Looking Beyond COP27 Hopes and Fears

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UN climate conferences like COP27 in Egypt, often appear from the outside as a ritualistic wringing of hands about pledges, perils, promises and other things people hope for or fear. What if we focused for a moment on things we actually know and the direct implications of that knowledge — leaving aside the fears and hopes? We know that electric vehicles (EVs) and renewable power generation are both strongly outpacing growth forecasts. We know high oil and gas prices are accelerating that growth. And we know that the day-to-day weather people experience is getting hotter and more turbulent. Among the many things we don’t know are what strategies will win out for dealing with the last quarter or so of CO2 emissions from “hard-to-decarbonize” sectors — a critical question for the future of the countries and corporations that constitute today’s global oil industry.

What We Know

Weather is getting more extreme. We know that from this year’s radical shrinkage of flows in rivers from the Yangtze to the Po and Rhine, to the Colorado and Mississippi. We know it from historic storms and floods, including one that put 10%-25% of Pakistan under water. As people worldwide see this close up, concern and openness to change grows. Polls even in the notoriously climate change-denying US show over 70% now accept global warming is happening, with most of the rest undecided. UN climate scientists this year expressed a consensus view that such events are definitively linked to rising greenhouse gas concentrations in the atmosphere.

EVs, meanwhile, are selling like crazy into an otherwise sodden personal vehicle market. Worldwide, sales of battery electric and plug-in hybrid vehicles combined were up 62% year on year in first-half 2022, despite an 8.1% drop in light-vehicle sales overall, according to data website EV-Volumes. The International Energy Agency (IEA) expects EVs to make up about 13% of worldwide light-vehicle sales this year. China led the first-half wave with what EV-Volumes labeled a “staggering” 113% EV sales surge, regardless of Covid-19 closures and a housing market collapse. The US and Canada entered the EV race as a serious contender with a 49% year-on-year sales gain, while crisis-plagued Europe saw a slowdown to just 9% EV sales growth.

Solar and wind are selling like crazy, too. Three-quarters of the way through the year, when same-year “forecasts” should be pretty firm, the IEA sees 400 gigawatts of new renewable generating capacity being installed in 2022, mostly solar and onshore wind. That‘s up from 295 GW in 2021 and a slightly earlier IEA forecast of 320 GW. Disputes continue over whether manufacturing capacity is adequate to sustain the pace, but the high demand should come as no surprise to free marketeers: New solar and onshore wind installations currently produce far-and-away the cheapest electricity virtually worldwide, aided by high natural gas and coal prices, according to levelized cost of energy calculations from Energy Intelligence. Batteries are becoming ever-more common accompaniments to these intermittent forms of renewable power.

Implications of What We Know

Assuming that extreme weather events continue or worsen, forms of generation other than solar and wind are likely to become less dependable, and oil and gas operations more expensive. Low river levels affecting water intake for nuclear and fossil-fuel plant cooling was a major problem this summer in parts of Europe and China — as were high water temperatures. Hurricanes and typhoons are affecting coastal refineries and offshore facilities more frequently. Melting permafrost is a threat to other oil and gas installations. Most oil and gas infrastructure can be protected — at a cost. The fix for power plants dependent on increasingly undependable river water is less obvious, undermining the advantage such facilities enjoy over intermittent solar and wind.

EVs show signs of moving into midsized truck, van and bus markets at a pace that may soon match that for light vehicles. The big question now is around large trucks, where a lurch towards battery electric in its race with fuel cells would not only speed the transition of transport away from oil — since battery-electric technology and fueling infrastructure are more advanced than fuel cells — but also reduce the potential market for blue and green hydrogen that big oil companies are eyeing. Chinese automakers are leaning toward batteries for big trucks, and Volkswagen has opted exclusively for batteries. Most other large-truck manufacturers are still on the fence, experimenting with both.

The room in power generation for natural gas as a transition fuel is shrinking, as primary generation moves to renewables and short-term backup functions move to batteries. Battery technology seems bound to improve rapidly, given widescale R&D related to all those millions of both auto and storage batteries. This means that the residual need for gas-fired generation to offset renewables’ intermittency will shrink further. Then there’s the LNG pricing surge that has seen Europe largely drive Chinese, Indian and other Asian and Latin American buyers out of spot LNG markets. The IEA now projects peak gas this decade, under current policies. Unless the Ukraine war stops soon and Europe goes back to Russian pipeline gas, clearing up LNG for other markets, the peak could come much sooner — leaving a lot of Russian gas stranded.

What We Don’t Know

What all this says is that the “low-hanging fruit” that constitutes as much as three-quarters of global energy use is moving to solar- and wind-generated electricity, not just for traditional end-uses but for the bulk of transportation. Timing is still an issue, but it won’t take all that long. Among the few important things that have yet to be determined is the fuel for large trucks, airplanes and ships and for energy-intensive industrial processes such as cement- and steelmaking.

These are the areas where the fight will play out between carbon capture and storage (CCS) on the one hand — including to make blue hydrogen — and electrification on the other. Electrification technology for cement and steel manufacture is less developed than CCS technology, but new candidate processes are appearing, while CCS continues to labor under the burden of decades of failure to brings down costs that, at current high levels, provide ample room for such candidates to morph into genuine contenders.

The future of plastics is another enormous question mark. How far will recycling and bioplastics take over from petroleum-based plastics? Will ocean pollution reach such proportions that plastics are elevated to the same level of global concern as carbon emissions?

These questions feed heavily into the uncertainty overhanging both international oil companies and the Middle Eastern and other nations that rely heavily on income from fossil fuel sales. The big, big problem behind it all is that, important as these markets may be, they are and will remain incapable on their own of supporting an oil and gas industry of anything like its current size — even if they all grow and remain reliant on fossil fuels. The argument that some oil and gas will continue to be needed for decades to come may or may not be correct, but it’s plausible. Arguing that global oil use will continue to grow for decades is not plausible in the face of EVs’ success.

Sarah Miller is a former editor of Petroleum Intelligence Weekly, World Gas Intelligence and Energy Compass. The views expressed in this article are those of the author.

Low-Carbon Policy, Electric Vehicles, Renewable Electricity
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