The surge of interest in renewable sources of energy and alternative energy technologies came unexpected on the back of a wave of changes caused by combination of disruptors to the oil and gas industry. Traditionally resilient to change, energy majors have today completely re-evaluated their priorities realising that current strategies were not flexible enough in the face of global market price shifts. Unfortunately, many projects have been cancelled, or put on hold, for example, development of offshore reserves (including international joint ventures), some new refinery projects, few methanol projects, and large-scale refining-petrochemical integration projects – the list goes on.
The gas industry had its fair share of interest with several LNG (liquefied natural gas) ventures (especially in Russia, and Europe) and gas-chemical projects coming to the fore, and fertiliser production becoming one of the few remaining sectors that still generates reasonable margins under current circumstances.
Impacting the whole energy complex
Not that long ago – in February 2020 – we highlighted at our ME-TECH conference a shortlist of factors that could have the most impact on the petrochemical industry, and these are now applicable to the whole energy complex:
Globalisation and integration: While before this year, it was clearly a positive factor for development, now with the world changing, it could reverse – demand for electricity increasing, and demand for certain transportation fuels on decrease, etc.
Economies of scale: Again in the near future, smaller-scale specialised plants may well become more profitable than before (product and feed flexibility and high marginal products being the key) and even more than those with large capacities producing basic products and experiencing shortage of feed supply.
Price of crude: It may become an opportunity to expand into new business areas – these can be researched and developed.
Environment: Dealing with plastic waste and the quest for sustainability are high up on the GCC countries priority list. We have seen a strong focus now on recycling technologies for plastic bottles to produce similar quality materials. Few renewable energy projects are expected, with many countries in the region embracing ambitious clean energy targets to free up more hydrocarbons for export and stay ahead of market shifts in response to climate change concerns.
Green energy movement
McKinsey predicted last year a moderate uptake of renewable feedstock use. Renewable feedstock such as bio-ethanol was projected to increase to 4% by 2050. Is it possible to double, or even triple the number after the crisis is over? An interesting document on this topic is the China Renewable Energy Outlook – a 14-year plan to decarbonise one of the world’s largest economies – wind and solar photovoltaic (PV) have already entered the post-subsidy era in China. The International Energy Agency’s (IEA) scenario assumes strong growth in renewables, but still projects that oil and gas will continue to provide at least 48% of the world’s energy in 2040. According to the World Bank and IRENA (International Renewable Energy Agency), renewable energy prices are now competing with coal industry, and by 2050 use of coal for electricity production shall be reduced by at least by 30%, led by EU (European Union).
The most forward-thinking companies have decided to focus on activities listed in their sustainable development policies, investing in the future today. We would like to reflect on some of the most interesting cases.
Important players in the green energy movement – Equinor, Shell and Total – have decided to invest in ‘Northern Lights’ project to capture and store CO2 (CCS) at the shelf of Norway. If EFTA (European Free Trade Association) gives the project approval, it will become one of the first important steps towards creating value in CO2 management and complying with Paris Agreement targets.
A technology with declared high potential is CO2-enhanced oil recovery (EOR), which uses injected CO2 to extract more oil from the field while providing CO2 storage. Doubling the amount per barrel of CO2 allows carbon produced to technically become negative in some fields. It is well-established in North America, but the most attractive locations for development are said to be Russia and China (due to stationary sources near reservoirs) and the Arabian Gulf, including Saudi Arabia and Kuwait, as their crude can be produced on a large scale with minimal energy investment.
The role of hydrogen
Possibly, the most promising technology route for decarbonisation is hydrogen. According to an ICCT (International Council on Clean Transportation) study, “liquid hydrogen could power essentially all container vessels crossing the Pacific Ocean”, which would go a long way to meeting IMO (International Maritime Organization) 2020 requirements, and helping transportation companies keep logistics prices under control while still creating value. The world’s first liquefied H2 carrier vessel was launched in Japan in December 2019, and in 2023 the first retrofitted liquid hydrogen fuel cell cruise ship will sail from Norway.
Today, almost 80% of total hydrogen supply is from oil and gas, and is coupled with low technology and commercial risks. Other uses are: recycle CO2 in cement and steel industries, and heat and power; fuel cell electric vehicles; and synthetic fuels production with low environmental risk unlike bio-fuels. Hydrogen produced by water electrolysis with renewable electricity is synthesised with carbon from CO2 to produce complex hydrocarbons, which is viable for aviation (when the industry recovers from the lockdown demand drop).
It can also be used for heating – a pilot project was run in the UK where zero-carbon hydrogen has been injected into a gas network for the first time to heat several buildings, and the technology can then be scaled up for commercial use.
Transition to cleaner energy
We support the idea of driving towards circular economy concept (CEE). The CCE cycle has four main pillars: Reduce (energy efficiency, low-carbon fuels); Reuse (including CO2-EOR); Recycle (use of secondary plastics, use of carbon in synthetic fuels, fertilisers/urea, methanol, polymers, and other chemicals); and Remove (carbon capture, utilisation and storage).
A good example here is the Ras Tanura Saudi Aramco Refinery Margin Enhancement. The plant is being gradually developed: in 2021, clean fuels project (+50% margin improvement), and going forward, full conversion refinery (60-90% margin increase). Advanced companies aim to create a portfolio of hydrocarbon sources combining traditional fuels with recycling – utilising available options along the value chain, i.e., mechanical, chemical and thermal recycling, and renewables.
If companies hope to achieve these goals, they need to focus more and prioritise this transition. According to IEA, between 2015 and 2019, less than 1% of the total capital spending in oil majors was made on projects outside of oil and gas – just over $2bn.
Structural changes like these do not happen overnight, and not all companies that have influence on the markets will be eager to fully support the transition before they are ready, but if anything, these ‘black swans’ boosted the long-awaited activity in this area.
Even though few international organisations insist that the path to full green energy is one-way and shall be full-on, it is important to keep in mind that the existing energy industry is very large and very important – social-wise – offering hundreds of thousands of jobs, and providing taxes to help support economies, and investments in R&D.
Therefore, shutting down the oil and gas industry as a matter of principle – even with noble intent – will risk doing more harm than good, shifting existing balances in industry and society even more than now, whilst not necessarily bringing all the environment safety benefits hoped for.
For certain, the transition to cleaner energy and cleaner environment will dominate future investments in all regions in the world.
Euro Petroleum Consultants will be holding the ESF 2021 – Energy and Sustainability Forum – in Cannes in March, focusing on these important topics and challenges.
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