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Hello readers,
Welcome to another edition of the newsletter, rounding up the biggest developments in the oil and gas industry in July. As subscribers, you’re also getting a preview of our new Zero Carbon Analytics branding, which we’ll be rolling out across our website shortly.
We start with the news that fossil fuels are “running out of road” due to the falling cost of renewables, according to UN Secretary-General António Guterres. Some facts from IRENA, published to coincide with his speech:
- 91% of large renewable projects commissioned last year were more cost-effective than fossil fuel alternatives;
- solar PV was 41% cheaper than the lowest-cost fossil fuel alternatives, while onshore wind projects were 53% cheaper;
- battery storage systems costs have declined by 93% since 2010.
Given the huge cost competitiveness of renewables, it shouldn’t be that surprising that India has hit its goal of 50% installed electricity capacity from non-fossil sources five years ahead of its target.
This month I’m taking a look at the International Court of Justice’s landmark legal opinion, whether the EU’s promise to buy more US energy is an empanada (I’ll explain), why oil companies have walked away from a science-based net zero target, and much more.
I’m going to be on leave in August, so there’ll be a brief pause for the newsletter, but we’ll be back in early October with a round up of September’s biggest developments.
Please share this newsletter with your colleagues and contacts who can subscribe here.
Thanks,
Murray
Oil and gas in the transition
States must curb fossil fuels
In what has been described as a turning point in international climate law, the world’s highest court, the International Court of Justice (ICJ), has issued its opinion on the “obligations of states in respect of climate change”. It found that countries have a duty to curb emissions, and those that fail to do so may be liable to pay compensation to countries impacted by climate change. Fossil-fuel production, consumption, the granting of exploration licences or the provision of subsidies “may constitute an internationally wrongful act” attributable to the state or states involved. Governments are also responsible for regulating companies, as part of their responsibility to reduce emissions. The ICJ’s opinion is not legally binding, but is expected to be highly influential in individual climate litigation cases. Although its opinion runs to 140 pages, the last three pages contain its unanimous findings and are well worth a read.
Even more oil from OPEC
OPEC+ agreed to raise production by another 548,000 barrels per day (bpd) in August, with another similar increase expected in September. This would end the 2.17 million bpd in voluntary production cuts from eight OPEC+ members, and bring the total production increase since April to 2.5% of global demand. This flood of oil is being felt in the US, where almost half of executives in its key onshore oil producing region expect to drill fewer wells than they had planned this year, with large producers more likely to see their drilling significantly fall.
The flipside to OPEC’s production increases is the weakness in demand, with the IEA forecasting the slowest oil demand growth since 2009, excluding the pandemic. Even the more bullish OPEC has cut its oil demand forecasts for the next four years, in large part due to weak demand in China. Saudi Arabia, the driving force within OPEC, may well be playing a long game – pushing down prices to gain market share and disincentivise other companies and countries from investing in new projects.
The EU’s oil and gas empanada
The US and EU trade deal included a commitment for the EU to buy USD 250 billion of oil, gas and nuclear technologies for each of the next three years. The number was described by experts as “pie in the sky” given that this is more than triple the value of oil and gas imports to the EU last year, and that “it is private companies not states that contract for energy imports.” The European Commission hit back at the criticism stating that the figure was based on “a thorough and robust assessment”, however its figures amounted to only half of the USD 250 billion target. My bet is that it is a promise made with little intent of actually being realised, or as the Polycrisis says, it’s an EMPANADA – Everyone Makes Promises And Never Actually Does Anything.
EV sales keep growing
EVs are close to reaching half of sales of buses and two and three wheelers, according to BNEF’s latest EV Outlook. The growing share of two and three wheelers is particularly crucial for oil demand forecasts for developing and emerging markets, where they make up a significant portion of the transport system. China’s dominance of the EV sector is stark, accounting for more than half of global EV sales, more than half the world’s public chargers, and well over three-quarters of manufacturing capacity for lithium battery cells and their components.
Other news from around the world:
- Pakistan is seeking to sell excess LNG amid a supply glut, just a few years after struggling to secure LNG supplies during the European energy crisis. The country has seen a huge growth in solar power following that crisis, resulting in a decrease in gas-fired power generation, and with it a declining need for gas. The country may be tied by the terms of its contract with Qatar, however, which usually prevent the resale of Qatar’s LNG exports, unlike the more flexible terms offered by exporters such as the US.
- The German cabinet has approved a deal with the Netherlands to drill gas in the North Sea, close to a UNESCO World Heritage site. In what may be the most meaningless company commitment ever, the company proposing the project, One-Dyas, has said that it would halt operations “when demand for natural gas ceases” – which apparently means “aligning with the goal of climate neutrality”. Someone urgently needs to tell this company that “climate neutrality” requires slightly more than promising not to sell something only when no one in the world wants it.
- BP and Shell have joined Eni, OMV and Repsol in resuming oil and gas exploration in Libya, despite the country being divided following more than a decade of internal conflict.
Energy transition strategies
Major oil and gas companies Shell, Aker BP and Enbridge have all quit the Science Based Targets initiative (SBTi) advisory group, following a disagreement of the proposed net zero standard for oil and gas companies, according to the FT. The SBTi had proposed that to receive the standard, companies should not develop new oil and gas fields and that production should fall significantly. Shell said that it withdrew after seeing the draft standard which “did not reflect the industry view in any substantive way”. Work on the standard has now been paused. All credit to SBTi for sticking to the science of what is required, rather than allowing the industry to shape the rules to fit corporate views.
The Indian state-owned Oil and Natural Gas Corporation (ONGC) is planning to spend USD 22 billion by 2030 on decarbonisation, including renewables, green hydrogen and ammonia and carbon capture and storage. The company aims to start importing LNG, as well as targeting 10 GW of renewable capacity and 2 million tonnes per year of green ammonia production by 2030. As the company’s director of strategy said; “There is a glut of oil worldwide […] In this scenario, we are thinking of making ONGC a future-ready company. This means we are now going for diversification other than the [oil and gas exploration and production] business.” Surprising statements coming from a state-owned oil company, as these have often been the laggards in the energy transition.
Clean energy investments
BP has pulled out of a proposed USD 36 billion renewable energy and hydrogen project in Australia. The proposed project would use 26 GW of wind and solar to produce 1.6 million tonnes of green hydrogen per year, one of the largest projects of its kind in the world. BP also sold off its US onshore wind business, which managed 1.3 GW of power generation. The decisions are in line with BP’s strategy to reset its focus to oil and gas production and to raise USD 20 billion in asset sales.
TotalEnergies has started building a 1 GW solar project in Iraq that will supply power to 350,000 homes. The government hopes the project will help achieve its goal of increasing solar capacity from 42 MW at the end of 2024 to 12 GW by 2030.
Hydrogen and ammonia
The European Commission has proposed giving a green light to “blue” hydrogen made from natural gas with carbon capture and storage, with the fuel set to meet the proposed threshold of reducing emissions by 70% compared to traditional fossil fuels. It’s likely this proposal will receive some pushback when it is debated by the Parliament and Council, with some calling for a tighter definition that only includes hydrogen made from renewables.
Carbon capture and storage (CCS)
CCS is one of the few “low-carbon” industries that stands to benefit from Trump’s “Big Beautiful Bill”, with subsidies for CO2 used to increase oil production now raised to the same level as for geological storage. That the oil and gas industry will be the main beneficiary of this seems more than coincidental, with the industry also benefitting from reduced minimum tax rates for oil production. The New York Times has a useful breakdown of the energy winners and losers from the legislation.
From Zero Carbon Analytics
- Imports of LNG in the Philippines will rise six-fold before the end of the decade, costing the country an estimated USD 3.9 billion over five years, according to new analysis published with the Center for Renewable Energy and Sustainable Technology (CREST).
- LNG cannot guarantee energy security for Southeast Asian countries, despite these countries planning to spend nearly USD 12 billion on new LNG import infrastructure. Supply disruptions and competition with Europe present significant risks to importing countries, while the deployment of domestic renewables and the ASEAN power grid can increase their energy independence and resilience.
