How Should Oil Companies Adapt to a Carbon Constrained World?

October 12, 2016 | 11:10 am
Jeremy Martin
Senior Scientist and Director of Fuels Policy

Last week my colleagues released a report on the failure of major fossil fuel companies to make a clean break from disinformation on climate science and policy, or to plan adequately for a world free of carbon pollution as laid out in the international climate agreement reached in Paris in 2015.  Today I want to focus on oil companies, and consider how they should change the way they extract oil and use it to produce gasoline, diesel, and other fuels and products.

In order to adapt to a carbon constrained world, oil companies should invest in a supply chain that focuses on the most important products and most efficient ways to produce them in a world committing to reduce heat-trapping emissions.  The changes in the transportation fuel sector will not happen overnight, so this will be a process that plays out over a span of several decades.  Assessing their progress in this ongoing evolution will require much better information than we have today about the emissions of the whole global oil supply chain.

Running out of oil used to be a major concern, not any more

For many decades, securing access to enough oil to power our economy, particularly the transportation sector, was a top concern of policy-makers.  But changes in how we make and use fuel are altering that equation.  Geologists and chemical engineers have proven adept at locating and converting an ever wider range of fossil resources into gasoline, diesel and other fuels and products, tapping resources not previously included in estimates of oil reserves like tight oil extracted from shale by fracking in North Dakota and Texas, and bitumen separated from the tar sands in Alberta.  Thanks to this ingenuity, the availability of sufficient gasoline, diesel and other transportation fuels is much less of a concern.  Instead, the most profound challenge facing the oil industry is the climate consequence of using the products it produces.  Instead of worrying about where the oil will come from, we need to focus on where it is going (the atmosphere).

A stable climate means being smart about which fossil fuels to extract

Recent analyses have compared the known fossil fuel resources (reserves and recoverable resources) to the level of atmospheric carbon dioxide consistent with stabilizing global temperature rise at less than two degrees centigrade.  These studies have found rather from needing to identify new fossil fuel resources, climate stability requires that a significant share of already identified resources are never extracted and burned.  Until and unless we have carbon capture and storage technologies deployable at scale, fossil energy companies interested in a long term future can no longer simply locate and secure rights to extract additional fossil resources.  Rather, their competitiveness and business prospects will depend upon their ability to supply a changing mix of products at competitive prices with minimal emissions.  In short, oil companies will need to be smarter and cleaner, rather than just bigger and cheaper.

Getting smart about oil

Figuring out which fossil fuels should remain in the ground is simple if you think in very broad strokes.  Most of the coal and the most polluting sources of unconventional oil like tar sands should not be developed or extracted, while a larger share of conventional oil and gas can be used as we transition to a steadily growing share of energy from renewable and low carbon sources.  But it gets a lot more complicated if you get into the details.  What makes this tricky is that both the supply and demand side of the fuel fossil business have complex carbon implications, and both are changing over time.  If all the fuels were made into one product, we could phase out the dirtiest sources first.  But the fact is that different fossil fuels are used to produce different products today, demand for these products is changing today and will change even more dramatically in years to come.  This is true both in terms of broad categories like coal, oil and natural gas, but also within the range of resources called oil.  As the team behind the recently updated Oil Climate Index explained last week, there is a lot more complexity in different crude oils than most people understand.  Different crudes supply a different mix of products, and the carbon impact depends on both the extraction, refining, and product mix.

Two key questions

To think clearly about the prospects for a carbon constrained oil supply chain, we need to consider two key questions: which refined products of fossil fuels are the hardest to replace with low carbon alternatives; and how these products can be produced with the lowest emissions.  Put another way, we need to consider separately the emissions from fuel users and fuel producers, and figure out the prospects for minimizing both.

We understand how to reduce emissions from using fossil fuels

Emissions from the use of fossil fuels account for the majority of their lifecycle emissions, so let’s consider these first.  We have a good understanding of what is required to reduce emissions from fossil fuel use, and have in place some key initial policies to reduce these emissions, such as the Clean Power Plan to cut emissions from electrical power generation, and energy efficiency measures to cut fossil fuel use in vehicles and homes, policies to promote fuel switching towards cleaner fuels and to promote substitution of renewable fuels for fossil fuels.

Coal is easier to replace than jet fuel

It’s already clear that decreasing coal use is easier that cutting oil use, and as we look into the future, many experts expect that substantially decreasing gasoline use in the cars and trucks we drive will be easier than replacing jet fuel in the aviation sector.  As we move towards a future in which global warming emissions are increasingly constrained, it seems clear that some parts of the fuel market will shrink faster than others.

We are not doing as well at reducing emissions from extracting and refining

The emissions from extracting and refining fossil fuels are less well understood, and are much less carefully regulated, but it is clear these emissions vary widely.  Consider just the fossil fuels we call oil.  In fact, oil is not just one thing. The resources we call oil range from thin liquids that resemble nail polish remover, to materials more like peanut butter or window putty.  Different fuels are more or less suitable to produce different final products.  And emissions from extracting and refining these various resources range from less than 50 kg CO2e/barrel to more than 250 kg CO2e/barrel.  Moreover, the average emissions per barrel have been rising quickly.

Reducing avoidable emissions

Some of the variation in emissions from extraction and refining is a function of how oil producers conduct their business, for example, the extent to which they are venting and flaring methane and other associated gases at oil and gas extraction sites.  There are readily available strategies to dramatically cut these emissions. For example, where venting and flaring are the problem, simply investing more attention and resources to reducing methane leaks, and building and maintaining the appropriate infrastructure to manage gas responsibly can drastically reduce the emissions associated with oil extraction.

Avoiding the dirtiest sources

In other cases, the type of oil resource itself, such as extra heavy or sour crudes, are inherently more energy intensive to extract and refine.  The tar sands are the best known example, but other extremely heavy crudes from Venezuela fall into the same category.  In theory, technology may be able to mitigate the additional emissions from these fossil fuel resources, particularly if carbon emissions from the extraction and refining process can be cost effectively captured and safely sequestered.  But at the present time, this technology is not commercially available, and its technical and economic prospects are unclear.  Until the cost effectiveness of these strategies is clear, these fossil resources are clearly disadvantaged.

Old oil fields often have rising emissions

Even the same oil fields will have different emissions over time, as more energy and different techniques are required to extract oil as an oil field gets depleted.  This is called enhanced oil recovery, and it involves pumping steam, carbon dioxide, methane or other gasses into the oil field to help oil flow so it can be extracted.  How the power to run the pumps and heat to create steam is generated, where the carbon dioxide or other gases come from, and how much of the carbon dioxide or methane stay in the ground versus escaping into the atmosphere make a big difference in the emissions.  As I said, it is complicated, but this complexity means that the engineers and operators have lots of opportunities to reduce emissions, if they have the motivation to do so.

Different types of oil are suitable for producing different product slates

The expansion of so-called tight oil production from the Bakken in North Dakota produces a mix of hydrocarbons on the light end of the spectrum, with a lot of short hydrocarbon molecules like methane, ethane and what are called natural gas liquids.  These light products are used for power generation, to produce plastic and are blended with gasoline, but they are not readily refined into diesel or jet fuel.  Other heavy oils tend to produce more heavy products, including more petroleum coke, a heavy low value product that is more or less a substitute for coal.  Oils with a lot of sulfur, often called sour crudes, are also problematic, and require extensive additional processing to produce low sulfur fuels that are required to avoid serious air pollution problems. Thanks to the magic of chemistry and the ingenuity of chemical engineers, it is possible to make a wide range of products from different initial sources of oil, by adding additional process steps and chemical transformations.  With the right process, methane, the smallest hydrocarbon, can be converted to diesel fuel.  But these chemical transformations come at a cost in dollars, energy, emissions and yield.  Sorting out which oil sources are most suitable from a cost and emissions perspective requires information about the chemical nature of the oil, including the levels of impurities and the fractions of lighter and heavier hydrocarbons.

Implications for the future of the oil industry

Even in a future where carbon pollution is increasingly constrained, some key transportation fuels are likely to be around a lot longer than others.  The companies that can produce those fuels, and do so without creating a lot of additional emissions from their own operations, will be the winners in carbon constrained economy.  The fossil fuel industry should focus on resources and processes that produce the hardest to replace fuels (more jet fuel, less petroleum coke) with the lowest carbon supply chain.  To assess their progress requires greater data transparency than is presently available.  Greater reporting, traceability and transparency of the full supply chain will allow responsible energy companies, investors, consumers, and policy-makers to make better decisions about the future of oil and gas. This need for improved disclosures is also highlighted in The Climate Accountability Scorecard.

Policymakers should demand improved transparency and implement policies that push the oil industry to adopt the best available control of pollution from their own operations. This will ensure that even as demand for fossil fuels shrinks overall, the oil industry does its share to cut its emissions and supports the transition to a world free of carbon pollution.