Sustainability Shift—Report Analyzes Oil’s Future in the Energy Transition
When considering the energy markets and climate risks, the debate around the energy transition has shifted from when it will happen to what it will look like.
When considering energy markets and climate risks, the debate around energy transition has shifted from when it will happen to what it will look like. This is the focus of a new S&P Global Platts report, Sustainability Shift—Oil’s Future in the Energy Transition. The report was issued in association with the Platts London Oil and Energy Forum.
Among the report highlights:
- Aviation and shipping have the biggest challenges ahead in the global shift to cleaner fuels.
- Investor concerns about stranded assets and environmental, social, and governance (ESG) requirements will lead to survival of the fittest among producers and refiners in the mid to long term.
- Changes in transportation fuels will shift refining strategies, with some plants closing. Refiners will move their focus from a clean gasoline/diesel focus to jet and petrochemicals, with investments needed to secure longer term viability.
- Biofuels will move from an attention on volume-based blending goals to stronger rules around origin and questions of land use and life-cycle emissions.
- Zero-carbon hydrogen can provide a channel for achieving emissions reductions in otherwise challenging sectors such as industrial heat, refining, ammonia, residential/commercial heating, and heavy-duty/long-haul trucking.
Roman Kramarchuk, the head of energy scenarios, policy, and technology analytics at S&P Global Platts, said, “While the ambition of the Paris Accord requires reducing greenhouse-gas emissions to limit global temperature increases to 2° C or below, current trends in energy consumption still lead us to outcomes of 3°C and higher. With the world demanding ever more energy, policymakers are focusing on efficiently utilized, lower-emissions, lower-carbon fuels that are affordable to end-users and aligned with economic growth. Such transformation creates both risks and opportunities for the existing energy capital stock and the incumbent players.”
The public’s ambitions around climate policy increasingly affect the world’s energy markets, and, while the drive away from hydrocarbon fuels might lead to a peak in oil demand over the next couple of decades, oil will surely remain a significant share of total energy demand in the future. S&P Global Platts Analytics expects world oil-demand growth to slow in the years ahead driven by efficiency improvements and technological and regulatory change. However, Platts Analytics still forecasts a global oil-demand rise to about 114 million B/D by 2030, about 1% a year, slowing from a recent high growth rate of 1.9% in 2017. The fastest demand growth is expected to occur in petrochemical feedstocks, which will lead to new types of chemical refineries. Furthermore, investors will likely continue to shy away from stranded-asset risks, stemming from low-complexity/low-margin oil refineries, which could trigger a “survival of the fittest” race in the world’s refining system.
Among the more challenging sectors to decarbonize will be aviation, where oil plays, and will continue to play, a key role. While emissions from aviation make up a comparatively small share of total global greenhouse gas emissions, they are also growing faster than any other sector in transportation, doubling aviation’s share of total CO2 emissions.
Growth will be strongest in the developing world, where the rising middle class demand more travel. This focuses attention on the policies and technologies needed to reduce the sector’s emissions. Unlike most with other sectors, emissions in aviation are not covered by the 2015 Paris Agreement. Instead, the International Civil Aviation Organization (ICAO) has adopted the Carbon Offsetting and Reduction Scheme for International Aviation program requiring carbon offsets to cover the increases in emissions from 2019–20 levels. Voluntary compliance will begin in 2021, with mandatory participation not coming until 2027. Despite emissions reductions from sustainable aviation fuels, new technologies, and equipment efficiency, whether the policy frameworks, financial incentives, and commitments are yet in place to make a significant difference is not clear.
Crop Use for Ethanol
Platts Analytics expects demand for both ethanol and biodiesel to rise in 2020 as governments seek to meet greenhouse-gas emissions targets, with biodiesel demand jumping 6.1% and ethanol 1.4%. Still, countries, particularly in Europe, are increasingly rethinking the effects of crop-based biofuels and encouraging investment in feedstocks that can sequester carbon without converting land to agricultural use.
On an energy-unit basis, according to the S&P Global Platts report, the water footprint of biofuel is higher than that of fossil-based counterparts. Bioethanol has an average water intensity of 3.3 L/MJ, which is 40 times higher than conventional gasoline.
In some specific markets such as California, corn-based ethanol is much less desirable than ethanol made from sugar cane or molasses. It is good for volumetric mandates but not as good for greenhouse-gas reduction. In the US overall, expect less growth in demand for biodiesel made from soybeans and canola and more growth for renewable diesel made from used cooking oil, corn oil, and tallow, according to Patricia Luismanso, head of biofuel analytics for S&P Global Platts.
Growth in demand for hydrocarbon-based diesel, unlike for gasoline, will continue over the course of the next decade, albeit at a slower pace, according to S&P Global Platts Analytics. Biomass-based diesel (BBD), therefore, has a larger base of growth when compared with ethanol. BBD has been, and will continue to be, most actively used in Western Europe. Other key markets will include the US, Latin America, and Southeast Asia.
Car Sulfur and Petrochemical Aromatics
One conundrum facing refiners at a time when car manufacturers are making cars with higher-performance engines that require more octane is that sulfur cuts to gasoline also reduce the octane level. S&P Global Platts Analytics sees increased focus on hydro-treating catalysts that minimize octane loss. Expect a boost in demand for petrochemical aromatics, used as an octane booster in the blended gasoline pool. This will result in greater competition between gasoline and petrochemicals.
Platts Analytics expects the world to need the equivalent of 63 world-scale ethylene crackers with capacities of 1.5 million metric tons/year between 2020 and 2035. This would be to satisfy growing demand for petrochemical products, which, in turn, is going to raise the petrochemical feedstock demand from 13.7 million B/D in 2020 to 20.7 million B/D in 2035, at a compound annual growth rate of 2.8% per year. The demand projection includes propane dehydrogenation processes. Without propane dehydrogenation, petrochemicals demand will rise to 17.8 million B/D in 2035 from 11.7 million B/D in 2020.
The bunker industry, a 300-million-metric-ton/year market, expects to have adjusted to the International Marine Organization’s 2020 low-sulfur shipping fuel mandate over the course of the year. The transition is going mostly as expected, with low-sulfur fuels (both residual and distillate-based) pricing much higher than high-sulfur ones. This is increasing the drive for ships to install scrubbers to allow them to use the cheaper high-sulfur fuel. Scrubbers do not help with CO2, and they can have wastewater-management issues of their own. Longer term, the battle then becomes which alternative fuel becomes dominant for the shipping industry as it seeks to wipe out its greenhouse-gas emissions in subsequent years. The size of the demand requirement makes the use of bio-based fuels a challenge. Liquefied natural gas (LNG) only accounts for 5% of current bunker fuel use (mostly in LNG tankers) and has the potential to increase more widely, but its greenhouse-gas savings vs. oil is relatively small and concerns remain over methane emissions across the supply chain. Ultimately, the use of a variety of fuels—including ones not used today—along with other energy-saving technologies likely will be required to reduce substantially the shipping industry’s greenhouse-gas impact.
Addressing emissions from the industrial sector, long-haul trucking, shipping, and residential and commercial uses, along with the need for storage to achieve clean-power goals, will prove particularly challenging but is critical to meet global carbon-reduction targets. Platts Analytics estimates that a shift to zero-carbon hydrogen in existing applications—refining, ammonia, industrial—along with modest penetration in gas pipelines and trucks can reduce global energy combustion CO2 emissions by more than 7%. Nearly all hydrogen is produced currently from fossil fuels, with more than two-thirds produced using the steam methane reforming process (with the possibility of sequestering the emitted CO2). In addition, it can be produced by electrolysis, a carbon-free process that uses electricity to separate hydrogen from water. This process is energy-intensive; however, when paired with electricity from renewables, electrolysis could also help address the problem of intermittency of wind and solar generation.
Energy producers and energy consumers across all sectors are under intense pressure to find lower-carbon solutions as the world looks to move closer to net-zero carbon emissions. The world needs more energy and less carbon emissions. Renewables, however, simply cannot keep up with the growth in energy demand, and switching to lower-carbon fuels such as coal to gas makes limited progress toward achieving the net-zero target. As such, S&P Global Platts Analytics maintains that better ways must be found to include fossil fuels in the world’s future energy mix while minimizing their impact on greenhouse gases.
Chris Midgley, the head of analytics at S&P Global Platts, said, “We need to maximize the integration of renewables into global energy systems, reduce carbon intensity of the fossil fuels we do consume, improve efficiency of all things which consume energy, and incentivize the investment into capture and sequestration or reuse of much of the carbon the world produces.”