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Statoil launches analysis of carbon outcomes

The major launched its fifth annual Energy Perspectives in June to assess the scale of the carbon emission problem

The world envisaged by hopeful politicians – where the temperature rises by no more than 2ºC for the coming few decades – is a very long way from where we are today.

Something of the scale of the problem emerges from a new study by Statoil. In June, the state-owned major launched its fifth annual Energy Perspectives, which analyses three scenarios to illustrate a range of carbon outcomes, depending on which elements of each most closely reflect reality. While action to limit emissions has a cost, the alternative could be much costlier, hence the need to act now.

Like the International Energy Agency, Statoil does not question the link between higher carbon dioxide emissions and rising temperatures. And its ‘reform’ and ‘renewal’ scenarios mirror the IEA’s ‘new policies’ and ‘450 ppm’ respectively.

But Statoil also has a bluntly candid ‘rivalry’ scenario, where it examines the obstacles in the way of policy-makers’ efforts to limit the rise in temperature – also known as ‘geopolitics’. In particular it talks of the unravelling of the US-dominated post-Cold War order and asks whether conflict and rivalries will prevail over co-operation and co-ordination, the preconditions for its most optimistic scenario to come about.

If the globe is to have every chance of cutting carbon dioxide, it cannot be afraid of technology exchange and trade

Speaking to Petroleum Economist, the report’s author, Statoil’s chief economist Eirik Waerness said that if the globe is to have every chance of cutting carbon dioxide, its different blocs cannot be afraid of technology exchange and trade.

“We have to make it as easy as possible for all,” he said. “We cannot do this in a world of mistrust and without export of technology.” As an example he gave China, where German-exported cars keep their engines running when motionless whereas they do not at home; and where coal-fired plants are inefficient and so dirtier than need be as they are built using obsolete designs.

Never mind the world: not even regions of single-market Europe are going along the same road at the present.

Different countries have adopted their own approaches to carbon reduction, such as the UK, where a higher, government-regulated carbon price limits the profitability of coal-fired power plants. Raising the carbon price has proved difficult, given the importance of coal to some of the newer EU member countries’ economies. In the most extreme of Statoil’s scenarios, carbon costs a staggering $150/tonne, compared with sub-€10/t in the European carbon trading scheme historically.

Statoil looking ahead

“There are a lot of regulatory challenges,” Waerness said. These include the incentives for renewables; and a carbon price high enough to justify its capture and storage, which the IEA sees as essential if carbon emissions are to be reined in and yet is nowhere working commercially as an adjunct to a power generation plant.

In some parts of continental Europe, renewable-generated electricity has automatic priority access to the grid, but if it is exported through an extensive system of interconnectors, this will affect the price of power in other countries where different generation cost structures and subsidy systems prevail. Some companies have given up trying to compete and shut up shop, destroying shareholder value; others, such as E.ON, have restructured radically to adapt to a future world where one day every householder might be sourcing or generating its own energy unpredictably.

And in other parts of Europe, the principles of the free market are more fluid than the European Commission would like. As numerous foreign investors in Hungarian gas and power supply have learned to their cost, what one government wants, a successor might reject. Raising taxes on these energy companies is an easy way to electoral support.

And different countries have different priorities for spending: in Greece, military spending is higher than most other countries as a proportion of its GDP, while it cannot pay off its debts.

At time of press, it was on the verge of being ejected from the Eurozone, with unknown financial repercussions. To the east, Russia has been hit by sanctions and war is continuing in Ukraine.

This is all limiting the resources that might otherwise be available for combating climate change and lowering energy intensity as cheap coal becomes the fuel of choice for powering weak economies.

Even in relatively stable countries, subsidies for oil and gas consumers encourage the greater use of fossil fuels and limit efficiency measures, but removing them in countries such as Venezuela, Saudi Arabia and Qatar is difficult politically, he said.

Other problems are longer-term. According to Waerness, new oil production is going to have to increase enormously over the coming 25 years – 50m b/d or another five Saudi Arabias will be needed – even though demand is going to fall by 15% – in order to replace existing field declines. So the majors will continue to search for oil and gas.

While some areas are exceeding expectations, such as the US, others – including some which have undergone violent regime-change – have slid backwards in terms of output, even if the means of production are potentially there.

Gas production is going to have to rise 15% to meet demand even though supplies will have to be contracted differently from now – especially given the intermittency in the power sector. Take-or-pay terms make no sense when the annual demand is so variable.

Its use as bunker fuel will provide the producers with some certainty but until that sector takes off,other ways will have to be found to keep resource-holders interested in producing gas and to keep financiers interested in financing their activities, with non-market mechanisms likely to play a big role. Capacity mechanisms and auctions have already been tested to ensure investors come forward to fill the supply-demand gap in Europe.

Waerness sees it as the job of the developing world to direct gas towards countries where coal dominates the power sector. Under the most ambitious scenario – and he is careful to point out that the scenarios can only hope to point out what might happen depending on unforeseeable circumstances – coal use falls by half but it will still be needed for steel-making, for example.

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