UNFCCC 28 In Dubai (November 30 – December 12, 2023)

Restrictions On Oil And Gas Trade Contradict Interests Of Global Climate Agenda

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Such a paradoxical statement, at first glance, may seem contrary to common sense. After all, the idea of the energy transition is to exclude from the global energy balance, to the maximum possible extent, the fuels that are a source of greenhouse gas emissions. At the same time, the West put oil and gas from Russia at the top of the list of priorities for such an exception, classifying them as “molecules of unfreedom.” John Kerry, the US special envoy for climate change, recently said he was particularly pleased that sanctions have accelerated the transition to clean energy and thus denied Moscow the opportunity to use its energy weapons.
I would like to assert that from the climate agenda interests standpoint (promoting which is exactly Kerry’s function), there is no reason for joy. An attempt to remove Russian energy resources from the world energy balance does not accelerate, but rather slows down humanity’s progress towards its cherished goal of stopping the rise in temperature on the planet. Such a statement seems paradoxical only at first glance, but if we consider the transition to clean energies in a practical context, then such a conclusion becomes obvious. What is the context that usually disappears from view when the energy transition is reduced only to an uncompromising fight against fossil fuels?

The energy crisis is forcing us to rethink the role of the oil and gas industry in the process of decarbonization

Even in Net Zero Pathway (NZP), the greenest scenario of the International Energy Agency (IEA), which the agency believes, unlike its other scenarios, will limit global temperature rise to 1.5 degrees by 2050, fossil fuels do not disappear completely, although their share will be reduced by that time in primary energy consumption from 4/5 to 1/5. The fact is that for many reasons, complete replacement of fossil fuels with renewable sources is impossible. Attempts to speed up the process of this substitution by artificially limiting the influx of investment in the extraction of fossil fuels have already led to results directly opposite to the expected.
The result of almost seven years of systemic underfinancing of the oil and gas sector, which was superimposed by uncontrolled money emission during the years of the COVID epidemic, was the global energy crisis. To mitigate the consequences of the spike in energy prices since mid-2021, huge compensation from state budgets was required. Thus, according to the conclusion made by the think tank of the International Institute for Sustainable Development (IISD), in 2022, G20 countries invested a record amount of budgetary allocations into fossil fuels. It amounted to $1.4 trillion ($1 trillion in the form of subsidies, $322 billion as investments by state enterprises, and $50 billion as loans from state financial institutions). There is no doubt that these budget funds, which the IEA estimates are equal to all investments in the energy transition in the same year, could be put to better use in terms of the climate agenda, for example, in the form of doubling investments in renewable energy sources or helping developing countries to decarbonize their economies.
Trying to solve the climate problem through the wrong means, namely by creating barriers to investment in the oil and gas sector, has only set humanity back in its progress towards carbon neutrality. It is also obvious that the implementation in practice of the geopolitical project of the West to squeeze Russia-originating oil and gas out of the global market played an important role in the development of the current energy crisis.
The conclusion that suggests itself in the current situation is that by following only the logic of the fight against fossil fuels, it is impossible to ensure the harmonious replacement of these fuels with renewables, that is, without crises and reverse motions. An uninterrupted supply of oil and gas to the world market requires a continuous flow of investments in new oil and gas projects with a long payback period and government participation in them (subsidizing geological exploration, solving infrastructure issues, etc.). These investments are incompatible with the ideology of the NZP IEA scenario. Moreover, the narrative in this scenario, where investment in new oil and gas projects is incompatible with commitments under the Paris Agreement, puts an end to oil and gas projects in developing countries, which often give them their only chance to escape energy poverty.

Energy security comes to the fore

At various levels – international organizations, research institutes, corporations – the process of rethinking the role of the oil and gas industry in decarbonization has begun in order to prevent its degradation at least for the transition period.
Thus, from mid-2021, the IEA stopped publicly voicing calls not to invest any more in new oil and gas projects, because it was faced with the reality that the direct withdrawal of money from these projects led to acute energy shortages. IEA head Fatih Birol said at the end of 2022 that “without a breakthrough in investment in clean energy, investment in traditional energy projects also risks being insufficient to meet potential growth in demand.”
Large international oil and gas companies have announced a revision of their investment plans in 2023. Without withdrawing their commitment to achieving energy neutrality by 2050, these companies are increasing investments in the production of traditional fuels. The example of the Dutch-British Shell company is noteworthy in this sense. The new management of the company, represented by Wael Savan, announced in August 2023 that it was abandoning plans, approved by the previous management, to reduce oil production by 1-2% per year by 2030. Therefore, despite the resistance from radical shareholders, Shell plans to increase in its portfolio the share of oil rather than green sources. The return to traditional activities in the oil and gas industry is also associated with the resignation of BP head Bernard Looney, who led the restructuring of the company for the past four years.
The director of the respected Oxford Institute for Energy Studies (OIES), Bassam Fattouh, said in a policy paper in September 2023 that resource security issues are now coming to the forefront of energy policy. He called for a reconsideration of the role of hydrocarbons in the transition to clean energy, focusing on the efforts of oil and gas companies to reduce their carbon footprint.

The updated NPZ scenario should abandon its anti-fossil fuel bias

There are many ways to decarbonize fossil fuels, from reducing emissions throughout the chain, from production to the end consumer, to acquiring green certificates that compensate for associated greenhouse gas emissions. Once these fuels can be decarbonized, particularly to a negative carbon footprint, they are transformed from a perceived cause of climate problems to a solution to them.
After transformation, hydrocarbons can take their rightful place in the global energy balance after 2050. Unlike the NZP IEA scenario, relying on decarbonized fossil energy sources will not lead to the degradation of related industries. Thus, the NZP scenario assumes that, compared to 2021, global oil consumption in 2050 should fall by 4 times, gas by 5 times, and coal by 10 times. The updated NZP scenario does not involve “killing” the oil and gas industry. The balance between renewable and non-renewable energy sources in the energy mix will determine the market in the competition between decarbonized fossil fuels and renewable energy sources.
The most important advantage of such a rethought role of fossil fuels for achieving the goals of the Paris Agreement is that their replacement with renewable energy sources will occur as objective economic conditions for this process, which will eliminate the possibility of uncontrollable situations with the formation of energy resource shortages. However, transforming the oil and gas industry into carbon-neutral will require investment in the accelerated development of the carbon capture and storage (CCS) industry.
Unfortunately, the likelihood of an updated version of the NZP IEA scenario with adding weight to carbon-neutral fossil fuels in the global energy mix is low. Thus, in a recent interview, Fatih Birol once again stated that the “golden” age of fossil fuels is over, and they are irrevocably consigned to history.
It is also puzzling that both Birol and Fattouh, when analyzing the difficulties of replacing non-renewable energy sources with renewable ones, substitute the study of the objective causes of these difficulties with groundless references to “Russian aggression against Ukraine.” If the real problems of the climate agenda (high cost of renewable energy sources, inflation, boycott of “non-green” investments, etc.) are replaced by one far-fetched excuse, then there is no reason to expect from such analytics a serious “rethinking” of fossil fuels’ role in achieving the goals of the Paris Agreement. This case falls under the statement that if vision of reality does not correspond to it, too bad for this reality, and in our case, for the cause of combating climate change.
The IEA’s forecast for fossil fuel demand, which expects it to peak before 2030, has been sharply criticized by OPEC that named such forecasts irresponsible and especially dangerous because they are accompanied by calls to abandon new oil and gas projects.
OPEC considers technological innovation as a key focus for oil and gas companies, which are investing heavily in hydrogen projects, CCS facilities, and the circular carbon economy.
But despite its open-minded approach to fossil fuels, OPEC has been passive in preparing an NPZ scenario that could offer a different, competitive vision for the transition to a carbon-neutral economy than the IEA, with a greater weight of decarbonized oil and gas.
The Gas Exporting Countries Forum (GECF), representing the interests of gas exporting countries, could become another platform for preparing its own NPZ with the inclusion of natural gas in addressing issues on the climate agenda, which would avoid underinvestment in this sector. Research structures of the BRICS countries, specializing in combating climate change and refusing to discriminate against oil and gas of Russian origin, could also play an important role in preparing an alternative scenario.

Green investments by oil and gas companies that do not require abandoning hydrocarbons

Global oil and gas companies are demonstrating in practice how they can survive under the strict demands of the climate agenda without withdrawing investment from the industry itself into wind parks and solar modules. Moreover, BigOil representatives are not abandoning the development of existing fields and are actively acquiring new production assets, so they are not changing the basic profile of their activities. How do they reconcile the incompatible – hydrocarbons with commitments to become carbon neutral by 2050?
Decarbonization of the oil and gas industry is ensured by a focus on blue hydrogen and the rapid formation of an industry for the capture and disposal of greenhouse gases. As a rule, in a CCS cluster, there is an anchor investor who takes on the costs of constructing gas collection and transport infrastructure for CO2, as well as the preparation and operation of the geological reservoir. Other project participants are undertaking the construction of carbon capture plants at their production sites and providing connections to the CCS infrastructure. Oil and gas companies are more suited to the role of such anchor investors than anyone else is.
For example, the American energy giant ExxonMobil unveiled a decarbonization strategy in April 2023, which does not imply a change in the basic profile of its activities. At the same time, in three locations on the Gulf Coast, ExxonMobil is initiating projects to create clusters for the utilization and disposal of carbon dioxide, with the expectation that these storage facilities will not only increase its own production of blue hydrogen, but also provide decarbonization services to third parties on a paid basis. For this purpose, ExxonMobil is seeking partners to create a hub in the Huton Ship Channel area, where it plans to create a public CCS with a capacity of 50 million tons per year in 2030 and 100 million tons per year in 2040.
According to BloombergNEF, governments and global oil and gas companies have already invested more than $83 billion in CCS projects and have no plans to stop there.
Not only the USA, but also Saudi Arabia, the UAE, Great Britain, and Australia are planning to launch blue hydrogen production in the next few years. Deloitte estimates that global production of blue hydrogen alone will reach 57 million tons in 2030, 99 million tons in 2035, and peak at 125 million tons in 2040.

Due to sanctions, the potential of oil and gas companies in the fight against climate change remains unclaimed

Changes in attitudes towards blue hydrogen and CCS in Russia should be sought in the events that occurred in the country after February 24, 2022. And before this date, there was a split in the Russian professional community in relation to the green agenda. This breakup has only intensified after the introduction of sanctions, leading to a rise in the position of climate skeptics.
The transfer of projects for decarbonization of the energy sector to the periphery of Russia’s economic interests is ultimately justified by their classification as imposed by the hostile West with the aim, along with sanctions, to undermine our economy.
At the same time, Russian oil and gas companies have enormous potential that can make an invaluable contribution to the fight against climate change.
Let us recall that in December 2021, the Russian Ministry of Energy prepared a program “Development of Hydrogen Exports,” which was planned to be approved in the first quarter of 2022. The program envisaged turning the Russian Federation into one of the world leaders in the production and export of low-emission hydrogen. In the optimistic scenario (accelerated development of exports), the potential for supplies abroad was estimated at 6.4 million tons per year by 2030 and 30 million tons by 2050.
Russia also has enormous potential for burying greenhouse gases. Thus, the State Commission for Mineral Reserves of the Russian Federation estimated the potential of CO2 storage in Russia at no less than 4.6 gigatons. This makes it possible to utilize not only Russian CO2 emissions. CCS resources in the Russian Federation can be provided to foreign countries on a commercial basis. Russian oil companies such as Tatneft, LUKOIL, and Gazprom Neft are already actively looking for places to create CO2 storage systems.
The development of blue hydrogen and CCS projects is constrained by the high cost of steam methane reforming plants and the construction of underground storage facilities. If climate change poses the most serious threat to human existence, then questions of geopolitics must give way to tight international cooperation in finding a solution to stop this threat. As we see, there is no basis for John Kerry’s positive assessment of the achievements of the collective West in the fight against the Russian oil and gas industry from the position of the global climate agenda.
The emerging new centers of the multipolar world are simply called upon to take on the mission of creating a practical model for the transition to carbon neutrality, taking into account the mistakes already made and rethinking the place of fossil fuels in this transition.

Zuhretdin Zuhretdinov
Indipendent Expert Oil&Gas (Uzbekistan)