The magazine for oil and gas professionals in the energy transition
November 2020 – open access articles The following articles are taken from Petroleum Review magazine’s November 2020 edition for promotional purposes. For full access to the magazine, become a member of the Energy Institute by visiting www.energyinst.org/join
Your EI magazines Dear member, Ours has never been an Institute happy to stand still, and the world in which we work is changing faster than ever. So, I’m writing to you now to explain some exciting new developments. During the lockdown in its various stages, it has become the norm to operate digitally, whether that’s how we meet, attend events or access information and stay up to date. At the EI that has meant introducing our EI LIVE webinar series and expanding the reach of our Toolbox health and safety app into more sectors and more languages. It’s also been front of mind for our editorial team, not least because it’s been hard to maintain mail delivery of Energy World and Petroleum Review to certain parts of the world. Spurred by this, they’ve worked hard to improve the digital reading experience we offer. I hope you have already tried out the superb new digital flipbook format, which provides something very close to the page-turning experience you’re used to. On top of this we’re increasingly keen to keep pace with the environmental expectations of our members and the wider society we serve. We have already moved to a compostable wrap on our magazines but, in light of the EI’s recent commitment to reach net zero emissions well before 2050, we want to go further. For these reasons, we have taken the decision, from the start of 2021 onwards, to establish digital as the default way for members to access their magazines. This will ensure all those with online access can get their magazines, it will give you all access to more knowledge, it meets our environmental commitments towards achieving net zero and so demonstrates our leadership to others. We know that most members have access to the internet as you use other digital services, but I recognise this may not be right for everyone; indeed, some may not have ready access to the internet. Those who exceptionally for this reason need a hard copy can opt in by emailing magsinprint@energyinst.org or writing to Mags in print, 61 New Cavendish Street, London W1G 7AR, stating your name, membership number and preferred magazine. But for all other members, we will cease circulation of hard copies and instead inform you by email each month in our Energy Network e-newsletter that it’s time to dive into your latest magazines online for all the news and features you’re used to. If you’ve recently changed your email address, please could you make sure it’s up to date at myprofile.energyinst.org/Home/Login I encourage you to make the most of being able to access both our magazines at knowledge.energyinst.org/magazines – together they provide the full global energy picture. We strongly believe we can deliver more and better by making and building on this change. My very best wishes to you all, keep well.
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2 Petroleum Review | November 2020
Energy transition
UK
Building back greener and better
The energy sector will have a crucial role to play in rebuilding the UK’s economy while underpinning its move to a low carbon future, write PwC’s Janine Freeman, Steve Jennings and Adrian Del Maestro.*
T
he COVID-19 pandemic is having a huge impact on UK society. From personal wellbeing to the health of the economy, the ramifications of this pandemic are varied, deep and painful. However, as the country emerges from the crisis, there is an opportunity to harness the energy sector’s crucial role in underpinning the transition to a cleaner, net zero economy, and use it as a cornerstone to ‘build back better’. The UK government has a central role in orchestrating and stimulating an economic recovery. However, any stimulus from the government needs to harness the strengths of the private sector, especially across the constituent parts of the energy industry – power utilities and oil and gas companies – which will have a critical and enabling role to play. The impact of the lockdown and its after-effects across the energy value chain is well documented. The global oil and gas sector has seen significant demand destruction with oil prices plummeting before recovering slightly. In response, oil companies have reduced capital expenditure, cut headcount and in some cases scaled back dividends. At the same time, several oil majors are taking this opportunity to reinforce their shift towards low carbon sources of energy. ‘New energy’ merger and acquisition (M&A) activity by oil and gas players is continuing at pace – as illustrated by BP making its first notable move into the US offshore wind market through a $1.1bn partnership with Equinor in a deal that includes a 50% stake in the Empire Wind project off New York; Aker Solutions merging with Kvaerner to develop low carbon capabilities; and Shell in Australia acquiring the carbon farming business Select Carbon, to name a few examples. As for power and gas utilities, electricity demand in the UK declined over the lockdown period with commercial and 12 Petroleum Review | November 2020
industrial businesses scaling back activities. This much lower level of electricity demand combined with high levels of renewable power generation output created negative prices on wholesale power markets. As a result, fossil fuel powered generators had to stop running and National Grid, the UK electricity system operator, needed to take expensive, shortterm balancing actions to turn off renewable output as well. Through this experience, we have had a window into the future of a power system with a much higher proportion of renewables while simultaneously being reminded of the importance of flexible power solutions on the system to make sure the UK maximises the output from renewables. Key themes Aside from the industry impact, there are some emerging societal themes in a post COVID-19 world that will likely shape the energy sector going forward. PwC has identified* a number of these themes: Increasing levels of home working – The coronavirus pandemic has led to more people working from home. Digital technology has made adapting to this change relatively easy and many businesses are looking to shift towards a blended model more permanently. Improving air quality and reducing noise pollution – Throughout the lockdown, air quality significantly improved and noise pollution reduced, largely through a reduction in transport use. This has not gone unnoticed by the public and momentum is building that could sustain the benefits felt in lockdown. For example, whereas sales of petrol and diesel cars are in decline, the growth of electric vehicle (EV) sales is continuing to rise. According to data from the Society of Motor Manufacturers and Traders (SMMT), car registrations in August 2020 year-to-date
witnessed falls in diesel and petrol (60% and 45% respectively) while battery electric vehicles (BEVs) and plug in hybrid electric vehicles (PHEVs) saw registrations increase (157% and 68% respectively). Maintaining reliable and affordable energy supplies – The challenges of efficiently managing a system with a high proportion of renewable power have been highlighted during lockdown. To continue as a leader of the global energy transition, the UK must double down on its efforts to drive private investment into a range of new energy technologies. This will ensure the continued development of a more resilient, cleaner and affordable energy system to underpin environmentally sustainable economic growth. The recent announcement by UK Prime Minister Boris Johnson to accelerate the contribution of wind power illustrates our evolving energy systems. Fostering resilience through more local supply chains – The pandemic highlighted the fragility of global supply chains. Public opinion on the benefits of globalisation is changing. Vibrant new global trade arrangements are vital for the UK post-Brexit, but they must factor in climate change and sustainability considerations as well as supply chain resilience. Increased desire to improve social equity – Many workers have been furloughed or made redundant because of social distancing and the economic downturn. This has
Energy transition
disproportionately affected those already disadvantaged in society. Policy must aim to ensure that no one is left behind.
Testing times Against this backdrop, the UK government will need to consider a number of stimulus policy options to drive an economic recovery. In making these choices, it will be important to consider other societal needs as well as job creation. PwC research has identified four ‘tests’ through which government can consider the effectiveness of different interventions in delivering against wider societal requirements: Jobs – The scale, geographic coverage and breadth of the energy industry makes it an excellent platform for job creation. There is a huge opportunity to create mass employment across the entire country. In particular, domestic, labour intensive activities can provide work for thousands and the development of other low carbon infrastructure and services can create long-term employment in high growth sectors. Net zero – The costs of a global natural disaster have been laid bare through the COVID-19 pandemic. It is imperative that we use this crisis to avoid another one – the climate crisis. If this opportunity is used now to create jobs in the development of infrastructure to protect the climate and natural resources, then we can avoid the need to incur the virtually incalculable costs of dealing with a climate disaster at a later date.
Photo: Shutterstock
Innovation and leadership – The UK already has a leadership position on energy. The policyled development of a low carbon energy system has put it ahead of most countries. An environment has been created for emerging technologies and businesses to succeed. We must build on this as we come out of the COVID-19 crisis and ensure that greater investment is driven in areas where the UK can be world leading – to build exports and growth.
Fairness – Even ahead of the current pandemic crisis, social inequity and a feeling in many communities of being left behind has become an ever more visible challenge for governments across the world. The UK must take this opportunity to ‘level up’ its economy by developing progressive policies that enhance fairness and protect the most vulnerable in society. Energy policy recommendations Based on these observations, there are five key energy policy recommendations the UK government should consider when addressing an economic recovery plan: Launch a national housing infrastructure upgrade programme – A centrally funded, long-term national energy efficiency, low carbon and smart building retrofit programme is needed. Indeed, the UK government announced in July 2020, a £3bn package of grants to improve the energy efficiency of homes and public sector buildings. In addition, scaled roll-outs or pathfinder projects need to be initiated across key low carbon heat technologies for homes and business, including heat pumps, hybrid heat systems, district heat networks, hydrogen boilers and solar thermal. Government and industry should also work on a new approach to support greater take-up of smart meters to bring forward the work for installers and enable a smarter system. The energy industry should work with consumers to ensure the default option becomes having a smart meter installed. Moreover, the installation of smart meters in non-domestic premises and newbuild homes should be mandated. Further accelerate the transition to low carbon transportation – The EV market needs to be incentivised by increasing grants and supporting broader investment in charging infrastructure. Incentives are also needed to attract the EV industry and supply chain to locate manufacturing and other jobs in the UK. Meanwhile, Clean Air Zones should be rolled out and there should be expanded funding for low carbon public and active transport infrastructure – improving air quality and reducing noise pollution.
incentives and network charging to speed up investment in flexible power solutions, alongside funding mechanisms to speed up efficient investment in more low carbon power generation. Networks also need to be incentivised to prioritise investment in digitalisation and enable efficient anticipatory investment. Accelerate the development of regional low carbon industrial clusters and local supply chains – The development of carbon capture, use and storage (CCUS) and low carbon hydrogen solutions needs to be accelerated and long-term planning launched for the decarbonisation of industry through regional industrial clusters. Greater supply chain resilience needs to be fostered and imported carbon emissions reduced by incentivising onshoring of selected supply chain manufacturing and production. Support workers, businesses and local authorities with their recovery from the crisis – The UK government must work with industry to launch a training programme to support unemployed workers into permanent employment. It needs to provide funding support for small and medium sized businesses to transition their operations to net zero, and develop a mechanism to make it easier for local authorities to benefit from funding of decentralised energy projects. Key building block Energy will be a key building block in the UK’s economic recovery and a critical element in ‘build back better’. The government clearly has a role in stimulating a green economic recovery as illustrated by the launch of the energy efficiency grants package. And the private sector, in partnership with government, will continue to make a valuable contribution. ● *This article is based on a report written by PwC in collaboration with Energy UK – Rebuilding the UK economy: fairer, cleaner, more resilient, published in June 2020.
Unlock more private investment in a digital, flexible and affordable, low carbon energy system – The government should accelerate the development of UK markets, Petroleum Review | November 2020 13
Alternative fuels
HYDROGEN
A refining role
Refiners will play a major role in the development of a hydrogen market, write Jeff McDonald and Zane McDonald, S&P Global Platts.
A
The EC has highlighted that hydrogen supply must ultimately consist of renewable ‘green’ hydrogen in order to meet decarbonisation targets, yet low carbon, ‘blue’ hydrogen (produced from natural gas with carbon capture technologies to cut greenhouse gas emissions) also has a role to play in the short to medium term Source: Shutterstock
s the hydrogen world continues its efforts to scale up production and bring costs down, discussions of how to develop the markets and what they would look like have come to the forefront. Those conversations are taking place globally in corporate boardrooms, government halls and trading houses. Decarbonisation is driving the debate and the buzz around hydrogen. Many challenges remain – most notably around cost, transportation and storage – and how much customers are willing to pay. The refining sector will have a major stake in the transition. According to S&P Global Platts Analytics, the sector currently consumes more than 35mn t/y of hydrogen out of more than 70mn tonnes of pure hydrogen globally. By 2025, the forecast calls for demand increasing to as much as 40mn tonnes on the back of higher refinery runs and growing demand for low-sulphur products. The vast majority of hydrogen derives from fossil fuels without the adaptation of carbon capture technologies – primarily natural gas (‘grey’ hydrogen) and coal (‘brown’ hydrogen). However, that could soon change. ‘While 98% of pure hydrogen supplied in 2018 was produced with fossil fuels emitting CO2,
Changing trading patterns As production picks up, trading patterns are going to change. In conventional hydrogen markets, industrial gas producers sell on a we expect additions of almost bilateral basis directly to refining 1mn t/y of electrolysis hydrogen and petrochemical plant customers. capacity between 2020 and 2025 Parties agree to long-term contracts [‘green’ hydrogen produced from and the hydrogen does not travel renewables] – and additions of except in short distances by capacity for nearly 1mn tonnes of dedicated truck or pipeline. hydrogen produced from fossil fuels The market looks similar to and carbon capture over the same European continental natural gas time period [‘blue’ hydrogen],’ says markets from the 1960s, when Roman Kramarchuk, Head of Platts natural gas started to become Analytics Future Energy Outlooks. available from the giant Groningen In July 2020, the European field. The industry’s challenge was Commission (EC) published a blocto develop the demand side and wide hydrogen deployment strategy. where gas prices were calculated Here, the EC took aim at incumbent based on oil prices. fossil hydrogen, suggesting quotas Pricing stayed that way until be put in place to drive integration the late 1990s/early 2000s, when of low carbon hydrogen into the supply and demand factors began to refining and chemical sectors. introduce price discovery through Low carbon hydrogen produced price reporting agencies or through from carbon capture technologies an exchange, as Michael Karasz, a can directly replace grey refinery German-based consultant with hydrogen – driving down the carbon The Energy House, can attest. Karasz footprint of oil product supply. and German consultancy Conenergy The majors have gone a step are leading an industry-based study further. In early June this year, on the development of hydrogen Shell announced it had successfully markets in Europe, which he hopes installed 10 MW of electrolyser will influence policymakers to set a capacity at its Rhineland refinery in legal framework to move the traded Germany. These electrolysers will market forward. produce zero carbon renewable, ‘Governments need to support or green, hydrogen to the tune of both supply and demand (through approximately 1,300 t/y to offset its quotas and targets), and let them use of grey hydrogen. The next stage grow at the same time,’ Karasz of this project will increase Shell’s says. The study will aim to discuss hydrogen production by an order what a European trading market for of magnitude, with the addition of hydrogen could look like and how another 90 MW of capacity. successful business models within Petroleum Review | November 2020 19
Alternative fuels
Figure 1: Global net captive refinery hydrogen production capacity Note: Capacity expansions shown do not account for potential duplicative capacity to hedge against outages and by-product hydrogen production Source: S&P Global Platts
only over the last few years has grown globally in capacity. ‘They were talking about megawatts – now, we have gone to gigawatts, not just in a couple of places, but all over the world,’ maintains Baringa analyst Erik Rakhou. His explanation – the development of wind markets started with government support and drove down costs, making wind competitive against fossil Hydrogen adoption generation. Furthermore, three key Another key lesson can be taken elements must come together to from the LNG market, which is create the hydrogen economy over almost unrecognisable from a the next 10 years – a combination decade ago when the Japan Korea of targets, incentives and support Marker (JKM) was first launched, mechanisms. and which not only now includes Targets could take the shape price data from China and other Asia of national hydrogen strategies, locations, but has become a global with over 20 announced to date, benchmark. including the EU, France, Germany, Japanese demand for a clean the Netherlands and Japan. fuel to generate electricity drove The EC also could strengthen development of the LNG market the EU Emissions Trading System as the country moved away from (EU ETS), further incentivising nuclear power in the wake of the production of renewable and low Fukushima disaster in 2011. carbon hydrogen. More recently, Chinese policies Companies also are setting to move away from dirty coal towards cleaner natural gas in north targets, such as BP’s plans to grow its hydrogen business to a 10% share of China gave an extra impetus to the core markets by 2030. emergence of spot activity. As incentives, oil majors are There are clear parallels with setting carbon price points to hydrogen, in terms of early interest make their business cases work in the need for clean, low carbon for hydrogen projects, confirms fuel. In some ways, however, Rakhou. Support mechanisms would hydrogen has outpaced LNG in include the Important Projects terms of market adoption as well as interest from a wide range of sectors, of Common European Interest programme and funds reserved such as mobility, power generation for cross-border clean hydrogen and materials production that have cooperation; but it remains unclear been difficult to decarbonise. how these would work. Hydrogen also could mirror the scaling up of offshore wind, which As the market grows, there such a market might look. ‘Within the next three years or so, we’ll start to see some hydrogen clusters with a certain number of producers and consumers connected by pipeline, but only on a local or regional level,’ Karasz continues. ‘Once you have a certain number of customers and producers connected by pipeline, they will start trading.’
20 Petroleum Review | November 2020
will need to be a developed infrastructure for accommodating cross-border trading. The European Hydrogen Backbone, which nine European gas transmission companies presented in July 2020 (see Petroleum Review, September 2020, p5), visualises a vast pipeline network eventually covering the entire EU. The price tag could range from €27bn ($32bn) to €64bn ($75.8bn). Also, traders will need governments or international agencies to develop universal standards to certify different products, including whether hydrogen is truly green or something else. As was the case in the wind and solar markets, standardised ‘guarantees of origin’ contracts also could play a critical role in developing a commodity-scale hydrogen market, as they would distinguish between hydrogen products based on their carbon content and ensure traceability to their source. Electrolyser capacity growing Growth in installed electrolysis capacity fits into a broader narrative that policymakers and regulators around the world have been constructing. In early June, Germany announced a national hydrogen strategy that ensured 5 GW of installed domestic electrolyser capacity by 2030. More recently, in September, France upped the ante with a commitment of 6.5 GW of capacity by 2030. Growth in renewable hydrogen
Alternative fuels
production capacity will be key to meeting green hydrogen targets, as economies of scale and learningby-doing will drive down costs and translate increased production into more competitive economics, a bullish driver for further hydrogen demand. However, in the absence of strong policy drivers, economies of scale are not likely to be enough for renewable hydrogen to be truly cost-competitive with incumbent fossil energy sources, say market watchers. Low-cost feedstock electricity and cost-effective hydrogen transportation are also prerequisites for a proper renewable hydrogen-based economy to succeed. The EC also highlights that hydrogen supply must ultimately consist of renewable green hydrogen in order to meet decarbonisation targets, yet low carbon, blue hydrogen also has a role to play in the short to medium term. The EC envisions both blue and green hydrogen sectors developing within Europe, but also sees an important role for importing green hydrogen from neighbouring countries in Eastern Europe and North Africa. One could imagine both seaborne and
domestic trade around the Port of Rotterdam, which already has the infrastructure created for hydrogen projects to emerge. In addition, the port is looking to import renewablebased hydrogen from Southern Europe and other origins as it looks to maintain its central position as the hub for energy imports into Northwest Europe. It is also likely that markets could emerge around the Houston area in the US Gulf Coast, which has ready customers and a hydrogen pipeline network for its petrochemical and refining customers, as well as Southeast China. Cost-of-production assessments There is no clear consensus on these questions, but price discovery, transparency and price risk management will be critical as markets emerge. To assist this critical need, S&P Global Platts established the world’s first suite of hydrogen price assessments in December 2019 and within months expanded those to include cost-ofproduction assessments for both methane reforming and electrolysis in the Netherlands, Japan and North America. It was a natural step for a price reporting agency with long history of developing price assessment
processes in energy and other commodities. But particularly noteworthy is the fact that the price references were launched ahead of actual market formation, specifically for the purpose of responding to market needs and market calls for bringing pricing transparency to what is otherwise an opaque market, largely reflecting inflexible, long-term contracts to refining and chemical customers. The hydrogen price assessments place a value on hydrogen production costs both including and excluding capital costs at key regional hubs by different production pathways, including steam methane reforming (plus carbon capture and storage in the Netherlands), along with polymer electrolyte membrane (PEM) and alkaline electrolysis. As the actual physical market of hydrogen develops and clarity around spot-market values continues to evolve with the marketplace, look to the refining sector to play a key and important role. Why? It has a long history with hydrogen and a ready ability to help meet hydrogen demand. ●
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Asia-Pacific
CHINA
China tackling climate change S peaking to the UN General Assembly in New York via video link on 22 September 2020, China’s President Xi Jinping announced that the country is aiming to be carbon neutral by 2060. A commitment that took many industry watchers and those at the Assembly by surprise. Commenting on the news, Wood Mackenzie Research Director Alex Whitworth says: ‘With this announcement, the world’s largest carbon emitter finally shifted from its long-term position of having limited responsibility to reduce global emissions as a developing country, to assuming clearer leadership in tackling climate change.’ President Xi also stated that China will reach peak emissions before 2030. The world’s largest, and growing, energy market, China currently contributes about 28% of global emissions. Calling for urgent reforms in the systems of global governance towards a greener and more sustainable pathway, President Xi said all countries should ‘stop only pursuing development rather than environment protection’. However, many questions about the announcement remain unanswered, as the market analyst’s Asia-Pacific Vice Chair Gavin Thompson notes: ‘Firstly, China’s definition of “carbon neutrality” is not well defined from the short announcement. Further, no roadmap was offered as to how this will be achieved. 2060 is a long time out and immediate, concrete steps have yet to be announced. But China’s upcoming 14th fiveyear plan has the potential to be the most important document in global energy market history. Increased investment in wind, solar, electric vehicle and battery storage technology deployment will almost certainly feature, and we can expect support for green hydrogen and carbon capture technology. It won’t of course be the complete roadmap and I expect clean coal will continue to receive strong support.’ He continues: ‘But if any country can achieve such ambitious goals it will be China. Strong state 26 Petroleum Review | November 2020
President Xi Jinping’s announcement that China is aiming to be carbon neutral by 2060 took many industry watchers and those at the UN General Assembly in New York by surprise
China is aiming to become carbon neutral by 2060. Wood Mackenzie analysts present their views on an announcement that surprised many industry watchers.
support and coordination have proven extremely effective at reaching economic goals. If this is now directed towards climate change then China is capable of transforming its carbon emissions trajectory over the coming four decades in exactly the same way that it has transformed its economy over the past 40 years.’ Meanwhile, the consultancy’s Asia-Pacific Head of Markets and Transitions Prakash Sharma says: ‘China currently emits over 10bn tonnes of carbon and will need to make significant efforts to reach net zero without affecting its economic development. In Wood Mackenzie’s recently released Accelerated Energy Transition Scenario (AET-2), we have China’s emissions fall nearly 60% by 2040 from the 2019 level using electrification, renewables, green hydrogen and carbon removal technologies. We expect China will need to deploy over a billion tonnes of carbon, capture and storage (CCS) capacity across its power and industrial sectors. These efforts will need to start much earlier and at a higher scale to deliver on the carbon neutral goal by 2060. The impact on global energy and commodity markets and seaborne trade is significant in our AET-2 scenario. Major
commodity exporters’ strategies are reset too to align with China’s ambitions.’ PetroChina ‘near zero’ goal President Jinping’s announcement came just a few weeks after PetroChina became the first national oil company (NOC) in the world to announce plans to meet ‘near zero’ net emissions by 2050 and invest in geothermal, wind and solar power, as well as pilot hydrogen projects. However, the company’s announcement came with frustratingly little detail. When asked if this was a serious move by PetroChina to reduce carbon emissions, Miaoru Huang, Senior Manager, China Gas Research, Wood Mackenzie, says: ‘PetroChina is all about scale – the company produces 4.6mn boe/d – so any effort to reduce emissions requires serious consideration. PetroChina has committed more than $33bn of capex in 2020, after budget cuts. Diverting a proportion of this into new energy is an important step, even if small in percentage terms. New energy also provides PetroChina much needed growth opportunities. This isn’t PetroChina’s first step in addressing the energy transition; through its parent, CNPC, the company is already a member of the Oil and Gas Climate Initiative (OGCI). PetroChina may not be looking to emulate the full net zero ambitions of some of the OGCI’s European members – and I expect it will only be addressing Scope 1 and 2 emissions – but it has placed itself ahead of many of its NOC peers.’ Max Petrov, Principal Analyst, Corporate Research, adds: 'Let’s stick with scale. PetroChina is targeting $0.4–0.7bn/y between 2020–2025, rising to $1.5bn/y thereafter to invest in geothermal, solar, wind and hydrogen. Through to 2025, that’s only 1–2% of total spend.' 'Compare this with the European majors – Eni plans to spend over 20% of its total budget on renewables by 2023; for BP it will be 33% by 2030. I agree PetroChina has positioned itself
Asia-Pacific
amongst the leading NOCs on net emissions reductions, but others are showing greater ambition. With a notably more emissionsintensive portfolio, Petronas is seeking board approval for a net zero 2050 target. Both CNOOC and Petronas have announced more aggressive spend on renewables for 2020, closer to 5% or higher.' So, how can PetroChina achieve net zero? ‘Without more detail, it’s not clear,’ says Petrov. ‘We assume that the company is targeting Scope 1 and 2 emissions, excluding the carbon footprint associated with end-user emissions (Scope 3). That means PetroChina is going to need to invest into clean energies significantly more than stated. Gas will also have to play a critical role in decarbonisation. Oil declines fastest in PetroChina’s current production profile, reducing from around 57% in 2020 to only about a quarter by 2035. Gas production is broadly flat through to 2035, helping curb emissions. If the company can grow gas production at the expense of oil, near zero looks in the bag. But this was the plan long before this announcement.’ ‘If PetroChina sets its sights on reducing Scope 3 emissions, things get even more complicated. In such a scenario, the company would have to shrink its upstream operations, similar to announcements made by some European majors. With an already mature portfolio, natural decline cuts PetroChina’s production levels by half by 2035. You could argue achieving near zero never looked easier, but would the company
The world’s largest, and growing, energy market, China currently contributes about 28% of global emissions Photo: Petrochina
and the government accept the trade-off?’ 'Don’t be too surprised by the lack of detail,’ adds Huang. ‘This is standard for Chinese companies rather than any deliberate lack of transparency. After all, PetroChina is not a European major and targets in China are often aspirational rather than firm commitments.' 'Looking at the current portfolio, PetroChina’s carbon emissions intensity is noticeably lower than many of its IOC and NOC peers. Production is predominantly onshore, with limited exposure to deepwater and LNG (though the latter is rising). Yes, this makes near zero look more straightforward, but a “do nothing” approach to reducing emissions isn’t on the cards. With President Xi’s push to expand domestic output and to grow overseas, PetroChina must look to boost output.' Petrov notes that gas is ‘essential’ to achieving PetroChina’s targets. He says: ‘PetroChina needs to continue to increase the share of gas – particularly domestic production – to meet growing demand. Tight gas and shale gas are critical. Yes, more capital will be allocated to new energies, but note the vague reference to this depending on progress in these sectors. Over the next five years at least, domestic gas will dominate.’ Huang agrees that ‘gas is key’, but doesn’t fully discount the potential for investment in low carbon and new energy options. ‘During PetroChina’s recent 1H2020 results call, management
put major emphasis on its gas enduser business. The recent creation of PipeChina and the need to compete with city gas distributors will encourage PetroChina to invest more into integrated energy solutions, including new energy.’ Taking a lead So, can we expect more from China on climate change leadership? Huang suggests the announcement gives an indication around China’s thinking on the energy transition and its broader role in climate change leadership. ‘China worked hard to position itself as a driving force behind the 2016 Paris Agreement. Soft power matters. The leadership’s more recent re-focus on energy security has rolled back some of these efforts. China is stressing “clean coal” as a dominant fuel while developing technologies and manufacturing capacity for low carbon energy. But if China wants to drive the agenda in the future, its NOCs will also need to be climate leaders.’ Meanwhile, Petrov expects significant change in China’s policy ‘only to the extent that the leadership will use next year’s 14th five-year plan to bolster existing policy initiatives and financial incentives for renewables and anti-pollution measures’. He adds: ‘Employment, education and the environment are the three main pillars of the next plan. Given current economic and geopolitical uncertainty, stability is critical.’ The bottom line ‘Some will label this greenwashing,’ comments Petrov. ‘I just don’t see PetroChina ready to embark on the kind of transformation that the likes of BP and Eni have announced. The company’s mandate remains firmly in oil and gas; E&P will continue to dominate the portfolio. Is PetroChina ready to transform its existing profitable businesses? Highly unlikely. But a lot can change in 30 years.’ Huang adds: ‘All oil and gas companies are facing pressure to reduce carbon emissions. And with its already low carbon portfolio, lower emissions trajectory and future investment in gas, PetroChina was already on this path. Little may radically change in the short term. But this is China, any shift in gear by the government on carbon and things could move fast.’ ● China's carbon neutrality bill could hit over $5tn – see p8 for details.
Petroleum Review | November 2020 27
