Thursday, 17 January 2019

IOCs prepare for a low carbon future

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Global warming arguably represents an existential threat to international oil companies. As the world weans itself off oil, companies that have made billions selling it will come under increasing pressure. But oil companies are already making changes they hope will ensure they remain relevant in the low-carbon economy. BySolomon Teague.

For all the noise around renewable energy and the need to reduce carbon emissions, international oil companies (IOCs) appear notably sanguine about the prospects for their oil extraction businesses.

Energy demand, they point out, is set to continue to grow for years to come, and while renewable energy sources such as wind and solar will meet an increasing proportion of it, the world is a long way from being ready to quit oil.

In a report outlining its strategy for facing climate change published in March this year, Chevron argued that for peak demand to be reached even within two decades, “a series of critical demand-reducing factors would need to occur simultaneously, apply across the entire slate of oil products and move at an unprecedented pace.

“Such a confluence of events in the next two decades would represent a historic and unprecedented revolution,” it said.

Other IOCs agree that demand is only going one way. BP projects that it will increase by 30% by 2040, though it also thinks it will peak sometime between 2040 and 2050. Shell predicts demand will double, though it has a number of possible scenarios of how long that will take.

Regardless of the specifics, the expectation is of a general upward trend in energy demand, driven by demographics, urbanisation and a growing middle class in emerging markets.

That makes it difficult for global energy companies to match their enthusiasm for renewable energy with a similar commitment to reducing their use of fossil fuels.

Most continue to see a role for fossil fuels in the future, especially in specific, carbon-intensive industries such as cement and steel manufacturing. But they aim to mitigate this by shifting as much as possible out of coal and oil and into the less CO2 emitting gas.

“Investment in new oil and gas production will be essential to meet ongoing demand,” said Shell in its Energy Transition Report, published in April. Like BP, Chevron and others, its strategy is to keep investing in oil while simultaneously investing in renewables and other technologies, with the balance shifting increasingly towards gas and renewables over the medium and longer term.

Shell and BP have set targets for this rebalancing, with both envisaging renewables accounting for around a third of their energy supply in coming decades. They also plan to tilt production away from oil towards gas, with Shell acquiring BG Group in 2016 as a way to increase its exposure to gas and begin its decarbonisation.

Also in 2016, it brought its various interests in renewable energy, including biofuels and both on and offshore wind, under one roof, as part of the Shell New Energies business, which looks at both power and new fuels.

Chevron takes a different view, preferring not to set an arbitrary target for growth in renewables.

“Our experience indicates that superior financial performance is more achievable through active and dynamic portfolio management – including allocating capital where highest predicted returns are forecast – than through pre-setting targets for certain types of assets,” it said.

Another difference is in their attitudes to carbon pricing. Most have embraced this approach, with BP explicitly advocating what it calls “a sensible strategy”. It plans future projects on the assumption that carbon will cost US$40 per tonne.

Shell has also publicly backed carbon pricing, with David Hone, its chief climate change adviser, in September writing in a blog post that “trade in carbon units underpins the journey to net-zero emissions while allowing economies to grow and prosper”.

Chevron takes a different view here too, with its CEO John Watson having stated that consumers would never back policies that increased their bills.

But in many other ways the preparations IOCs are making for a low carbon future are strikingly similar. Most now operate in-house venture capital funds that use their balance sheets and global relationships to invest in start-ups and SMEs. These target investments that offer exposure in a range of areas, from power generation to efficient engine manufacturing and carbon capture and storage technology.

In June 2018, Chevron Technology Ventures launched a VC fund, the Future Energy Fund, with an initial commitment of US$100m. CTV has made investments in alternative energy companies such as Ensyn, which produces renewable liquid fuels and chemical products from wood residues.

BP Ventures has made investments in many potentially carbon-reducing companies globally, including Bright Source, which develops and builds solar thermal power generation plants, and Heliex Power, which generates electricity from wet steam and two-phase fluids.

Shell Ventures has a similar mandate and is making investments of its own. In June, it provided equity financing for SunFunder, a solar energy finance business providing financing for solar assets in emerging economies. In August, it led a US$31m financing for Ample, a technology company looking to develop electric cars.

But the international oil companies have not confined their carbon reduction efforts to their VC funds. Most have also bought existing companies outright, or alongside other large partners, financing acquisitions from their balance sheets or via project financing. This has allowed the IOCs to build their businesses in alternative energies such as wind and solar.

It remains unclear which renewable energy sources can achieve the necessary scale, and concentration, to become a viable substitute for oil and gas. While there are a growing number of electric cars on the road, it is less obvious that electric trucks or trains can be viable – it may be that hydrogen cells constitute a better bet for such transport uses.

The IOCs are therefore hedging their bets. Shell talks about “a mosaic of solutions”, with no single technology or power source emerging as a silver bullet to cure the world of its addiction to fossil fuels.

Instead, it sees many independent technological breakthroughs, from improvements in battery storage, increasingly efficient wind turbines and solar panels and even carbon-capture technology.

Shell has committed to invest US$1bn–$2bn per year in a range of new energy technologies between 2016 and 2020, either investing in companies or buying them outright. It hopes this will help guide it to a decision about technologies have the potential to deliver on a commercial scale.

Chad Holliday, chairman at Shell, said he likes to think of new energies as like a farmer sowing different seeds in different places. “Over time, we will see where the best and most profitable crops start to grow. Then we will give the winners all the nourishment they need to flourish,” he said.

One such seed Shell has sown is in solar energy, where it has had mixed results. It acknowledges its failed experiments in this business, notably in the production of panels – a venture it does not plan to repeat. But it remains engaged in the solar business, particularly solar energy trading.

In January 2018, Shell took a 44% stake in Silicon Ranch, a solar company in Tennessee. In December, Silicon Ranch agreed to build solar power stations for Walton Electric Membership Corporation that will provide power for Facebook’s data centre in Georgia.

Chevron is building up in solar, and operates photovoltaic projects at Questa, New Mexico, and in the San Joaquin Valley, California, that test and evaluate solar technologies. It has invested in five joint venture photovoltaic solar facilities, in California, Arizona and Texas, capable of generating a combined 73MW of renewable energy.

IOCs see a big future in wind. BP operates 13 wind farms in the US, across seven states, as well as having a stake in a facility in Hawaii, which generate an aggregate capacity of 1,432MW. In April, it also announced it had partnered with Tesla to build its first battery storage project at the Titan 1 wind farm in South Dakota.

In November, Shell partnered with DEME, a Belgian company that builds and maintains wind farms, and French marine renewable technology specialist Quadran Energies Marines, to build offshore wind farms in Dunkirk.

In July, it also helped finance the €1.3bn 730MW Borssele III/IV offshore wind farms in the Dutch North Sea, via project bonds. Here, Shell acted as part of the Blauwwind consortium alongside Partners Group, Mitsubishi/DGE, Eneco and Van Oord.

Meanwhile, Chevron’s Casper Wind Farm in Wyoming comprises 11 turbines to generate 16.5MW of energy. It also makes investments outside of solar and wind. Chevron has a geothermal facility in California with a capacity of 49MW, and has also invested in potential green petrol substitutes, such as biofuel and renewable diesel.

But IOCs stress the importance of not only switching to renewables, but also cleaning up their fossil fuels. Leakages in gas transportation release considerable amounts of methane into the atmosphere – itself a powerful greenhouse gas that accounts for approximately 9% of Chevron’s total GHG emissions.

Approximately one-quarter of this 9% is considered fugitive emissions, or leaks from equipment and piping. By improving the pipes and reducing leakage, IOCs can make gas greener, they say.

Of the remaining emissions, most are generated by flaring and venting. Chevron has worked to reduce flaring of natural gas: at Tengizchevroil in Kazakhstan, Chevron has reduced flaring by 85% compared with 2000, through projects such as the four-year, US$258m gas utilisation project.

IOCs also see carbon capture and storage (CCS) as a crucial part of their decarbonising strategy. BP says it captures and stores up to 1m tonnes of CO2 per year at its In Salah demonstration plant in Algeria.

The IOCs’ VCs have played an important role in this: CTV invested in Inventys, which develops carbon capture technology, while BP Ventures has taken a stake in Skyonic, which converts CO2 into solids for storage.

Chevron said it has invested more than US$75m in CCS research and development over a period of more than a decade. On top of this it has invested about US$1.1bn in two projects to reduce greenhouses gases, estimating that it can reduce emissions by about 5m metric tons per year once operational.

One, the Gorgon carbon dioxide injection project, will see CO2 injected into a deep reservoir known as the Dupuy Formation, more than two kilometres beneath Barrow Island in Australia. It is expected to be the largest GHG emissions-reduction project undertaken by industry globally. A similar initiative called the Quest project is being developed in Alberta, Canada.

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