Fuel switching, carbon reduction, and upstream bans

• Date: 01 March 2020
• Published date: 01 March 2020
• DOI: http://doi.org/10.1111/oet.12764

LOOKING AHEAD

Fuel switching, carbon reduction, and upstream bans

In mid-February, the IMF warned major oil producers

that their wealth was at risk due to the approach of peak

oil demand, which it expects by 2041. That peak demand

date could move even closer as more and more countries,

cities, and companies sign up to net zero carbon targets.

Already, economies worth more than $39 tn, rep-

resenting about 49% of the world's annual GDP (gener-

ated by nations, regions, and cities), have an actual or

intended net zero target by 2050 or earlier, according to

analysis from the Energy and Climate Intelligence Unit

(ECIU)—although most have yet to outline exactly how

their energy systems will achieve this. Nevertheless,

some—including Norway and Denmark—do have realis-

tic plans, with even hard-to-replace hydrocarbon areas,

such as industry, haulage, and shipping, now developing

workable technical solutions, including green hydrogen

or even ammonia. For example, Norway's state-owned

Equinor signed a deal in January for the world's first ever

ammonia-fuelled ship, and both Denmark and Germany

recently announced that they are considering offshore

wind to produce green hydrogen.

The first major economy to add its name to the

zero-carbon list was the United Kingdom, which com-

mitted to a net zero target by 2050 (up from 80%) in

mid-2019. This was followed in January by the new UK

government's decision to bringforwardthedateofban-

ning the sale of ICE cars from 2040 to 2035, while (cru-

cially) adding in hybrids. Other countries that have

similar targets include France by 2040, Netherlands by

2035, and Norway by 2025. Norway (alongside Iceland)

is currently closest to net zero and even has a plan to

replace aviation fuel use with biofuels, with a target of

30% by 2030—the first nation to attempt this. In inter-

national shipping, the IMO has a 50% reduction target

by 2050.

These bans and targets leave oil demand in the trans-

portation sector looking increasingly vulnerable. Oil and

more recently gas demand is also being displaced from

the power sector by cheap renewables, even in the Mid-

dle East. Producers had been expecting petrochemicals to

provide alternative future growth, but this is also looking

increasingly shaky given mounting public concerns

about plastic waste pollution. Already governments are

implementing new rules on use and recycling, particu-

larly on plastic packaging and single-use plastics—which

make up about a third of demand. Last month China

announced guidelines for phasing out all nondegradable

plastic products, while the EU is considering making all

plastic reusable or recyclable by 2030.

1|SOME OIL COMPANIES

ATTEMPT TO ADAPT

Some oil companies themselves are committing to lower

carbon emissions, including from the hydrocarbons they

produce—as illustrated by BP's January announcement

of a zero-carbon target by 2050 (on the resources that it

extracts from the ground), along with a target of halving

the carbon intensity of all the products it sells (including

the huge volumes of third-party products that it buys pro-

cesses and resells).

“The world's carbon budget is finite and running out

fast; we need a rapid transition to net zero,”said new

CEO Bernard Looney shortly after taking over at BP at

the end of 2019. Mr Looney has conceded that BP's oil

and gas production will inevitably fall in the coming

decades to meet the net-zero target.

Other oil companies moving in a similar direction

include Repsol, Total, Equinor, and Shell. Total has said

it aims to cut the carbon intensity of its products by 15%

by 2030 from 2015 levels, and is considering an immedi-

ate stop to fuel oil sales to power markets in an effort to

make quick gains—the sales of fuel oil for both power

and shipping accounted for about 5% of its 4.1 mn bpd

sales in 2019.

Of course, oil companies are not the only ones seeking

to reduce carbon intensity, with big consumers ranging

from the Church of England to multinational tech giants

like Microsoft committing to net zero by 2030 or soon

after—further driving hydrocarbon demand reduction.

2|UPSTREAM HOSTILITY

These carbon reduction moves by oil companies fit in

well with a new emphasis at the United Kingdom's Oil

and Gas trade body, which underlines the need for the

upstream sector to cut carbon emissions to maintain its

license to operate.

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