The Energy Podcast
Is There A Role For Oil And Gas In The Journey To Net Zero?
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Episode notes
As the world grapples with the urgent challenge of climate change, the energy industry is working to reduce greenhouse gas emissions while continuing to deliver the secure and affordable energy people need today. Is switching to renewables the answer, and do oil and gas have a role to play?
Presented by Julia Streets. Featuring Dr Bassam Fattouh of the Oxford Institute for Energy Studies, Sian Lloyd-Rees of Mainstream Renewable Power and Shell’s Zoe Yujnovich.
The Energy Podcast is a Fresh Air Production for Shell, produced by Annie Day and Sarah Moore, and edited by Molly Lynch and Sophie Curtis.
TRANSCRIPT
Shell The Energy Podcast
Season 4, Episode 4
00:00:00
Julia Streets: Today on The Energy Podcast.
00:00:07
Bassam Fattouh: If oil and gas is to remain part of the energy mix, the key issue then becomes how to reduce greenhouse gas emissions from hydrocarbon related activities.
00:00:16
Sian Lloyd-Rees: If we want to achieve net- zero by 2050, we all need to adopt that 2050 mindset now, making the decisions today that are consistent with the future that we want.
00:00:26
Zoe Yujnovich: The journey to net-zero must be achieved whilst at the same time providing a stable and reliable supply of energy.
00:00:34
Julia Streets: The science is clear and the world is in a fight to avoid the most serious effects of climate change. Energy and the use of it is one of the biggest contributors to global greenhouse gas emissions. And this means that the oil and gas industry, which supplies much of that energy, is under pressure like never before. Many countries are working to achieve net- zero carbon emissions by 2050, while continuing to meet the demand for secure and affordable energy.
The impact of the war on Ukraine on the global energy market has shown just how delicate the balance is to maintain. Some critics argue that only a drastic scale back from oil and gas will do, advocating for actions like an immediate end to the development of new oil and gas fields. Others believe that the global economy cannot be decarbonized without the constructive participation of the oil and gas industry.
On one thing, there is broad agreement that business as usual is no longer an option. How can the world manage the balancing act of meeting demand while investing in the energy of the future? Does it need to go further and faster? Hello, I'm Julia Streets, and today on the Energy Podcast we ask; is there a role for oil and gas in the journey to net- zero? With me to discuss this are Dr. Bassam Fattouh, Director of the Oxford Institute for Energy Studies, Sian Lloyd- Rees, the UK Managing Director for Mainstream Renewable Power and Shell's Integrated Gas and Upstream Director, Zoe Yujnovich. So, Bassam, let me start with you. How does the world get its energy today?
00:02:10
Bassam Fattouh: Based on the latest statistics for 2022, hydrocarbons, that means oil, gas and coal, accounted for the bulk of primary energy consumption. Oil accounted for more than 30% of primary energy consumption, followed by coal, which still account for more than 25%, and then the share of natural gas is not far away, standing at around 25%. The share of renewables in the form of solar and wind has been rising fast and accounted close to 10% of primary energy consumption, surpassing nuclear energy and hydroelectricity. But Julia, it's important to focus not only on the shares, but also the growth rates. For instance, if you take coal, the growth rate between 2012 and 2022 was close to zero, whereas renewables grew more than 12% per annum during the same period. So the energy mix actually can evolve faster than implied by historical standards, which is needed if we are to meet our climate targets.
00:03:12
Julia Streets: So in support of the UN Paris Agreement's ambition to limit the global temperature increase to 1. 5 degrees centigrade, above pre- industrial levels, many countries have set net- zero targets and I'm curious to know what does that mean for the energy industry? Sian, can I come to you?
00:03:28
Sian Lloyd-Rees: As Bassam’s just talked about, the energy mix today includes a number of different energy sources and to achieve net- zero, we need to grow our cleaner energy mix going forward, but that's going to take time and it's going to take a balance of different things. From my perspective, as a wind developer, we are focused on trying to accelerate the uptake and the introduction of wind powered energy and solar energy on a global basis. But there are challenges.
When we look at the wind resource in the world, a lot of it lies in the northern- hemisphere, the greatest need is in the southern- hemisphere. It lies far from offshore in quite deep waters, and that requires different technologies, floating technologies, to be able to access it. We then have the challenge of transporting that wind energy, once we've managed to deliver it at an affordable price, to different parts of the world. So we have technology challenges, we have geographical challenges. We also have the challenges around the supply chain and the materials that we need in order to be able to ramp up in terms of renewables. Yes, we need to grow our renewable energy percentage in terms of the mix, but we also need to focus on the energy sources today and we need to decarbonize those. Oil and gas today needs greater decarbonization, but so do many other heavy industries as well around the globe.
00:04:39
Julia Streets: And Zoe, perhaps I could bring you in here. I'd love to get your thoughts as well about what all this means for the energy industry.
00:04:44
Zoe Yujnovich: The journey to net- zero must be achieved whilst at the same time providing a stable and reliable supply of energy. Whilst the global energy mix is changing, demand for energy services will continue to grow and it'll need to be met by a combination of different types of energy. It's certainly going to be critical that we don't dismantle the current energy system faster than we can build the clean energy system of the future. We are very focused on trying to understand how to change the demand patterns and indeed how we therefore supply alternative energy into those different demand hubs.
Oil and gas will continue to play a crucial role in the energy system for decades to come, but of course we will see that demand reducing gradually over time. The other thing I think I would say is of course it's also very critical that we actually lead by example in how we drive that energy efficiency. And we are very focused on cutting emissions from the existing operations. So in short, it's absolutely essential that the energy mix will change, we must reduce emissions from our own operations and also find those profitable sustainable ways to transition to net- zero.
00:05:56
Julia Streets: Just building on that, there's some warnings from environmental groups. The continued investment in oil and gas infrastructure can risk the making of the transition to cleaner energies even more difficult or even too expensive. And I'm really curious to hear from our guests today whether they think that is fair. Sian, can I come to you first?
00:06:16
Sian Lloyd-Rees: Yes, and there is a lot of discussion around the concern that infrastructure decisions and investment today shape the energy future that we'll get. So from our global wind developer perspective, we look carefully at government policies and the subsidies and investment areas they prioritize. And the UK move faster than many countries in focusing its fiscal incentives into renewable development with a contract for different commercial mechanism, which they initiated, which guarantees a long- term contract certainty for wind developers. Likewise, in the USA, we're seeing the Inflation Reduction Act focused on attracting investors and infrastructure developers into the renewable energy space, and the EU has got a similar mechanism.
So we certainly are seeing a subsidy reallocation trend in favor of renewable energy sources and the growth which all helps to address the argument around renewables being more expensive or not fit for purpose. But overall, if we want to achieve net- zero by 2050, we all need to adopt that 2050 mindset now, making the decisions today that are consistent with the future that we want. And this is what we look for when we engage with governments in different parts of the world in terms of where their future investment is going.
00:07:23
Julia Streets: Bassam, can I bring you in here, because I'm curious what would be the impact of stopping new investments in oil and gas altogether?
00:07:30
Bassam Fattouh: Well, at this stage of the transition where we haven't seen a fundamental shift in demand and in fact demand for oil and gas continues to rise, the impact of stopping investment will be higher and more volatile prices for the simple fact that by not investing, not only there will be no new oil and gas supplies, but also existing supplies will start declining. And high oil and gas prices have multiple effects. It raises the issue of affordability and governments will have to put in place packages to protect consumers, which will affect their fiscal balances. Also, energy transition policies may lose support from the general public if this results in high energy costs. That is why it's key to have an orderly and just transition. But there are also other unintended consequences. For instance, higher gas prices can result in substitution from gas into oil and coal which have higher emissions.
In fact, the Russia- Ukraine war revealed these types of substitutions. In Europe as a result of high gas prices, we saw a substitution from gas into diesel, fuel, oil and coal in power. In some developing countries, which were priced out of the gas market, particularly the LNG market, we saw increased reliance on coal. Some developing countries' access to finance is extremely limited and they face high cost of borrowing and don't have in place the appropriate regulatory framework to attract investment in renewables. Also has been chronic underinvestment in distribution and transmission networks, which actually could limit the rapid deployment of renewables.
00:09:09
Julia Streets: There's one other element to the finance investment discussion, which we must bring forward, because the profits of oil and gas companies regularly hit the headlines. And following from the energy crisis brought about by the invasion of Ukraine, energy costs for households have soared across the world. Meanwhile, companies like Shell have reported record gains. So I suppose my question is shouldn't oil and gas companies use more of their profits to fund the transition? And of course Zoe, I have to come to you with that question.
00:09:38
Zoe Yujnovich: As we mentioned earlier, today's energy system is still overwhelmingly comprised of fossil energy and whilst recognizing the need to continue to decarbonize that energy, many of the oil and gas reserves have a natural decline. So we have to continue to invest to essentially ensure that we can have that stable production over time.
Over the last 15 years, as well as maintaining our core business of oil and gas, we have been investing in a wide range of low carbon energies, from hydrogen production to de- risking carbon capture and storage, biofuel production, electric vehicle charging, as well as wind and solar generation. We have invested in 2022, about 8. 2 billion in low carbon energy and non- energy products. This is about a third of our total capital expenditures, and of that about 4. 3 billion went into low carbon energy solutions.
00:10:38
Julia Streets: Bassam, I'm keen to get your voice on this discussion about the use of profits as well. Your thoughts?
00:10:43
Bassam Fattouh: Well, in this current environment, international energy companies are generating very healthy cash flows. Part of these cash flows will be directed towards investment in oil and gas project, because the demand for oil and gas is still rising. But there are also expectations that companies must allocate much larger part of their cash flows and capex budget to clean technologies. And I think the amount of capital allocated to renewables has become a key metric for many investors and NGOs. The challenge really is how to allocate cash flows to these projects at an accelerated rate, while achieve attractive returns to their shareholders as some of these technologies, such as green hydrogen and CCS is yet to scale up. If the alternative opportunities in the clean technology space are limited and evaluations are inflated and large investments in hydrocarbons are not particularly rewarded by investors, because of fears that investment in new project increase the risk of stranded assets, then companies will use these high cash flows to reduce debt, return money to shareholders through buybacks and dividends.
Actually a trend that we have seen in this cycle, this has the attraction of making the energy firms more resilient in terms of lowering their leverage ratios and making these companies more attractive for investors and shareholders. But of course for many investors and perhaps observers, this is a signal that companies are not doing enough to decarbonize their activities and they are not transforming their activities and operations fast enough. But from company's perspective, this is seen as ensuring that capital is not destroyed in projects that don't meet their profitability criteria and where scale has not yet been achieved.
00:12:28
Julia Streets: So, how is the oil and gas industry driving down emissions from its existing operations?
00:12:34
Bassam Fattouh: If oil and gas is to remain part of the energy mix, the key issue then becomes how to reduce greenhouse gas emissions from hydrocarbon related activities. And this requires heavy investment in areas such as electrification of platforms, reducing venting and gas flaring, CCS and the development of low carbon fuels in the aviation and transport sector. This also requires developing and harmonizing standards for measuring, monitoring, reporting and verifying emissions. And although there has been progress made in this area, I think the landscape remains very fragmented, which make it difficult to measure performance over time and compare between companies and countries. So that's why the efforts really should be concentrated on how to reduce the emissions of hydrocarbon related activities while demand is still there.
00:13:24
Julia Streets: Zoe, keen to hear your thoughts.
00:13:26
Zoe Yujnovich: There are many things that we're doing recognizing that it's critical that we take action now on those things that we control, while also of course influencing the way demand will evolve for our customers. When we look at carbon emissions, we've been able to reduce ours from our own operations by 30% at the end of 2022, compared with 2016, which is our reference year, and this takes us more than halfway toward our target, a 50% reduction by 2030. For several years we've also been transforming our remaining integrated refineries into low carbon energy and chemical parks. But we also recognize that when we make new investments, we must hold a really high bar to ensure that they're not just economically resilient, but they're carbon resilient as well. So for example, we just recently brought online Timi in Malaysia, our first wellhead platform in the country that's powered by a solar and wind hybrid power system.
We're also growing our liquified natural gas business that will play a critical role in a balanced energy transition in the way it also compliments renewables production. Liquified natural gas can be easily transported to places where it's needed most and that picks up on Sian's point that not all countries will be endowed with natural resources, whether they be hydrocarbons, wind or solar. And so it allows you to actually move that energy to where it's best needed. And of course, on average, natural gas emits about 50% less carbon emissions than coal when used to produce electricity, making it the natural lower carbon substitute in the near term.
And we also are trying to look at ways in which we can re- scope the way we do our engineering. In our US Gulf of Mexico, we have Vito, a completely redesigned platform. We see by actually bringing new technology and integrating the way our scope is reviewed, that we've been able to reduce by 70% the lifecycle cost from the original host concept, a true demonstration of how we can really challenge ourselves to improve carbon and fiscal returns and how they can really work together in a complimentary way.
00:15:36
Julia Streets: So on the subject, let's go offshore to hear what's happening on Shell's newest deep water platform, Vito. Vito is in the Gulf of Mexico and has been especially designed to deliver greater energy efficiency. Operations Maintenance Coordinator Rodney Townsend is there to show us around.
00:15:53
Rodney Townsend: My name is Rodney Townsend and I'm currently standing on Shell's offshore platform Vito, Shell's 13th deepwater development. I'm around 150 miles southwest of New Orleans in the blue waters of the Gulf of Mexico. Vito is an amazing facility, four bright yellow cylindrical columns hold up the top sides, which are home to vessels, separators, pumps, generators, and compressors, all the processing equipment and support systems that we use in oil production.
Vito is like a remote island made of steel and floating in the water. I'm one of 60 people in the Vito family currently offshore, where we work and live for 14 days at a time. The platform I'm standing on today is different than the original plans for the facility. In 2015, Shell began redesigning the Vito Project to take advantage of the latest technology and make it more cost- efficient while, reducing its CO2 footprint. It's about a third smaller than the previous platforms we've built, consumes less electricity and features energy efficient gas turbines, compression systems and more. These measures, along with others, resulted in a reduction of approximately 80% in CO2 emissions over the lifetime of the facility. Vito's simplified and replicable design is a blueprint for future deepwater projects.
00:17:24
Julia Streets: So, could the world switch to a hundred percent renewable energy tomorrow? And if not, I'm curious, why not? Sian, what do you think?
00:17:33
Sian Lloyd-Rees: The statistics on what percentage of the overall energy mix renewables makes up varies, but let's say it's currently contributes up to 25% of global energy demand, and that's taken us 40 years to get to that point. But we are now seeing a rapid increase in seabed leases for offshore wind being allocated and more solar and hydrogen developments as well. We're also seeing government subsidies and investment prioritizing renewable energy uptake. So good progress, but as I've mentioned previously, there remain challenges. And different parts of the world are addressing routes to market for the energy in different ways.
In the UK, we're seeing some shorter term challenges for sure with inflation. The cost of development has increased. There's global supply chain challenges, and today we are actually seeing wind developers put their field development plans on hold, based on them being unaffordable at this point. And then you marry that with the fact that the average time to take a wind development to market is 10 years. Now solar is much quicker, but wind and solar both will need to be included in the energy mix. And similarly, hydrogen will play a key role, but the demand for hydrogen and the routes to market for hydrogen derivatives are yet to be fully understood. The industry and governments are working together on how they can also accelerate the policies, the fiscal measures that they put in place that attract the inward investment that we see going forward. So I think we can pick a pace and scale, but I'm not sure we can do it overnight.
00:18:57
Julia Streets: Zoe can I bring you in? I'd love to hear your thoughts.
00:18:59
Zoe Yujnovich: Yeah, I think about this in terms of perhaps three time horizons. In the first instance, it is about looking for ways to increase electrification, and so we've globally rolled out a significant footprint of EV charging. We're second to Tesla. And we also look at things like biofuel production, which can be drop- in fuels, which can use existing infrastructure and help to reduce the carbon intensity. So that is where you see things like sustainable aviation fuel, which is also helping to reduce the footprint of aviation.
We then look at areas like carbon capture and storage. We have projects that are actively sequestering carbon in Canada, and in Australia. And we continue to look at additional opportunities to grow and scale that, recognizing it's such a critical part of decarbonizing the existing energy system. When you couple something like carbon capture and storage with liquified natural gas for example, you get blue hydrogen. And that perhaps brings us to the third horizon, which is in hydrogen, which today isn't seen as competitive, but there is an enormous amount of work that clearly we're doing around how we could de- risk that.
And perhaps the best example to bring that to light would be Holland Hydrogen 1, where indeed it'll be Europe's largest renewable hydrogen plant once it's operational. It's currently in execution, it's a 200 megawatt electrolyzer, it's expected to produce about 80,000 kilograms of renewable hydrogen per day. So I think the time horizons will vary, much of which will be influenced by things like demand, but I think it's critical nonetheless that we do de- risk all of these time horizons together.
00:20:34
Julia Streets: Bassam, can I bring you in here? Because I'd love to get your thoughts about the role of policymakers when it comes to this journey to net- zero.
00:20:43
Bassam Fattouh: Well, the energy system has always been transitioning and as people discovered more efficient sources of energy, they switched from the less efficient, the higher cost energy to the more efficient, lower cost energy. I think this transition is different in a key aspect that many of the fuels we are using are efficient. The infrastructure around them has been built over many years and many of the assets are still economical and operational. But of course there's the issue of externality associated with emissions that need to be taken into account. And that's where governments play a very, very important role, because this needs to be priced either through carbon taxes or emission trading systems.
But not only that, we need to achieve a decarbonized system fairly quickly. This would need, for instance, early retirement of assets. If you leave it to the private sector and without governments putting in place incentive through subsidies or taxes, this will not take place, at least not at the speed needed. Also, some of the technologies that we need to rely on, to reach our net- zero targets, need to be scaled up, so we could achieve the cost reductions. Again, I think governments need to play a key role here. Of course, this does not mean that the private sector shifts all the risk to governments. That's not what I'm saying at all. But there must be some reasonable allocation of risk to enable investment in new technologies and fuels to achieve scale, cost reduction, but also bankability of projects.
00:22:14
Julia Streets: And Sian, your thoughts on this?
00:22:16
Sian Lloyd-Rees: Well, let me just add, I think strong policy certainly encourages the investment that's needed. And again, we can look at the UK as this is a good example. Very early policy on wind encouraged that inward investment. It's why the UK currently has a hundred gigawatts of wind under development. Sweden moved quickly, they also have the same amount. And then of course we saw different policies in different parts of the world. In South Korea, there was a very strong policy in terms of local content provision as part of the seabed leases and the encouragement of technology to be developed. So South Korea will never be the largest wind development region in the world, but certainly they've moved very quickly to establish a very strong supply chain that can flourish as it serves global markets. So we do see policy as being a good signal for where the government's priorities are and how fast they want to move and how it differs in different parts of the world.
00:23:06
Julia Streets: And Zoe, what are your thoughts on this question?
00:23:09
Zoe Yujnovich: When we look at different policies, as we mentioned a bit earlier, we have seen quite a change in things like how the Inflation Reduction Act has really stimulated opportunities that might have previously been on the fence, but are now more interesting because of the tax credits that are being provided. And then perhaps just to bring it to life in terms of how we think collaboration can work, if we take an example for LNG Canada, which is an asset that we are partners in, it's on the west coast of Canada. It's on track for being commissioned by the middle of the decade. And having worked with customers, predominantly across Asia, who still rely on a significant aspect of gas in their energy ecosystem, we are able to produce, with new technology, a plant that actually has 60% lower emissions than the average facility that's currently performing today. And so an example of how collaboration with customers, with the governments, both federal and provincial level, enable us to develop an ecosystem that provides the right incentives and really drives change at a faster pace.
00:24:15
Julia Streets: But I wonder if we could just look ahead a little. I'm curious to hear your thoughts and Sian, I'm coming to you first of all, what do you think the energy mix will look like by 2050?
00:24:26
Sian Lloyd-Rees: So my preference would be that the energy mix in 2050 resembles where we start from today, which is to have an ambition of around 80% renewable energy in the mix by 2050 and certainly the remainder much cleaner. And I do believe we'll take a mix of cleaner energy from the use of carbon capture, use of hydrogen, et cetera, but also in terms of the uptick in renewable energy, predominantly in wind and solar as the primary sources.
00:24:53
Julia Streets: And Zoe, can I ask the same question of you? What do you think the energy mix will look like by 2050?
00:24:59
Zoe Yujnovich: I hope it's radically different to the one that we see today. I do hope that where hydrocarbons are part of the energy mix, they're largely decarbonized, both because of the emissions in the creation of the hydrocarbons, but also in the way that we can couple that with things like carbon capture and storage for customers. I hope that technology will play a really significant role in ensuring that that's affordable and scalable. And I also hope that we do so in a way that's quite thoughtful in the way that the transition is navigated, so we don't see these volatile moments that we've experienced that are incredibly painful for the world to endure as we've seen over the past 12 to 18 months.
00:25:40
Julia Streets: Well, it's been a fantastic discussion. Thank you for all your thoughts, because in a really short period of time, we've talked about supply and demand, supply and value chains, security, affordability, technology, and innovation. We've thought about policy and also ultimately the need for collaboration in the ecosystem. This is all about action to achieve the ambition. So my thanks to Dr. Bassam Fattouh, Sian Lloyd- Rees and Zoe Yujnovich. You've been listening to The Energy Podcast brought to you by Shell. Listen and follow for free wherever you get your podcast, so you don't miss a single episode. The Energy Podcast is a Fresh Air Production, and I must remind you that the views you've heard today from individuals not affiliated with Shell are their own and not Shell PLC or its affiliates. I'm Julia Streets. Thank you for listening and until next time, goodbye.
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