Pressure is increasing on the oil and gas industry to define its role in the energy transition away from fossil fuels or risk losing its social licence to operate. Heidi Vella spoke to the Energy Institute’s external affairs director Nick Turton to find out what the sector should do next.
At the beginning of the year, Oil and Gas Authority chairman Tim Eggar sent a stark warning to the industry: if it doesn’t take steps now to mitigate and reduce its impact on the environment, it faces the risk of losing its social licence to operate. The sector, he said, needs to be a part of the climate change solution.
But how? From pledges to go carbon neutral to investing in renewables, the Energy Institute’s Nick Turton shares his thoughts on the oil and gas industry’s role in a low carbon future.
Heidi Vella: (HV) After avoiding the issue for many years, the oil and gas industry is now more open to honest discussions about climate change, but is the sector taking the issue seriously enough?
Nick Turton (NT): I don’t think climate change is controversial for the industry as a whole anymore. Five years ago it wasn’t a focus, but now it is a mainstream issue. However, while enough of the industry is talking about it and taking it seriously, frankly, for the emission reductions needed across the global economy, not enough is being done.
It’s not just the science that is piling up, it’s the real world impacts of climate change. There’s a growing movement for change, so there’s a lot of pressure on the whole energy industry, not just oil and gas, to step up. Public movements can lead to investor pressure, so it’s becoming a real commercial issue for companies. We’ve seen some of the big investment fund managers talking about stranded assets in the oil and gas industry if in the future we need to make even faster changes to combat climate change.
However, it’s not about stopping using oil and gas quickly – fossil fuels provide around 64% of global energy demand – but rather, how do we, in the short-to-medium term, use it in the cleanest way possible?
HV: What should the industry be doing?
NT: Around 15% of greenhouse gas emissions originate from production and transportation, that’s not just from carbon intensive processes but because of fugitive methane released during production, particularly of gas. However, much can be done to reduce those emissions and clean up this point in the lifecycle to make the fuel more appropriate for the longer term.
Methane is in the industry’s own backyard – and this is where the industry could be doing a lot more. The IEA looked at this issue and found around three quarters of fugitive methane emissions could be quickly tackled, and about half could be done so cost effectively. At the end of the day, its wasted product.
HV: Is the industry investing enough in carbon reducing technologies, such as carbon capture storage (CCS)?
NT: CCS needs to happen at quite a vast scale. This, I think, is a challenge for government because the market on its own won’t deliver it as CCS right now doesn’t provide a revenue stream. But the fossil fuel industry needs to play a part; if it is looking at its long-term future, it must see that successful deployment of CCS could prolong the life of its products. The industry is full of brilliant, ingenious people who have delivered vast projects involving chemicals and gases and fuels at scale. These are precisely the sort of people that could and should deliver CCS at scale, it’s within their skill-set.
HV: What role can carbon pricing play in incentivising emission reductions?
NT: Where there are attempts to introduce a price on carbon it is not particularly high enough. But also, there isn’t a global approach. Therefore, the danger is if carbon is priced highly in one country, the affected industries simply move to where the regulations or the carbon prices are not as stringent. And so the jobs move, and also the emissions move and just carry on. Those are the challenges governments wrestle with. I think this is one of the things that challenges the whole UN process.
HV: Is this issue of global competition amid differing emissions regulation more pertinent for aging fields like the UK North Sea?
NT: Well, having said what I just did, there is a growing possibility that being more low carbon for an industry could start to have real cachet. For instance, there are clusters of heavy industry around the UK, in places like Teesside in the Northeast and Grangemouth in Scotland, vying to become low carbon industry centres with CCS, hydrogen and other technologies. In the long-term they see that companies are going to want to locate somewhere where they can say ‘we operate low carbon processes’ or ‘we produce products which have less impact on the environment’. If these places can offer communal transport and storage of captured carbon, for instance, that’s a real attraction.
I think it could be the same for the North Sea. The Oil and Gas Technology Centre in Aberdeen, for instance, is focused on the North Sea becoming a low carbon basin. They see this as being attractive to companies in the future. This might have sounded far-fetched five years ago but I think the current debate is putting it centre stage, not just because of science and public pressures but also because of the commercial aspect.
HV: Some companies are continuing to invest in oil and gas while also diversifying into renewables, is this a good way to support the low carbon energy transition?
NT: I think it’s a good thing; however, I will add that overall it’s still less than 1% of their capital investments. Some companies are better than others and some are better positioned and more able to do this than others.
I wouldn’t say simply moving out of oil and gas and into renewables is the panacea, however. In the short-to-medium term, the world is dependent on oil and gas, and it needs to be used in a cleaner way. What’s so important is to clean up the products – oil and gas – as much as possible both for production and combustion.
HV: As you just noted, the industry often highlights that the world will depend on oil and gas for decades to come, but is that more the case for gas rather than oil?
NT: I think we’ve already seen the growth of gas as a fuel. In fact, particularly since the shale development in the United States and elsewhere, gas has become a fuel which already plays a major role in climate change by displacing coal, which is 40% dirtier than gas. Recently there was a study that said carbon emissions have flatlined and this is in large part because of this displacement of coal, and not just because of the growth of renewables. I think it isn’t an unreasonable conclusion to come to that gas has a more defendable role than oil – but it still needs to be cleaner.
HV: If the industry doesn’t move quickly and sufficiently enough on the issue of climate change, what could be the outcome in 5, 10, 20 years?
NT: Much talk is around 2050 because that’s when many of the net zero targets are for, but that is a distraction as it allows the debate to focus too far in the long term. I think, actually, in the next decade, unless we get some decisions right by governments and elsewhere, then we’re not going to be on track for net zero by 2050. I think there needs to be real change and big decisions made by government.
For the oil and gas industry it will be a defining decade. It’s either responding or it’s not. It was recently highlighted that there could be around $900bn worth of stranded assets if world governments fully got behind self-limiting global temperature by 2050. So those that act sooner to clean-up production of oil and gas or to diversify into other energy sources, will have better prospects for the long term.