Path to Global Consensus on Climate After COP28

Consensus in Words

The Conference of the Parties to the UN Framework Convention on Climate Change (COP28), which was held in December in Dubai, after a heated two-week debate, ended with the adoption of a declaration calling for reducing consumption and production of fossil fuels. It was specifically provided that this should be achieved “in a just, orderly, and equitable manner.” The declaration did not contain specifics: what is hidden behind these definitions, what are the details of the entire process, and its time frame. Without such specifics, the declaration seemed to be a formal, non-binding statement. However, this is not the case.

Although harsh wording was rejected during the discussion – “phase-out” or “phase-down” were replaced by the softer “transitioning away from fossil fuels” – the signing of the declaration by almost 200 conference participants de facto meant the recognition that fossil fuels have an impact on climate change. Major oil-producing countries did not acknowledge the existence of such an impact for many years, trying to avoid premature abandonment of traditional fuels. In Dubai, these countries, led by Saudi Arabia, still agreed to reduce consumption and production of fossil fuels, albeit subject to numerous reservations.

With this recognition, will oil-producing countries be able to defend their investment strategy aimed at maintaining high levels of commitment to fossil fuels? This strategy was generally formulated by Sultan Al Jaber, president of COP28 and at the same time the head of the largest oil company in the UAE. He rightly pointed out that oil and gas need additional investment because they have suffered from years of underinvestment.

A continued confrontation is inevitable

The consensus at COP28 between the group of oil and gas producing countries and the rest of the participants remained only in words. Each of these groups remained unconvinced. Therefore, the core group of countries, relying on the ideological support of the UN and IEA, will build on the success achieved at COP28 with triple strength. It will continue to consistently push the narrative that fossil fuels must be removed from the historical stage as quickly as possible. Consequently, investments in them must be consistently and gradually reduced. Let us recall that shortly before COP28, the UN released a report with the main thesis that fossil fuel producers have already exceeded their limit on increasing emissions. If they do not take radical steps, then in six years the Earth will no longer be able to cope with harmful emissions and keep the warming within 1.5 degrees.

I do not question the conclusions of UN analysts, but I note that the requirement to immediately phase out fossil fuels is unattainable in practice. In the foreseeable future, renewable energy sources cannot completely replace non-renewable ones. The reason being is not so much a lack of investment, but energy poverty, a shortage of free land in areas of consumption, the lack of sufficient critical materials on the planet for such replacement, and the huge costs of integrating renewable energy sources into energy systems. It is obvious that the need for traditional fuels will continue for many decades to come.

We must not forget that abandoning fossil fuel production and consumption poses an existential challenge for its suppliers. In the Gulf countries, for example, the share of hydrocarbons in exports is 95 to 99%. In OPEC there are also frankly poor countries that do not have enough resources to diversify their economies. What should oil and gas producers do to counter the climate mainstream’s demand for disinvestment in traditional energy sources?

Carbon Zeroing of Fossil Fuels

The solution to this seemingly insoluble problem suggests itself. As Darren Woods, head of ExxonMobil, rightly noted, humanity must reformulate the task in the fight against climate change. Instead of “we need to get rid of oil and gas,” the task should be stated as “we need to address the emissions associated with the combustion of oil and gas.” Our goal is to “reduce the emissions, find the technology to do that, and find technology that’s affordable to effectively implement solutions.”

If the climate threat comes from the carbon footprint of fossil fuels, then spending to reduce this carbon footprint must be a critical part of investing in them. Part of these targeted investments is directed to technological innovations along the entire chain, starting from the upstream. An example of this is the cost of reducing emissions resulting from gas flaring at the fields, uncontrolled methane emissions during its transportation and repairs of gas pipelines, venting of boil-off gas into the atmosphere on gas carriers, etc.

Note that 75% of emissions are generated at the final consumption stage when burning fossil fuels. This part of the emissions can be neutralized by purchasing carbon offsets. Offsets are certificates that attest to the reduction of emissions in tons of CO₂ obtained as a result of the implementation of environmental projects. These include industrial and power plant emissions capture and storage (CCS) projects. They belong to the technology-based removals category. Environmental projects based on the use of natural CO₂ absorbers (nature-based removals) are also suitable for offsets. Such projects include forest planting and care, restoration of peatlands and wetlands.

In other words, fossil fuels must undergo a process of transformation into the category of carbon-neutral fuels (abated fuels). Carbon neutralization must be an integral part of fossil fuel investment, allowing it to fit seamlessly into the green agenda. This approach should be widespread and apply to all types of fossil fuels. Interestingly, two years ago, the COP27 declaration included phase-out of coal. Since then, its consumption has only grown. COP28 participants changed the wording, calling for “accelerating efforts towards the phase-down of unabated coal power.”

First of all, carbon zeroing of fossil fuels will require the creation of a global industry for the capture and storage/utilization of carbon dioxide, the parameters of which must be sufficient to service such a transformation. Note that at COP28, carbon capture and storage technologies were given special attention in the fight against climate change, but without linking them with the future of the oil and gas industry. However, Big Oil is better positioned than anyone to take on a leading role in the development of the CCS industry, as it closely correlates with the core functionality of the oil and gas business. However, to achieve this, oil and gas producing countries will have to overcome at least two obstacles.

First, address the lack of trust in voluntary carbon markets. Let us emphasize that it was the oil and gas industry that initiated the creation of these markets. LNG suppliers were the first to offer their customers carbon-neutral liquefied gas, the emissions from which were compensated by carbon offsets. However, anti-fossil fuel activists have gone to great lengths to denigrate this undeniably progressive practice as trickery, as greenwashing. The campaign to demonize the carbon offsets of oil and gas companies resulted in decreased activity in the voluntary carbon markets. According to the World Bank, only 18 million tons of CO₂ were sold through the Xpansiv CBL exchange in 6 months of 2023, compared to 116 million for the entire last year.

It is oil and gas companies that must take on the responsibility of restoring this market by organizing international trade in verifiable carbon offsets in accordance with Article 6.4 of the Paris Agreement. Unfortunately, attempts to agree on implementing the provisions of Article 6.4 at COP28 have failed.

The second obstacle to carbon neutralization of fossil fuels is the current lack of market willingness to pay a premium for a low-emission product. Obviously, without such a premium, there are no incentives for emissions mitigation. The logic of developments leads to the fact that with the introduction of the CBAM (carbon border adjustment mechanism), the best that an exporter of carbon-neutral fossil fuels can hope for is not to pay an additional border tax. Not a word about paying a premium. The demand from fossil fuel producers to address issues in a fair and equitable manner has never been more urgent.

The argument in favor of such a premium should be as follows. Combating climate change comes with additional costs. An increase in the price of decarbonized fossil fuels is inevitable. But this increased price may be significantly lower than what fossil consumers will have to pay as a result of the disruption to the oil and gas investment cycle.

Blue Hydrogen as “Calming Gas”

Low-emission hydrogen is the fuel of the future, which by 2050, according to McKinsey, will reduce global emissions by 20%. The purpose of such hydrogen is to serve as a decarbonization tool in the sectors that are impossible or very expensive to convert to green electricity obtained from renewable energy sources. These sectors include transport, heating, iron and steel, cement industry, energy storage, and carbon-neutral fertilizer production.

Low-emission hydrogen can be produced in two main ways: by electrolysis of water using green electricity, which is why it is called green hydrogen, and by steam reforming of methane, capturing and burying the resulting CO₂ emissions. The latter is called blue hydrogen.

The topic of blue hydrogen was not raised at COP28, as climate mainstream adherents are promoting the idea of repurposing Big Oil companies into producers of green hydrogen. Green hydrogen is intended to replace oil and gas in the traditional areas of their consumption at present.

However, blue hydrogen produced from natural gas by steam reforming methods using CCS has a unique ability. It is the simplest and most effective method of decarbonizing the global gas industry. Blue hydrogen opens up seemingly forever lost prospects for prosperity, giving it a chance to organically join the world of new carbon-free energies.

In this new world, natural gas, as a “transitional” and “legacy” fuel, would be doomed to inevitable marginalization, as progress is made in achieving the goals of the energy transition. After conversion into blue hydrogen, natural gas acquires the status of “fuel of the future,” “fuel for all times.”

Blue hydrogen not only addresses the tension between the need to preserve fossil fuel investment and the climate agenda, but could boost the development of a global hydrogen market. With 1000 projects announced with direct investments of $320 billion and government support in the USA and EU, the low-emission hydrogen market cannot get on its feet. This is due to the extremely high cost of green hydrogen. For example, the cost of such hydrogen in Germany is currently estimated at $8 per kg. Blue hydrogen in countries that have strategic natural gas reserves costs less than $2 per kg.

Deloitte estimates that global production of blue hydrogen alone will be 57 million tons in 2030, 99 million tons in 2035, and peak at 125 million tons in 2040. Then it will account for approximately a third of the total global production of low-emission hydrogen. Saudi Arabia, the United Arab Emirates, Australia, and the USA have announced their readiness to increase production of blue hydrogen with a focus on its export; many projects will be launched in the next few years. The successful implementation of these projects opens the way to global climate consensus.

Zuhreddin Zuhreddinov
Independent Expert Oil & Gas (Uzbekistan)