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Hydrocarbon demand is set to fall in the coming decades, as a result of the initiatives undertaken by governments who have signed the Paris agreement,GlobalData’s latest research said.
The Paris Agreement is a legally binding international treaty on climate change. It was adopted by 196 Parties at COP 21 in Paris, on 12 December 2015 and entered into force on 4 November 2016.
Its goal is to limit global warming to well below 2, preferably to 1.5 degrees Celsius, compared to pre-industrial levels
Nigeria said it would not be deterred by the revelation and would continually deepen investment in the hydrocarbon sector.
GlobalData’s latest report reveals, sustainable alternatives to hydrocarbon-intensive products will be more popular in the coming decades.
In its attempt to reduce carbon emissions, and ensure the success of net-zero goals, the agreement will render conventional oil and gas activity less viable in the coming years.
As a remedy, oil and gas companies should adopt measures that prevent losses, such as carbon pricing, by altering processes across the value chain.
GlobalData’s report, ‘ESG (Environmental, Social, and Governance) in Oil and Gas – Thematic Research’, reveals that technological innovation and increased consumer mindfulness will make sustainable alternatives to hydrocarbon-intensive products more attractive. For example, in transport, historically the largest hydrocarbon-demanding sector, conventional cars will be displaced almost entirely by electric vehicles (EVs).
George Monaghan, Oil and Gas analyst at GlobalData, said, “Although some demand will remain, survival for most current oil and gas companies will mean transitioning to a new product. While there are many options for products, with renewable energy being the most popular, companies will only succeed if they invest while demand is there to capitalise on already strong cashflows, by the time demand falls. Companies that wait until hydrocarbon revenues dry up will have insufficient cash to fund a transition.”
Oil and gas companies will need effective governance, to steer themselves through the existential disruption, that the next three or four decades will bring. A balancing act will be necessary to keep meeting net-zero objectives, while retaining the size of operations. For example, companies must sustain sufficient cashflows to handle demand volatility, overhaul their asset portfolios, make astute investments, and satisfy sustainability-minded stakeholders, all while providing stable dividends.
Monaghan continued, “As millennials come to dominate the consumer base and workforce and begin to assert their preferences, companies that fail to maintain good social practices (towards workers and affected local communities) will struggle to attract and retain customers and employees.”
The emission reduction strategies available to oil and gas companies can be divided into two broad approaches: ‘change the process’ and ‘change the product’. It is easy but unwise to underestimate the effectiveness of the ‘change the process’ approach, as it involves multiple small and unglamorous changes, but can deliver significant emission reductions. At the same time, meeting 2040 or 2050 net-zero goals, and dealing with the increasing unavailability of hydrocarbon reserves will require companies to change the product.
Monaghan further explained, “Scope 1 and 2 emissions represent the majority of emissions for which the oil and gas industry is responsible. These emissions can be reduced by altering value chain practices. Since the end product is unchanged, this ‘change the process’ approach requires less R&D and infrastructural investment. It promises short- and mid-term returns.”
“However, other emissions are inextricable from oil and gas, particularly those produced by end-user combustion of the hydrocarbons (termed scope 3). Technological innovations may reduce the carbon content of the end-product, but practically, so long as the end-product is oil and gas, the company producing it will be responsible for significant scope emissions. To eliminate these emissions, companies must transition to a new end-product. This is the ‘change the product’ approach,” he added.
But Nigeria has reiterated its determination to continue to invest in hydrocarbons despite the global clamour for renewable energy.
Delivering an address at the Society of Petroleum Engineers Nigeria Council-44th Nigeria Annual International Conference and Exhibition (NAICE) 2021 virtually, on Tuesday, Minister of State Petroleum Resources, Chief Timipre Sylva, said Nigeria would leverage its huge gas reserves as a transition fuel option in the country.
Sylva added that oil and gas will continue to be relevant and play a major part in the energy mix in the foreseeable future, adding that “our approach towards the climate-change-net-zero-emission debate is to optimize the use of our abundant gas resource domestically as a transition fuel option towards meeting our nationally determined contributions on climate change.”
According to him, the government is determined to encourage more penetration of natural gas and its derivatives for domestic utilization, power generation, gas-based industries and propulsion in all aspects of the national economy.
He said this would address the great challenge posed by the volatile oil market, the environmental issues and public health concerns.
While agreeing with the projection by some energy experts that energy transition to low carbon energy sources would make the world a better living place with a cleaner climate, Sylva said, however, that “this process of change has to happen by way of a simultaneous global effort of transitioning national economies to the use of low carbon energy solutions.”
“An assumption that all national economies are driven by the same parameters does not take into account the different socio-economic, political and developmental peculiarities of individual nations,” he noted.
The minister said that despite the assurances of the country to continue to invest in the hydrocarbon sector, “the Government of Nigeria in collaboration with global partners is exploring policies, technologies and investments to address the current global challenge that will support migration from our reliance on carbon dependent fuels to meeting our commitment to the Paris Agreement.”
He said: “It is becoming obvious that a global migration from a fossil fuel-based economy to renewable would engender a corresponding decline in hydrocarbon, including possible divestiture in the sector, as deliberate frameworks are being championed to discourage extraction of carbon-laden resources. The COVID-19 Pandemic has further exacerbated the investment decline.”
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