By Arthur Deakin – OilNOW
The International Energy Agency (IEA) recently set out a narrow roadmap for the world to reach net zero carbon emissions by 2050. Annual renewable energy capacity will have to be added at four times the rate of 2020, which registered a record-high 280 GW in the past year. For solar power alone, this would be equivalent to building the largest solar utility plant in the world every day. The IEA also said that investors must refrain from developing any new fossil fuel projects, and for those that are operating, they must use carbon capture, utilization, and storage (CCUS) technologies to reduce emissions. This report should not discourage those helping the world meet its climate targets, but rather, it should serve as an incentive that it is still possible—despite the challenging path ahead.
To achieve net zero emission by 2050, governments will undoubtably have to rely on the expertise and cooperation of the six largest private oil companies in the world: ExxonMobil, Shell, BP, Chevron, ConocoPhillips, and Total. Known as “Big Oil,” these companies are responsible for 15% of the world’s oil and gas supply and have over 600 years of accumulated experience managing and producing energy. While BP and Total’s green energy strategies are focused on expanding their renewable energy portfolio, Shell is tackling the demand-side of the transition by expanding their electric vehicle network, developing hydrogen hubs, and selling more low-carbon fuels.
Exxon and its American counterparts, on the other hand, are pioneering the development of CCUS technology and prioritizing cleaner crude reservoirs with lower breakeven costs. CCUS technology is the process of capturing, storing and sometimes utilizing CO2 that would have otherwise been emitted to the atmosphere. The CO2 is often stored in geological formations where it can be kept safely and permanently. Occidental Petroleum, the sixth largest U.S. oil company, is developing a facility in the Permian Basin to capture CO2 from the air and pump it underground to break down shale rock. They aim to capture 1mn tons of CO2 /year and make their extraction of crude carbon negative. The recent IEA report and the U.S. reentrance into the Paris Accords has shifted momentum towards these initiatives.
In terms of prioritizing cleaner crude reservoirs, a clear example is the Stabroek Block in Guyana, where Exxon has discovered 9 billion barrels of recoverable oil and an estimated 9 trillion cubic feet of natural gas. The Stabroek block’s breakeven cost is between U$25-35 p/barrel, and its reserves are mostly composed of light to medium, sweet crude that is easier and cheaper to refine. These fuels are not only experiencing increased demanded across the globe, but they also generate less emissions and higher profits. By eliminating routine flaring and decarbonizing its FPSOs, Exxon can pave a low-carbon path for Guyana.
CCUS can also be used to reduce CO2 in carbon-intensive sectors such as cement, mining, and steel. In fact, CCUS technology is still the cheapest and most advanced option for reducing emissions in heavy industries, raising costs by less than 10% compared to 35% to 70% for electrolytic hydrogen. The establishment of eco-industrial hubs, grouping several large CO2 emitters in one area, would also reduce costs and risks when compared to individual CCUS projects. Until green hydrogen can be deployed at scale, CCUS in industrial hubs will offer the most-cost effective solution for reducing carbon in Guyana and abroad.
In addition to Occidental’s carbon capture facility in West Texas, Exxon has begun its own efforts to lower emissions in other parts of the world. In February 2021, Exxon launched a new venture aimed at commercializing its low-carbon technology portfolio. Through this venture, named Low Carbon Solutions, Exxon is seeking to build a U$100 billion carbon capture hub in the Houston shipyard, where it will remove carbon emissions at about one-fourth to one-half of the price it takes for electric vehicles to do so.
Venture such as these make sense for Exxon, a result of their familiarity with highly technical, large-scale projects that reduce CO2 emissions. Exxon will also benefit from an improved ESG standpoint, while simultaneously receiving some compensation for its carbon capture initiatives. Nonetheless, several countries, such as the U.S., are still missing a carbon tax that would allow energy players to better understand the price paid for each ton of carbon reduced from the environment. This would provide them with the much-needed market certainty and predictability to calculate returns for their large CCUS investments.
A carbon tax could also be beneficial for the Guyanese government, who would receive an immediate and growing source of income as oil producers extract more oil off its coast. The price of a carbon tax would have to be properly studied, set at a maximum amount that is not harmful to production, but at same time, not too low that makes it ineffective. A carbon tax would also have to be accompanied by a holistic set of climate policies if environmental damages are to be fully mitigated while simultaneously allowing for growth of the country’s energy sector. This includes bilateral partnerships to promote low-carbon initiatives, tax breaks for electric vehicles, an emissions trading system. Despite still being in the preliminary stages of discussions, Guyanese government sources have said that they are considering some type of carbon pricing.
Another important measure to ensure that the carbon tax is put to good use, is having the Guyanese government create a framework that makes the tax revenue neutral. This would mean that every dollar generated is returned to the population in the form of reducing personal and business tax credits, preventing added tax burdens to the economy. The tax should also be applied uniformly throughout the economy, preventing certain sources or sectors from being disproportionally penalized.
To prevent the Guyanese government from footing the bill to develop low-carbon initiatives, it could also get support from climate-friendly allies or multilateral institutions willing to promote said projects. An appropriate partner would be Norway, who has already provided Guyana with $250 million in financing in exchange for the conservation of its forest. The REDD+ agreement, aimed at preventing land deforestation and degradation, was signed in 2009 and ended in 2015. Norway could not only serve as a long-term partner to limit emissions, but also as a model for Guyana to develop its own sovereign wealth fund.
Initiatives such as carbon pricing and Exxon’s Low Carbon Ventures will be fundamental for the world to reach net zero emissions by 2050. For that to happen, governments need to provide the appropriate regulatory frameworks and fiscal incentives to encourage further investment. Big Oil will also have to carry its own weight by increasing expenditures targeting those low-carbon technologies. To comply with the Paris Climate Agreement, the IEA states that the total metric tons (Mt) of global CO2 captured will have to go from 40Mt in 2020, to 860 Mt in 2050. From fossil fuels and processes alone, the 3 Mt of CO2 captured in 2020 will have to rise to 860 Mt by 2050. Exxon should use its expertise in the CCS space to pave a low-carbon path for the development of Guyana’s oil & gas sector. Simultaneously, the Guyanese government should implement an attractive carbon pricing framework to provide market certainty. Hopefully, this two-pronged, public-private approach will serve as a successful example for other emerging oil and gas economies.
About the Author
Arthur Deakin is Co-Director of AMI’s energy practice, where he oversees projects in oil & gas, solar, wind and hydrogen power, as well as battery storage and electric vehicles.
Arthur has led close to 50 Latin American energy market studies since 2016 and has project experience in over 20 jurisdictions in the Americas. He has also written and published over 20 articles related to the energy sector.