COP21: Will climate change talks result in change?
The UN-backed global climate change talks, which have just started in Paris, are highly unlikely to produce an agreement that includes robust mandatory carbon emissions reductions targets that would heap further short-term financial pressure on oil and gas producers already dealing with global oversupply and low oil and gas prices, writes Ian Lewis
The patchwork of voluntary national measures, or Intended Nationally Determined Contributions (INDCs) that forms the basis for the Paris talks is also highly unlikely to provide the sort of clarity that producers are looking for regarding the speed at which rising carbon costs will affect their medium to long-term cost of production. So, assessing the economic viability of potential long-term oil and gas field investments is likely to remain heavily reliant on guesswork.
"Oil and gas companies should be looking at any sort of language from the talks that could produce a tougher deal in the future. We've seen some discussion of INDCs being revised and made more stringent on a five-yearly basis. Whether or not that gets into the final text of an agreement in Paris will be quite important," says Paul McConnell, principal analyst on the global markets team at consultancy Wood Mackenzie.
Subsidies working in favour of the oil industry are also likely to come under scrutiny in Paris, notably those keeping fuel prices artificially low in developing countries. But as many nations have already reduced fuel subsidies at a time when low crude prices mean the pain for consumers can be kept to a minimum, there may be little near-term impact for the upstream industry. It also seems unlikely that much headway will be made in curtailing other benefits for the industry, such as export credit agency support.
The International Energy Agency estimated in its World Energy Outlook 2015, published in November, that the average annual requirement for upstream oil and gas investment between now and 2040 would be around $750bn. It also noted that this figure would not change much even if tougher climate change measures than those likely to come out of Paris were adopted globally, because around 85% of the sum would be required to compensate for declining output at existing fields, rather than to meet increased demand.
Nevertheless, the stakes are still high for oil and gas firms. They would face massive costs and a contraction of their activities, if a concerted effort was made to restrict global warming to less than 2°C compared to pre-industrial times - the limit beyond which climate scientists say will be dangerous for the planet and which seems increasingly likely to be breached.
Barclays Capital, in a report published just before COP21, used IEA data to estimate that if global energy policies consistent with a 2°C trajectory were adopted, the fossil fuel industry would stand to lose revenues of some $34 trillion over the 2014-40 period compared to those under the IEA's base-case New Policies scenario - of that total loss, the oil industry would account for $22.4 trillion, gas for $5.5 trillion, and coal for $5.8 trillion.
While measures to come directly from COP21 are unlikely to trigger those sorts of declines, the conference is still likely to cement the process already underway to shift away from fossil fuels and that is certain to be financially punitive for the industry, even if the extent of the cost and timescale is not yet clear.
Industry seeks clarity
Industry chiefs have been keen to emphasise the important role oil and gas still has to play in the transition towards a cleaner energy mix and suggesting ways in which it could be best achieved.
The heads of the highest profile European oil firms have emphasised the key role of natural gas in stemming rising carbon emissions and the need for clarity on future policy. The chief executives of BG Group, BP, Eni, Royal Dutch Shell, Statoil and Total have swung their weight behind wider adoption of effective carbon pricing to promote a switch away from coal and give more certainty over costs for oil and developments.
While a handful of emissions trading schemes operating in the EU, parts of the US and elsewhere over recent years were intended to produce effective carbon pricing, oversupply of permits during the global downturn when energy demand faltered produced a carbon price so low as to be largely useless in incentivising lower emissions fuels and technologies.
"The oil companies want to see a realistic international carbon price, but that's not really going to be on the agenda in Paris, because no measures are going to be imposed from above at the conference", says John Mitchell, a former BP executive, who is now an associate research fellow at UK think tank Chatham House.
Wood Mackenzie's McConnell agrees. "A global carbon price seems a very distant dream. A framework to allow that to happen is unlikely to materialise for a long time if at all", he says.
Not all energy companies think carbon pricing is the answer. US firms have steered clear of this push, with ExxonMobil chairman Rex Tillerson saying he would prefer a carbon tax offset by reductions in other taxes, rather than the adoption of any form of carbon trading.
Gas poised to make gains
Despite the uncertain outlook, natural gas, with its relatively low carbon emissions, remains well placed to boost its share of the energy mix at the expense of coal, at a time when renewable energy and nuclear power alternatives are still being ramped up and emissions-reducing technologies are still under development.
The case for gas as a bridging fuel is being reinforced by measures to curtail the coal industry already being put in place in industrialised countries such the US and the UK - and even, to a more limited extent, in China - leaving room for gas producers to fill the energy gap.
"Gas will still be one of the preferred ways of reducing the carbon intensity of the energy sector compared to the traditional fossil fuel portfolio", Kamal Ben Naceur, Director of Sustainable Energy Policy and Technology at the IEA told journalists on the eve of the COP21 talks.
At a November meeting of IEA member country ministers and representatives from partner nations, chaired by US energy secretary Ernest Moniz, measures to improve global gas security were high on the agenda, reflecting the the growing importance accorded to gas and the growing traffic in LNG.
"What we want to make sure is that we raise the profile of gas on the international scene to the same level or a higher level as oil security", Naceur said.
The IEA's role in this would probably include improving transparency on LNG trade, providing more data on cargo movements, and storage capacities. The agency is due to report back to ministers on possible measures in 2017
The agency's role since its creation has principally been as a watchdog and think tank on behalf of industrialised western countries, but key developing world nations such as China, India and Indonesia have partner status and Mexico is set to become a full member, so the agency's role in setting the global energy policy agenda is becoming enhanced.
Stemming upstream emissions
The IEA has also stressed the oil and gas industry's role in reducing methane emissions from its upstream activities, something which industry experts say is vital not just for the health of the planet but also for the industry's image.
"Upstream companies are likely focusing on how to reduce fugitive methane emissions in the gas supply chain to counter NGO claims that gas is not as green as it might appear from the headline figure that it produces power with 50% of coal's greenhouse gases," says Howard Rogers, director of the natural gas programme at the Oxford Institute for Energy Studies.
While the upstream gas industry has been vociferous in promoting the benefits of its product and trying to project a more positive image, Rogers believes power companies and others further along the fuel supply chain have not done as much to promote the cause of gas as a bridging fuel.
"The main thrust seems to be coming from the upstream oil and gas players, who are supporting a story of 'low hanging fruit' - using gas instead of coal in power generation and the role of gas in balancing intermittent renewables. They have a logical case to make in terms of the practical and cost implications of attempting a rapid shift to renewables," he says. "But the gas midstream industry has consistently failed to find a voice in support of gas as a fuel. Indeed, most in Europe diversified into renewables in line with EU policy."
This is certainly no time for complacency for any part of the oil and gas industry. The Paris talks may be dependent on voluntary efforts, but the IEA is still hopeful enough tweaks can be made to the INDCs submitted by countries to enable global carbon emissions to peak as early as 2020. If those measures are implemented, the world could be a much tougher place to do business for fossil fuel firms in the very near future - a possibility reflected in the fact that several major oil companies already build a notional carbon price into their investment planning.
UN tries the 'softly-softly' approach
Gone are the days when the annual UN-backed climate change talks sought - and failed - to persuade governments to acquiesce to tough global greenhouse gas emissions targets drawn up by committee. The challenge of persuading nearly 200 countries in widely differing phases of economic development to agree on a unified framework for potentially costly emissions cuts has proved too much, at least for now.
That was the lesson learned from the last effort to produce a significant global climate change agreement, at the COP15 meeting in Copenhagen in 2009. That meeting aimed high but virtually collapsed by the end, highlighting the division between developed and developing nations over who should pay most for climate change measures.
Instead, for the COP21 talks in Paris, in the interest of engaging more countries in the climate change process, governments have been encouraged to produce their own national pledges or emissions reductions commitments, known as as Intended Nationally Determined Contributions (INDCs). These have been submitted to the UN climate change panel in the months leading to the talks.
Much of the work at the Paris talks involves firming up these commitments and implementing a regime to review progress and encourage tougher measures in the future. The hope is that a demonstrable willingness to be part of a cooperative process together with peer pressure will encourage countries to push harder to reduce emissions even without a legally binding agreement.
More emphasis has also been placed on leaving negotiators to seek areas of agreement quietly behind the scenes rather than allowing national leaders to try to cobble together a fudged pact at the last minute, as happened in Copenhagen. Heads of governments will speak - and depart - early in the Paris conference, to reduce distractions from the nitty-gritty of negotiations.
Critics say the UN climate change committee's new more 'softly-softly' approach is unlikely to produce carbon emissions cuts of sufficient size or speed to prevent dangerous global warming. But the UN can at least point to its success in receiving INDCs covering 183 out of a possible 195 nations, as evidence that the new process is engaging a wider range of participants.
Consultancy IHS Energy has looked at the 128 INDC pledges to mitigate greenhouse gas (GHG) emissions, representing 155 countries, that had been received by the end of October, and estimates that if they were all fully realised, the measures outlined could result in savings of around 10 gigatons of carbon dioxide in 2030 compared with business-as-usual projections.
That would represent only around 40% of the GHG reductions needed to reach the UN goal of limiting global average temperature increase to less than 2°C by 2100. And, as IHS Energy points out, "more than 100 INDCs rely on as-yet-undefined market-based mechanisms to realize their emissions-reduction goals. And more than one-quarter of the contributions proposed are conditional on new sources of climate finance that have yet to be secured".
The 48 poorest countries in the world would need to find a total of some $1 trillion between 2020 and 2030 if their INDCs are to be achieved and they are to mitigate the effects of climate change, according to the the London-based International Institute for Environment and Development. Much of that funding would need to come from wealthier countries.
"One danger for E&P players is that whatever 'pledges' are made, certain Asian countries will move away from commitments to use more gas and consume more coal anyway, even if this makes a mockery of the COP21 process," says Howard Rogers of the Oxford Institute of Energy Studies.
The INDC submitted by India, which is already the world's third-largest carbon emitter, allows the country's carbon emissions to treble by 2030. The government has pulled no punches about prioritising economic growth - and the use of cheap coal - over climate change measures. Instead, India is touting its plans to reduce carbon intensity - the amount of carbon dioxide produced per unit of energy used -and the role of its forests as a 'sink' to absorb atmospheric CO2.
But it's far from all being hot air at the national level. For example, China, the world's largest carbon emitter, reduced natural gas prices by nearly 30%, with further reductions possible, indicating the country is keen to switch from coal to gas in the power industry, with the dual aims of cutting pollution caused by emissions from coal-fired power station in its cities and reducing carbon emissions growth.
China has also said it plans to reach peak carbon emissions in around 2030, but will do so beforehand if possible - something that could well happen, especially if economic growth there flags. The country has also been cooperating closely with the US - the world's second largest emitter - to adopt a coordinated approach to tacking global warming.
Meanwhile, changes in government at national and provincial level in Canada during 2015 have seen a switch in policy away from exploiting the nation's large oil sands deposits, which have been targeted by environmental groups due to their high carbon emissions.
The government of Alberta province, home to most of Canada's oil sands production, has said it plans to to phase out coal emissions by 2030, restrict greenhouse gas emissions from oil-sands production and implement a carbon tax across the economy.
The fact is that some of the world's worst offenders in terms of greenhouse gas emissions are already taking steps to clean up their acts that seemed unlikely just a few years ago. This sea-change in attitudes combined with the less dictatorial approach of the Paris climate change negotiations, while still falling short of providing everything needed to prevent potentially dangerous global warming, just might get the world further towards that goal than has been possible before.