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Should Big Oil Embrace More Stringent Climate Scenarios?

Copyright © 2021 Energy Intelligence Group

While oil companies increasingly consider the International Energy Agency's (IEA) Sustainable Development Scenario (SDS) as their reference climate-friendly scenario, a group of over 60 climate experts and investors recently urged the IEA to design a more ambitious scenario aimed at strictly limiting global warming to 1.5°C -- instead of the SDS' 1.7°C-2°C and the IEA base case's 2.7°C-3°C. The difference between 1.5°C and 2°C looks small but, according to climate scientists, it means that the world's remaining carbon budget, or the maximum amount it can emit to stay within target, would be more than halved to 550 billion-750 billion tons of carbon dioxide from 1,300 billion-1,700 billion tons -- or 15-20 years of current emissions instead of 30-40 years. Another problem with the SDS, critics say, is its bullish oil price assumption of around $70 per barrel over 2025-40 in today's money, which is higher than in many oil companies' base case scenarios. Most forecasters, notably at oil companies, emphasize the role carbon capture and storage (CCS) could play in keeping CO2 within budget, based on its ability to limit emissions in power generation and industrial processes, along with its projected ability to achieve negative emissions by removing CO2 from the atmosphere when combined with bioenergy (NE Oct.11'18). Royal Dutch Shell, for example, recently published its Sky scenario -- a "technically possible but challenging pathway for society" to achieve negative emissions after 2070 and 1.75°C global warming by 2100. It involves the capture of 10 billion-12 billion tons of CO2 annually after 2060 -- a huge amount equivalent to approximately 2.5 times today's global oil production. Achieving 1.5°C would involve additional CO2 removal technologies, for example massive reforestation, Shell found: "We developed an addition to Sky that sees an area approaching the size of Brazil, or about 700 million hectares, being reforested over the coming decades." Similarly, the Intergovernmental Panel on Climate Change reviewed over 80 Paris-compliant scenarios designed to achieve 1.5°C, which involve an average 16 billion-18 billion tons of annual carbon capture from 2070 onwards (NE Jan.24'19). Critics argue that such volumes of carbon capture or negative emissions are too "gargantuan" to be realistic, with experts pointing, in a 2016 article, to a "distinct lack of evidence" that such solutions are "technically feasible, economically affordable, environmentally benign, socially acceptable and politically viable" (NE Oct.25'18). Similarly, nonprofit Global Witness called CCS a "risky gamble" in a recent report urging financiers not to overinvest in oil and gas companies. While CCS has had "negligible success to date," many climate scenarios rely on the "highly questionable assumption" that nearly as much CO2 would be captured in the 21st century as has been emitted since the industrial revolution, the reports emphasizes. A much safer option would be to eliminate the world's reliance on fossil fuels rather than trying to capture resulting emissions, Global Witness believes (NE Feb.7'19). Think tank Energy Watch Group (EWG) recently published a report suggesting that transitioning to 100% renewables is not only technically feasible but would also be "slightly cheaper" than the current global energy system -- mostly because extra renewable investment would be more than offset by drastically reduced fuel costs (related). It would also achieve a full energy transition without "reliance on high-risk technologies such as nuclear power and CCS." Any oil and gas production beyond fields already in operation or development is incompatible with the 1.5°C target, Global Witness stresses -- which means that the $4.9 trillion forecast capex in new fields "represents a potentially enormous misallocation of capital." Oil companies do not agree and insist that none -- or almost none -- of their assets are at risk of becoming stranded. Exxon Mobil for example insists that, assuming it retains its current global market share, it would need to replenish the equivalent of 35 billion barrels of proven oil reserves by 2040 -- or almost twice its current proven reserves of 21 billion barrels. Meanwhile, a "substantial majority" of Exxon's current proved reserves will have been produced by 2040. The US supermajor believes stringent climate policies and declining demand would only start to have an impact after that date. Chevron notes that the commodity prices used in its reserve calculations are "similar to the lowest price indicated in the IEA's SDS," which proves that none of its assets would be stranded "even in an aggressive climate change response scenario such as the SDS." Shell, in a 2017 assessment of its portfolio's resilience against the IEA's older 2°C scenario, found that it would only have a "slightly negative impact" on cash flows, as the IEA's oil and gas prices are "relatively high" compared with Shell's planning assumptions. Equinor reached similar conclusion in its latest sustainability report (NE Mar.7'19). When replacing the company's oil, gas and carbon prices with those of the IEA's SDS, the net present value of its portfolio of assets and projects drops by a mere 10%. And when the IEA's base case assumptions are used instead of Equinor's numbers, that net present value actually increases by 13%. Philippe Roos, Strasbourg Oil Demand to 2100 (million b/d) 2040 2050 2060 2100 Business as Usual: IEA BAU 121 -- -- -- Equinor Rivalry -- 121 -- -- Exxon Base 114 -- -- -- Shell Oceans 112 112 102 -- Slower Growth: IEA Base 106 -- -- -- BP Base 104 -- -- -- Equinor Reform -- 102 -- -- Shell Mountains 96 81 67 -- 2°C Scenarios: BP Rapid Transition 82 -- -- -- Exxon 2°C 78 -- -- -- IEA 2°C 70 -- -- -- Equinor Renewal -- 59 -- -- Below 2°C Scenarios: Shell Sky 92 81 66 26 IPCC 1.5°C 66 48 33 15 DNV GL 67 45 -- -- IEA <2°C 56 42 33 -- EWG 31 0 -- -- Projected oil demand to 2040-2100 in million barrels per

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