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Energy Transition Insights

“The oil and gas sector needs to be part of the energy transition.” That’s not from us, but from Jo Coleman, UK energy transition manager at Shell. She’s just one of the growing number of industry experts—including representatives from the International Association of Oil & Gas Producers, the Oil and Gas Climate Initiative, Equinor and Serica Energy—who have appeared on our Energy Transition Now podcast. If you haven’t listened in to these interviews yet, and you want to know what your peers are planning to do in response to calls for a low-carbon future, then do make some time to tune in for our weekly sessions.

Choosing the right path in the transition is not easy, and at times even confusing. In this edition of Westwood Energy Transition Insights, we take a look at one of the emerging concepts that some companies are pursuing: ‘green’ barrels.

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David Linden
Head of Energy Transition

The green barrel: added confusion or a serious proposition for the transition?

While the oil and gas industry has been setting targets to reduce its carbon footprint, recent legal and shareholder action has put the industry on alert around how to cut emissions as widely and quickly as possible. Broadly, the industry has been responding to this challenge by reducing operational emissions through electrification, managing flaring and venting, and improving efficiencies, and/or diversifying away from oil, towards renewables and other transition technologies.

But the response has varied significantly across the industry, depending on company size, location, value chain focus and ownership. And while targets are being set, the response will not be instant. For example, despite spending billions of dollars on low-carbon technologies, including renewables, hydrogen and carbon capture and storage, in the last five years, clean energy still only represented 1% of oil and gas capital expenditure in 2020, according to the International Energy Agency.

Therefore, while the world continues to demand hydrocarbons, the question is whether it is possible to sell oil in the traditional manner—but with none of the worrisome emissions that are causing a problem to the Earth’s atmosphere. That’s the thinking behind so-called ‘green’ or ‘carbon-neutral barrels,’ production which is—theoretically at least—free from a carbon footprint.

One of the most vocal proponents in this field is Scandinavia´s Lundin Energy, which in April announced it had sold the world’s first-ever certified carbon neutrally produced oil to Mediterranean refiner Saras. The fuel was produced at Lundin’s Edvard Grieg field, which already has one of the lowest carbon intensities in the world, at 3.8 kg of CO2 per barrel of oil equivalent. This meant Lundin was able to produce 600,000 barrels of crude with a carbon footprint of 2,302 tonnes of CO2.

This, in turn, was compensated for through “a high quality, nature-based carbon capture project,” certified by the Verified Carbon Standard (VCS), according to a press release. In addition, the entire trade was independently certified as carbon neutral by Intertek under its CarbonZero standard. “As a result, there were no net emissions released during the production of each barrel delivered to Saras,” Lundin said.

Lundin clearly believes this is the future of traditional oil, since it is investing $750 million to ensure all its production is carbon neutral by 2050.

Evolving green barrel definitions

It is worth noting that Lundin’s definition of carbon-neutral only included exploration, development and production-related scope 1 and 2 emissions. These typically represent just 10% to 20% of the total, and do not cover so-called scope 3 emissions. However, Lundin is far from the only company experimenting with low-carbon versions of traditional hydrocarbon products.

In March, Australia’s Woodside, joint owner of the Australian Pluto liquified natural gas (LNG) project along with Kansai Electric and Tokyo Gas, delivered the first cargo of ‘carbon-offset condensate’ to Trafigura, an independent commodity trading company. The offsets were verified by VCS or Gold Standard and included emissions from extraction, storage and shipping of the cargo. And other companies are going further still.

Shell also announced in March that it had taken delivery of the first ever carbon-neutral LNG cargo, from Gazprom. For all this delivery, all scope 1, 2 and 3 emissions from the LNG—calculated using a UK Department for Environment, Food and Rural Affairs conversion rate—were offset by “high quality, nature-based carbon credits,” Shell said.

And earlier in the year, Occidental Petroleum’s Oxy Low Carbon Ventures subsidiary delivered 2 million barrels of scope 1, 2 and 3 carbon-neutral oil to Reliance Industries in India. Macquarie Group structured the offset deal with offsets verified under the Verra Verified Carbon Standard programme, S&P Global Platts reported.

Following these initiatives, oil now also appears to be marketed as ‘green’ without its emissions (whether scope 1, 2 or 3) being fully reduced or offset. For example, the Moscow Times claimed that Russian state-owned producer Rosneft is planning to sell 100 million tons of ‘green’ oil a year from a Vostok facility currently under construction. The facility will have a 75% lower carbon footprint than other new projects thanks to “advanced technologies,” including the use of wind energy to power operations.

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Episode 6 of the Energy Transition Now podcast, featuring Clara Altobell of Serica Energy, now available.

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Initial observations

Based on these announcements, it would appear that some in the oil and gas industry see merit in a carbon-neutral or ‘green’ version of business as usual. It is hard to see this as anything other than a positive move since a net-zero world requires carbon emissions to be curbed wherever and as much as possible. While green barrels won’t necessarily get rid of global warming right away, they are better than doing nothing—and that should be applauded.

Furthermore, developing low-carbon oil allows (at least in theory) numerous players to develop pilot projects and experiment with the market, showcasing the way forward for decarbonising the sector. In the long run, decarbonising oil production could offer valuable lessons to other energy-intensive industries faced with similar challenges in lowering emissions.

Plus, it will allow players to differentiate themselves in an increasingly uncertain market, even if it only helps operators continue working with customers that have strict emissions control policies. At the same time, though, it is important to note that this nascent market faces several challenges:

  • The terminology around green barrels is unclear and confusing. There is no consensus on whether ‘green’ or ‘carbon-neutral’ should refer to only scope 1 and 2 emissions or include scope 3 as well. As it stands, anything slightly less carbon-intensive than the average could be sold as ‘green’.
  • This lack of clarity is unhelpful for an industry that already stands accused of greenwashing. Claiming a barrel of oil is carbon neutral while ignoring 90% of its emissions (those relating to scope 3) may not be the best way to convince stakeholders that one is serious about climate change and responsible action.
  • It is not yet clear how prolific the green-barrel market could be. In consumer markets it is usually possible to charge a premium for ecologically friendly offerings, but that approach is yet to be tested with wholesale oil.

One thing that is clear is that there needs to be a debate around the use of carbon offsets for this kind of application. Offsets are traditionally seen as an option of last resort when other carbon reduction techniques, such as electrification or carbon capture and storage (CCS), are not available. Hence, utilising cheap(er) carbon offsets to decarbonise oil production could send a wrong message that the industry is not fully committed to reducing emissions.

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Key questions

The advent of carbon-neutral oil and gas poses a series of questions for companies in the sector:

  • How should the industry define green, clean or carbon-neutral barrels?
  • Which carbon reduction tools (offsets, renewables, CCS and so on) are the most appropriate for your business?
  • What steps do you need to take to implement a green-barrel strategy if you decide this should be part of your business?

Speak to our commercial advisory service on what should be your next steps.

The digest: this month’s key headlines

  • A top US oil industry lobby has set up a greenhouse gas disclosure template, but only for scope 1 and 2.
  • Green hydrogen has suffered a blow in Australia as the government rules the AUD$36bn Asian Renewable Energy Hub is ‘clearly unacceptable‘.
  • Schlumberger has announced a commitment to net zero (scope 1, 2 and 3) emissions by 2050 to differentiate itself in the market.
  • Galp has said it will channel half of its investments into low-carbon and renewable projects by 2025.
  • And Equinor has also pledged to put half of gross annual investments into “renewables and low-carbon solutions,” but by 2030.
  • The US Department of Energy is aiming to help get the cost of green hydrogen down to $1 per kilo by the end of the decade.
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