By Gerard Kreeft
With the end of the school year students are eager to hear the results of how they fared. Unfortunately, I have only bad and worse news for my Big Oil Energy Transition Class 101.No one passed. Everyone failed. And in some cases failed miserably. How did this happen?
Energy Transition Class 101 has a very straight forward goal. It is focused on the two energy scenarios developed by the International Energy Agency (IEA): • Stated Policies Scenario(SPS) is geared for the short to medium term; and • Sustainable Development Scenario(SDS) for medium to long term.
The SDS scenario, the “Well Below 2 °C “is the benchmark that determines whether course participants pass or fail.
Unfortunately no one passed. Some will get a positive mention to encourage their green activities, others will be reprimanded in private, but given the disastrous results, a public rebuke is necessary.
In The Energy Transition Class 101 SDS scenario, the “Well Below 2 °C” benchmark was key for energy company participants to help understand the steps required to ensure an orderly, low-carbon,energy transition.
The Energy Transition Class 101 went a step further and took on board the Wood Mackenzie’s Accelerated Energy Transition scenario (AET-2),which assumes the world is on course for near 3 °C warming because of renewed energy demands and the challenge of reducing CO2 emissions.
According to Wood Mackenzie: “The AET-2 scenario is based on the Intergovernmental Panel on Climate Change carbon budget allocation for the next eight decades, to 2100. It sets out our view of how the world can limit the average rise in global temperatures to 2 °C, compared with pre-industrial times, examining potential policy drivers, cost reductions and technological innovations. Electrification and low-carbon fuels are central to meeting the 2 °C limit. We estimate that electricity meets 47% of total final energy consumption globally in 2050, compared with 20% today. Three key assumptions underlie our AET-2 scenario:
• rapid electrification in all sectors; • the decarbonisation of the power sector through the penetration of renewables and storage and coal-to-gas switching ;
• the large-scale development of carbon capture and storage (CCS) and carbon capture, utilisation and storage (CCUS) – 5Billion tonnes (Bt) by 2050 – and low-carbon hydrogen – 380Million tonnes (Mt) by 2050 – in hard-to-decarbonise sectors.”
AET-2 has massive implications for oil and gas demand in 2050: 70% lower than today. From 2023 onward oil demand drops with year-on-year fall of around 2Million barrels per day (2MMBOPD). Total oil demand by 2050 is down to 35MMBOPD.
Natural gas demands, in contrast, remains resilient to about 2050. Large scale CCS in the industrial and power sectors will support gas while the deployment of blue hydrogen (135Mt by 2050) is a growth sector. Growth will come primarily from Asia, especially China and India.
Under AET-2, the assumption is that as many as 80% of new vehicles sold are electric, either battery-driven or hybrid. Heavy transport- ships and trains- are electric or hydrogen driven. Non-combustion liquid petrochemical demand for plastics is damped by higher rates of recycling.
Wood Mackenzie’s AET-2’s scenario draws the following conclusions:• World needs no new supply of oil…”core function is to maintain current commercial production by going into full harvest mode”…• Market power slips from OPEC to giant gas producers such as USA, Russia and Qatar.• Downstream suffers death by a thousand cuts. By 2050 the refining sector will have withered to 1/3 of its current capacity with less than 150 of the current sites in operation.• Era of carbon-neutral gas is born. AET-2 would require $300Billion to support Liquified Natural Gas growth globally and $700Billion to support dry gas development in North America. Blue hydrogen and ammonia emerge as new market products.• Currently no International Oil Company nor National Oil Company is prepared for the scale of decline envisaged in this scenario.
To protect the guilty and more vulnerable my analysis of The Energy Transition Class 101 will be limited to two candidates- Shell and TOTAL- who have at least shown some potential green promise.
Shell
According to The Australasian Centre for Corporate Responsibility(ACCR), Shell states in general terms that it is aligned to meet CO2 neutrality by 2050, but has no defined number for the medium term in 2030. This is a 30% increase (pre-abatement) or a decrease of 30%. A difference in absolute terms compared tothe equivalent of Germany’s carbon footprint.
Shell has committed, by 2030, to decrease the intensity of its emissions by 20% (energy business only) and reposition its business away from oil, towards gas and chemicals, renewables and marketing.
Gas production will be expanded by 20% by 2025 as well as increases in renewable electricity and Electrical Vehicles(EV) infrastructure, biofuels and hydrogen(blue and green).
ACCR states that Shell plans to use 120 Mt nature based solutions per year by 2030 and 25 Mt CCS per year by 2035. This amount of nature based solution is greater than the size of voluntary offset traded in 2019 (104 Mt) and equals to a non-conifer forest the size of Washington state(needed to be mature by 2030).
Shell’s CCS ambitions are similarly difficult. Today there is 40 Mt of operational CCS globally and only 15% geologically, mostly attributed to Shell’s Gorgon JV, which is currently not working.
If Shell had implemented its CCS and nature based solutions in 2019 it could have provided 50% reduction of Shell’s required CO2 emissions. According to ACCR “Shell will not reach the carbon intensity under Transitions Pathways Initiative 2°C for oil and gas missing the 2030 target by 32%”.
TOTAL
TOTAL is now pledging to reduce the average carbon intensity of energy products – Scope 1, Scope2 and Scope3 – used by its customers worldwide, by 20% in2030, an increase from 15%. This indicator would have to fall by 75% to be consistent with a 2°C target, and by 90% for a target of less than 2°C.
Scope 1 – All Direct Emissions from the activities of an organisation or under their control. Including fuel combustion on site such as gas boilers, fleet vehicles and air-conditioning leaks.
Scope 2 – Indirect Emissions from electricity purchased and used by the organisation. Emissions are created during the production of the energy and eventually used by the organisation.
Scope 3 – All Other Indirect Emissions from activities of the organisation, occuring from sources that they do not own or control. These are usually the greatest share of the carbon footprint, covering emissions associated with business travel, procurement, waste and water.
TOTAL will by 2030 only cut in Scope 3 Emissions in Europe to 30% and by 2050 to zero. The fly in the ointment is that TOTAL is simply exporting its remaining Scope 3 Emissions to the rest of the world, including Africa, thus creating a two-tiered emissions system.
TOTAL states that it plans to increase its energy production from 3 to 4MMBOEPD by 2030, with half of that growth coming from gas, and oil likely to remain close to its current level. That means that gas production could increase by 30% by 2030.
These plans are at odds with Carbon Tracker’s Index (CTI) finding that Total must achieve a minimum 35% reduction in fossil fuel production by 2040 compared to 2019 levels, in order to stay within the IEA’s “Beyond 2 Degrees Scenario” (B2DS).
Yet in spite of the predicted increase in oil and gas production, another important change was taking place. In the summer of 2020, TOTAL wrote off a $7Billion impairment charge for two Canadian oil sands projects. This might have seemed like an innocuous move, merely an acknowledgement that the projects hadn’t worked out as planned.
It opened a Pandora’s box that is changing the way the industry thinks about its core business model—and point the way towards a new path to financial success in the energy sector.
While it wrote off some weak assets, it did something else: Total began to sketch a blueprint for how to transition an oil company into an energy company. For the first time a major oil company translated its renewable energy portfolio into barrels of oil equivalent. Patrick Pouyanné, Total’s chairman and chief executive, now says that by 2030 the company “will grow by one-third, roughly from 3MMBOEPD (Barrels of Oil Equivalent per Day) to 4MMBOEPD, half from LNG, half from electricity, mainly from renewables.”
At the same time that the company has slashed “proved” oil and gas from its books, it has added renewable power as a new form of reserves. Proved reserves long stood as the Holy-of-Holies for the oil industry’s finances—the key indicator of whether a company was prepared for the future. For decades, investors equated proved reserves with wealth and a harbinger of long-term profits.
Because reserves were so important, the Reserve Replacement Ratio, or RRR—the share of a company’s production that it replaced each year with new reserves—became a bellwether for oil company performance. The RRR metric was adopted by both the Society of Petroleum Engineers and the USSecurities and Exchange Commission. An annual RRR of 100% became the norm. Adding reserves doesn’t necessarily mean adding value.
But TOTAL’s write-off showed that even “proved” reserves are no sure thing, and that adding reserves doesn’t necessarily mean adding value. The implications are devastating, upending the oil industry’s entire reserve classification system, as well as decades of financial analysis.
How did TOTAL reach the conclusion that “proved” reserves had no economic value? Simply put, reserves are only reserves if they’re profitable. The prices paid by customers must exceed the cost of production. Given current forecasts that prices would remain lower for longer, TOTAL’s financial team decided those resources could never be developed at a profit.
A similar scenario could play out with TOTAL’s remaining oil and gas projects. If driven by shareholder activism, more projects could become earmarked as stranded assets. Which could act as a catalyst to accelerate Total’s renewables portfolio. The planned expansion to 35 GW by 2025, and 100 GW by 2030 could become the start of a robust campaign to embrace renewables at an even quicker pace.
This has huge ramifications for Africa which has long been a rich source of cash flow for the company. In 2019 the continent generated around $10Billion of TOTAL’s $26Billion cash flow from operations, and 30% of its oil and gas production (900,000 barrels of oil equivalent per day).
If TOTAL, through increased shareholder activism, takes on more renewable energy, this could have a profound effect on Africa’s renewable energy journey.
Conclusions
Perhaps in 2050 the Energy Transition Class 101will look back with nostalgia and smile about the challenges that the Class of 2021 faced. Will the more than 2°C challenge have been met? Perhaps the basis of fairy tales told to youngsters as bedtime stories by their grandfathers. Perhaps Grampa was a Member of the Class of 2021 that flunked.
Note: My thanks to Carbon Tracker, The Australasian Centre for Corporate Responsibility(ACCR), Institute for Energy Economics and Financial Analysis (IEEFA),Reclaim Finance, and Wood Mackenzie.
Gerard Kreeft, BA (Calvin University, Grand Rapids, USA) and MA (Carleton University, Ottawa, Canada), Energy Transition Adviser, was founder and owner of EnergyWise. He has managed and implemented energy conferences, seminars and university master classes in Alaska, Angola, Brazil, Canada, India, Libya, Kazakhstan, Russia and throughout Europe. Kreeft has Dutch and Canadian citizenship and resides in the Netherlands. He writes on a regular basis for Africa Oil + Gas Report.
