Harmonising commerce and climate

Demands for emission cuts mean that a number of oil companies are now making a commitment to renewable energy. But can offshore wind power (OWP) ever be as profitable as petroleum?

The petroleum industry has long been having a rough time of it, even before the coronavirus pandemic caused oil prices to tumble.

Governments and owners are calling for CO2 emission cuts, investors are withdrawing their money, and newspapers are refusing to accept fossil-fuel advertisements.

At the same time, artists are turning down grants from oil companies while young people demonstrate in the streets and call for an end to all petroleum operations.

“The companies are being leaned on heavily from a number of quarters,” agrees Valentina Kretzschmar, vice president for corporate research at global analyst Wood Mackenzie.

“Pressure from institutional investors has grown so much in the past couple of years that you can no longer operate as a big European oil company without a strategy for cutting emissions. That’s quite new.”

This trend particularly affects the big European players, whose governments want them to take account of society and the environment, and not just shareholders.

Clear goals for reducing greenhouse gas (GHG) emissions have also been set by these countries, while consumers are turning their fire on the companies when such targets fail to be met.

Some oil companies are responding by investing more in renewable energy, some are pulling out of petroleum altogether – and others are continuing as before.

Return

Kretzschmar maintained in 2019 that it was almost impossible for oil companies to expand renewable energy operations if these had to compete with much higher returns from petroleum projects.

 “That was true when oil fetched USD 60 per barrel, but not if the price is now down to USD 35,” she now says. “At this level, renewables can give the same return as oil and gas developments.”

 A report she issued in March asked if clean energy could be the winner in the oil price war, and concluded that the pandemic and low oil demand had speeded the transition to renewables.

 “What we’d expected, on the basis of our models, to happen 10-15 years into the future is now playing out right in front of our eyes,” Kretzschmar says.

 Even if oil prices rise again, which Wood Mackenzie expects to see from next year, petroleum is no longer as attractive as it used to be.

 “Pressure on the industry is constantly increasing, with investing in it viewed as risky,” Kretzschmar observes. “Big price fluctuations also create uncertainty, and oil projects cost a lot.

 “By comparison, renewable projects offer clear advantages, with less risk, lower CO2 emissions and smaller costs. Many oil companies therefore appreciate that it pays to diversify.”

 She has also noted an internal change of attitude in some of the oil companies.

 “The great majority prefer to react to external pressure. But we’re now starting to see some actually taking responsibility for reducing the damage caused by climate change.”

 Kretzschmar includes Equinor among the big European players and sees the company making a strong commitment to OWP. It has been joined by others, including Shell and Total.

 In her view, OWP fits extremely well with the core competence of these companies and allows them to transfer knowledge and skills.

 “They can use these capabilities to develop this new growth sector. We actually believe that OWP could deliver returns and cash flows familiar from petroleum projects.”

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Pace

According to Hildegunn T Blindheim, director for climate and the environment at the Norwegian Oil and Gas Association, the change of pace on renewables can be dated to December 2018.

That was when the EU published A clean planet for all ­– a strategy document which recommended moving to net zero emissions by 2050.

Two months earlier, the UN intergovernmental panel on climate change (IPCC) had published its assessment of the difference between global temperature rises of 1.5°C and 2°C.

“The seriousness of climate change is indisputable,” Blindheim notes. “A clear course was set by the EU, and we understood the need to raise our game and define new and more ambitious goals.”

Measures in the EU have largely concentrated on developing renewable energy, but the emission problems cannot be resolved by increased use of clean electricity alone.

Carbon capture and storage (CCS) facilities are also required in order to sequester emissions, and on such a scale that they can eventually become profitable.

“The technology is mature, after all, but we must get it built and rolled out in order to bring down its cost,” says Blindheim.

Strategy

She has headed work on a revised climate roadmap for Norway’s petroleum industry, which led to a report on The energy industry of tomorrow on the Norwegian continental shelf. Climate strategy towards 2030 and 2050.

Issued by the Konkraft partnership in March, this commits the Norwegian oil sector to cut its green house gas (GHG) emission in 2030 by 40 per cent compared with 2005 and in 2050 to near-zero.

“The absolute amount of GHG released remains virtually unchanged from year to year even though the industry is taking measures to cut the level,” Blindheim observes.

“Although we’re starting to see the contours of a decline in NCS emissions, they’ll be stable or rise a little for two-three more years because new fields are coming on stream.

“When the industry decided on its latest climate goals, it also saw that new reporting and follow-up systems had to be put in place.

“These would make it possible to determine the status of cuts along the way and ensure that measures are implemented. Plans call for them to be in place during the present year.”

She explains that the oil sector has matured during recent years. Instead of going on the defensive when attacked as a problem, it now recognises that it can perhaps overcome many of the challenges facing the world.

“This is an industry which has crossed the deep Norwegian Trench and developed horizontal drilling,” Blindheim points out. “We possess a lot of technological expertise.

“That includes not least the ability to implement the big, demanding industrial projects required if Europe is to reach its climate goals.”

Europe has industries which must reduce the amounts they emit. Steel mills and cement plants consume too much current and heat for this energy to be replaced by sun and wind.

When gas-fired power stations cannot be used as a reserve and swing producer, other solutions are required – with hydrogen as an example.

“Burning hydrogen rather than natural gas would provide a power station which functions as a massive emission-free battery for various forms of renewable energy,” says Blindheim.

United

Employees and employers in Norway’s oil and gas industry are united over its climate goals and agree on the methods to be used, emphasises Frode Alfheim.

As president of the Norwegian Union of Industry and Energy Workers (Industry Energy), he was involved in drawing up the new roadmap.

He says that this is a matter of developing technology which can reduce emissions in the petroleum sector even further, while building up new industries such as OWP, hydrogen and CCS.

“After all, we’re mining a non-renewable resource. At some point or another, the reservoirs will begin to empty or the resources will become harder and harder to recover.”

Jobs in the oil and gas sector have to be replaced, but Alfheim says that this will take several decades and that Norway must build on what it has.

 “As far as I’m concerned, those people in Norway who talk about ceasing oil production in 2030 are living on a distant planet.

 “If we were to shut down all emission sources in this country, it wouldn’t make a jot of difference to the climate battle. Quite the opposite – we’d increase global CO2 emissions.”

 Shale oil production in the USA releases 57 times as much CO2 per unit produced as crude output from the NCS, he points out, and believes people are too focused on equating oil with petrol.

 Alfheim observes that petroleum provides feedstock for a number of industries and is incorporated in countless products people depend on – from plastics to medicines and textiles.

 Such applications account today for only 11 per cent of annual world consumption of oil and gas, but he believes that this proportion is set to rise in coming years.

 “The pandemic and the oil price slump may encourage a greater commitment to OWP, but energy consumption – and thereby demand for petroleum – is likely to rise again as soon as economies recover.”

 Oil and gas will remain the most important source of jobs and incomes for Norway Ltd, Alfheim maintains, and notes that OWP and other industries depend on grants and subsidies to show a profit.

 “A subsidised industry can’t sustain the welfare state,” he asserts. “I believe most Norwegians understand, more than ever, how important it is that we have the oil sector. And that we’ve been so wise that we nationalised its ownership.”