting the EU’s domestic target and its compatible with the Paris Agreement.

These policy changes and regulation updates on individual countries to meet their domestic targets inline to the Paris Agreements is expected to positively impact the environment. The improvements in the OEM sectors with development of electric or hybrid cars, optimisation of hull shapes in the shipping sector, and other technological developments are further expected to optimise the climatic changes.