Shell Shirks Carbon Responsibility

I was in a meeting today held at the Centre for European Reform in which Shell’s Chief Financial Officer, Simon Henry, made two arguments to absolve the oil and gas industry of responsibility for climate change. He painted coal as the real enemy, and reiterated the longest hand-washing argument in politics – that Shell believes that a Cap and Trade system is the best way to suppress carbon dioxide emissions. In other words, it’s not up to Shell to do anything about carbon. He argued that for transportation and trade the world is going to continue to need highly energy-dense liquid fuels for some time, essentially arguing for the continuation of his company’s current product slate. He did mention proudly in comments after the meeting that Shell are the world’s largest bioethanol producers, in Brazil, but didn’t open up the book on the transition of his whole company to providing the world with low carbon fuels. He said that Shell wants to be a part of the global climate change treaty process, but he gave no indication of what Shell could bring to the table to the negotiations, apart from pushing for carbon trading. Mark Campanale of the Carbon Tracker Initiative was sufficiently convinced by the “we’re not coal” argument to attempt to seek common cause with Simon Henry after the main meeting. It would be useful to have allies in the oil and gas companies on climate change, but it always seems to be that the rest of the world has to adopt Shell’s and BP’s view on everything from policy to energy resources before they’ll play ball.

During the meeting, Mark Campanale pointed out in questions that Deutsche Bank and Goldman Sachs are going to bring Indian coal to trade on the London Stock Exchange and that billions of dollars of coal stocks are to be traded in London, and that this undermines all climate change action. He said he wanted to understand Shell’s position, as the same shareholders that hold coal (shares), hold Shell. I think he was trying to get Simon Henry to call for a separation in investment focus – to show that investment in oil and gas is not the same as investing in Big Bad Coal. But Simon Henry did not bite. According to the Carbon Tracker Initiative’s report of 2013, Unburnable Carbon, coal listed on the London Stock Exchange is equivalent to 49 gigatonnes of Carbon Dioxide (gtCO2), but oil and gas combined trade shares for stocks equivalent to 64 gtCO2, so there’s currently more emissions represented by oil and gas on the LSX than there is for coal. In the future, the emissions held in the coal traded in London have the potential to amount to 165 gtCO2, and oil and gas combined at 125 gtCO2. Despite the fact that the United Kingdom is only responsible for about 1.6% of direct country carbon dioxide emissions (excluding emissions embedded in traded goods and services), the London Stock Exchange is set to be perhaps the world’s third largest exchange for emissions-causing fuels.

Here’s a rough transcript of what Simon Henry said. There are no guarantees that this is verbatim, as my handwriting is worse than a GP’s.

[Simon Henry] I’m going to break the habit of a lifetime and use notes. Building a long-term sustainable energy system – certain forces shaping that. 7 billion people will become 9 billion people – [many] moving from off-grid to on-grid. That will be driven by economic growth. Urbanisation [could offer the possibility of] reducing demand for energy. Most economic growth will be in developing economies. New ways fo consuming energy. Our scenarios – in none do we see energy not growing materially – even with efficiencies. The current ~200 billion barrels of oil equivalent per day today of energy demand will rise to ~400 boe/d by 2050 – 50% higher than today. This will be demand-driven – nothing to do with supply…

[At least one positive-sounding grunt from the meeting – so there are some Peak Oil deniers in the room, then.]

[Simon Henry] …What is paramount for governments – if a threat, then it gets to the top of the agenda. I don’t think anybody seriously disputes climate change…

[A few raised eyebrows and quizzical looks around the table, including mine]

[Simon Henry] …in the absence of ways we change the use of energy […] Any approach to climate change has got to embrace science, policy and technology. All three levers must be pulled. Need a long-term stable policy that enables technology development. We think this is best in a market mechanism. […] Energy must be affordable at the point of use. What we call Triple A – available, acceptable and affordable. No silver bullet. Develop in a responsible way. Too much of it is soundbite – that simplifies what’s not a simple problem. It’s not gas versus coal. [Although, that appeared to be one of his chief arguments – that it is gas versus coal – and this is why we should play nice with Shell.]

1. Economy : About $1.5 to $2 trillion of new money must be invested in the energy industry each year, and this must be sustained until 2035 and beyond. A [few percent] of the world economy. It’s going to take time to make [massive changes]. […] “Better Growth : Better Climate” a report on “The New Climate Economy” by the Global Commission on the Economy and Climate, the Calderon Report. [The world invested] $700 billion last year on oil and gas [or rather, $1 trillion] and $220 – $230 billion on wind power and solar power. The Calderon Report showed that 70% of energy is urban. $6 trillion is being spent on urban infrastructure [each year]. $90 trillion is available. [Urban settings are] more compact, more connected, there’s public transport, [can build in efficiencies] as well as reducing final energy need. Land Use is the other important area – huge impact on carbon emissions. Urbanisation enables efficiency in distributed generation [Combined Heat and Power (CHP)], [local grids]. Eye-popping costs, but the money will be spent anyway. If it’s done right it will [significantly] reduce [carbon emissions and energy demand]…

2. Technology Development : Governments are very bad at picking winners. Better to get the right incentives in and let the market players decide [optimisation]. They can intervene, for example by [supporting] Research and Development. But don’t specify the means to an end…The best solution is a strong predictable carbon price, at $40 a tonne or more or it won’t make any difference. We prefer Cap and Trade. Taxes don’t actually decrease carbon [emissions] but fundamentally add cost to the consumer. As oil prices rose [in 2008 – 2009] North Americans went to smaller cars…Drivers [set] their behaviour from [fuel] prices…

[An important point to note here : one of the reasons why Americans used less motor oil during the “Derivatives Bubble” recession between 2006 and 2010 was because the economy was shot, so people lost their employment, and/or their homes and there was mass migration, so of course there was less commuter driving, less salesman driving, less business driving. This wasn’t just a response to higher oil prices, because the peak in driving miles happened before the main spike in oil prices. In addition, not much of the American fleet of cars overturned in this period, so Americans didn’t go to smaller cars as an adaptation response to high oil prices. They probably turned to smaller cars when buying new cars because they were cheaper. I think Simon Henry is rather mistaken on this. ]

[Simon Henry] …As regards the Carbon Bubble : 65% of the Unburnable fossil fuels to meet the 2 degrees [Celsius] target is coal. People would stuggle to name the top five coal companies [although they find it easy to name the top five oil and gas companies]. Bearing in mind that you have to [continue to] transport stuff [you are going to need oil for some time to come.] Dealing with coal is the best way of moving forward. Coal is used for electricity – but there are better ways to make electricity – petcoke [petroleum coke – a residue from processing heavy and unconventional crude oil] for example…

[The climate change impact of burning (or gasifying) petroleum coke for power generation is possibly worse than burning (or gasifying) hard coal (anthracite), especially if the pet coke is sourced from tar sands, as emissions are made in the production of the pet coke before it even gets combusted.]

[Simon Henry] …It will take us 30 years to get away entirely from coal. Even if we used all the oil and gas, the 2 degrees [Celsius] target is still possible…

3. Policy : We tested this with the Dutch Government recently – need to create an honest dialogue for a long-term perspective. Demand for energy needs to change. It’s not about supply…

[Again, some “hear hears” from the room from the Peak Oil and Peak Natural Gas deniers]

[Simon Henry] …it’s about demand. Our personal wish for [private] transport. [Not good to be] pushing the cost onto the big bad energy companies and their shareholders. It’s taxes or prices. [Politicians] must start to think of their children and not the next election…

…On targets and subsidies : India, Indonesia, Brazil […] to move on fossil fuel subsidies – can’t break the Laws of Economics forever. If our American friends drove the same cars we do, they’d reduce their oil consumption equivalent to all of the shale [Shale Gas ? Or Shale Oil ?]… Targets are an emotive issue when trying to get agreement from 190 countries. Only a few players that really matter : USA, China, EU, India – close to 70% of current emissions and maybe more in future. The EPA [Environmental Protection Agency in the United States of America] [announcement] on power emissions. China responded in 24 hours. The EU target on 27% renewables is not [country-specific, uniform across-the-board]. Last week APEC US deal with China on emissions. They switched everything off [and banned traffic] and people saw blue sky. Coal with CCS [Carbon Capture and Storage] we see as a good idea. We would hope for a multi-party commitment [from the United Nations climate talks], but [shows doubt]… To close : a couple of words on Shell – have to do that. We have only 2% [of the energy market], but we [hope we] can punch above our weight [in policy discussions]. We’re now beginning to establish gas as a transport fuel. Brazil – low carbon [bio]fuels. Three large CCS projects in Canada, EU… We need to look at our own energy use – pretty trivial, but [also] look at helping our customers look at theirs. Working with the DRC [China]. Only by including companies such as ourselves in [climate and energy policy] debate can we get the [global deal] we aspire to…

[…]

[Question from the table, Ed Wells (?), HSBC] : Green Bonds : how can they provide some of the finance [for climate change mitigation and adaptation] ? The first Renminbi denominated Green Bond from [?]. China has committed to non-fossil fuels. The G20 has just agreed the structure on infrastructure – important – not just for jobs and growth – parallel needs on climate change. [Us at HSBC…] Are people as excited about Green Bonds as we are ?

[Stephen Tindale] Yes.

[Question from the table, Anthony Cary, Commonwealth Scholarship Commission] …The key seems to be pricing carbon into the economy. You said you preferred Cap and Trade. I used to but despite reform the EU Emissions Trading Scheme (EU ETS) – [failures and] gaming the system. Tax seems to be a much more solid basis.

[Simon Henry] [The problem with the ETS] too many credits and too many exemptions. Get rid of the exemptions. Bank reserve of credits to push the price up. Degress the number of credits [traded]. Tax : if people can afford it, they pay the tax, doesn’t stop emissions. In the US, no consumption tax, they are very sensitive to the oil price going up and down – 2 to 3 million barrels a day [swing] on 16 million barrels a day. All the political impact on the US from shale could be done in the same way on efficiency [fuel standards and smaller cars]. Green Bonds are not something on top of – investment should be financed by Green Bonds, but investment is already being done today – better to get policy right and then all investment directed.

[…]

[Question from the table, Kirsten Gogan, Energy for Humanity] The role of nuclear power. By 2050, China will have 500 gigawatts (GW) of nuclear power. Electricity is key. Particularly coal. Germany is building new coal as removing nuclear…

[My internal response] It’s at this point that my ability to swallow myths was lost. I felt like shouting, politely, across the table : ACTUALLY KIRSTEN, YOU, AND A LOT OF OTHER PEOPLE IN THE ROOM ARE JUST PLAIN WRONG ON GERMANY AND COAL.

“Germany coal power generation at 10-year low in August”, 9th September 2014

And the only new coal-fired plants being built are those that were planned up to five years ago. No new coal-fired capacity is now being agreed.

[Kirsten Gogan]…German minister saying in public that you can’t phase out nuclear and coal at the same time. Nuclear is not included in that conversation. Need to work on policy to scale up nuclear to replace coal. Would it be useful to have a clear sectoral target on decarbonising – 100% on electricity ?

[Stephen Tindale] Electricity is the least difficult of the energy sectors to decarbonise. Therefore the focus should be on electricity. If a target would help (I’m not a fan) nuclear certainly needs to be a part of the discussions. Angela Merkel post-Fukushima has been crazy, in my opinion. If want to boost renewable energy, nuclear power will take subsidies away from that. But targets for renewable energy is the wrong objective.. If the target is keeping the climate stable then it’s worth subsidising nuclear. Subsidising is the wrong word – “risk reduction”.

[Simon Henry] If carbon was properly priced, nuclear would become economic by definition…

[My internal response] NO IT WOULDN’T. A LOT OF NUCLEAR CONSTRUCTION AND DECOMMISSIONING AND SPENT FUEL PROCESSING REQUIRES CARBON-BASED ENERGY.

[Simon Henry] …Basically, all German coal is exempted (from the EU ETS). If you have a proper market-based system then the right things will happen. The EU – hypocrisy at country level. Only [a couple of percent] of global emissions. The EU would matter if it was less hypocritical. China are more rational – long-term thinking. We worked with the DRC. Six differing carbon Cap and Trade schemes in operation to find the one that works best. They are effectively supporting renewable energy – add 15 GW each of wind and solar last year. They don’t listen to NIMBYs [they also build in the desert]. NIMBYism [reserved for] coal – because coal was built close to cities. [Relationship to Russia] – gas replacing coal. Not an accident. Five year plan. They believe in all solutions. Preferably Made in China so we can export to the rest of the world. [Their plans are for a range of aims] not just climate.

[…]
[…]

[Simon Henry] [in answer to a question about the City of London] We don’t rely on them to support our activities [my job security depends on a good relationship with them]]. We have to be successful first and develop [technological opportunities] [versus being weakened by taxes]. They can support change in technology. Financing coal may well be new money. Why should the City fund new coal investments ?

[Question from the table, asking about the “coal is 70% of the problem” message from Simon Henry] When you talk to the City investors, do you take the same message to the City ?

[Simon Henry] How much of 2.7 trillion tonnes of “Unburnable Carbon” is coal, oil and gas ? Two thirds of carbon reserves is coal. [For economic growth and] transport you need high density liquid fuels. Could make from coal [but the emissions impact would be high]. We need civil society to have a more serious [understanding] of the challenges.

After the discussion, I asked Simon Henry to clarify his words about the City of London.

[Simon Henry] We don’t use the City as a source of capital. 90% is equity finance. We don’t go to the market to raise equity. For every dollar of profit, we invest 75 cents, and pay out 25 cents as dividend to our shareholders. Reduces [problems] if we can show we can reinvest. [ $12 billion a year is dividend. ]

I asked if E&P [Exploration and Production] is working – if there are good returns on investment securing new reserves of fossil fuels – I know that the company aims for a 10 or 11 year Reserves to Production ratio (R/P) to ensure shareholder confidence.

Simon Henry mentioned the price of oil. I asked if the oil price was the only determinant on the return on investment in new E&P ?

[Simon Henry] If the oil price is $90 a barrel, that’s good. At $100 a barrel or $120 a barrel [there’s a much larger profit]. Our aim is to ensure we can survive at $70 a barrel. [On exploration] we still have a lot of things in play – not known if they are working yet… Going into the Arctic [At which point I said I hope we are not going into the Arctic]… [We are getting returns] Upstream is fine [supply of gas and oil]. Deepwater is fine. Big LNG [Liquefied Natural Gas] is fine. Shale is a challenge. Heavy Oil returns could be better – profitable, but… [On new E&P] Iraq, X-stan, [work in progress]. Downstream [refinery] has challenges on return. Future focus – gas and deepwater. [On profitability of investment – ] “Gas is fine. Deepwater is fine.”

[My summary] So, in summary, I think all of this means that Shell believes that Cap and Trade is the way to control carbon, and that the Cap and Trade cost would be borne by their customers (in the form of higher bills for energy because of the costs of buying carbon credits), so their business will not be affected. Although a Cap and Trade market could possibly cap their own market and growth as the sales envelope for carbon would be fixed, since Shell are moving into lower carbon fuels – principally Natural Gas, their own business still has room for growth. They therefore support Cap and Trade because they believe it will not affect them. WHAT THEY DON’T APPEAR TO WANT PEOPLE TO ASK IS IF A CAP AND TRADE SYSTEM WILL ACTUALLY BE EFFECTIVE IN CURBING CARBON DIOXIDE EMISSIONS. They want to be at the negotiating table. They believe that they’re not the problem – coal is. They believe that the world will continue to need high energy-dense oil for transport for some time to come. It doesn’t matter if the oil market gets constrained by natural limits to expansion because they have gas to expand with. They don’t see a problem with E&P so they believe they can keep up their R/P and stay profitable and share prices can continue to rise. As long as the oil price stays above $70 a barrel, they’re OK.

However, there was a hint in what Simon Henry talked about that all is not completely well in Petro-land.

a. Downstream profit warning

Almost in passing, Simon Henry admitted that downstream is potentially a challenge for maintaining returns on investment and profits. Downstream is petrorefinery and sales of the products. He didn’t say which end of the downstream was the issue, but oil consumption has recovered from the recent Big Dip recession, so that can’t be his problem – it must be in petrorefinery. There are a number of new regulations about fuel standards that are going to be more expensive to meet in terms of petroleum refinery – and the chemistry profiles of crude oils are changing over time – so that could also impact refinery costs.

b. Carbon disposal problem

The changing profile of crude oils being used for petrorefinery is bound to cause an excess of carbon to appear in material flows – and Simon Henry’s brief mention of petcoke is more significant than it may first appear. In future there may be way too much carbon to dispose of (petcoke is mostly carbon rejected by thermal processes to make fuels), and if Shell’s plan is to burn petcoke to make power as a solution to dispose of this carbon, then the carbon dioxide emissions profile of refineries is going to rise significantly… where’s the carbon responsiblity in that ?

UKERC : Gas by Design (2)

This week, I had the opportunity to join the launch of the UKERC’s latest research into the future of gas. The esteemed delegates included members of a Russian Trade Delegation and several people from the US Embassy. Clearly, the future of gas is an international thing.


[continued from Gas by Design ]

Mike Bradshaw, Warwick Business School = [MB]

[MB] I’m somewhat daunted by this audience – the report is aimed perhaps for informed public audience. The media [ambushed us on the question of shale gas, shale gas attracted more attention] but things we didn’t cover much about there we can cover here. It’s been a real rollercoaster ride in the gas industry. Any flights of fancy (in the report) are our faults and not theirs [reference to work of colleagues, such as Jonathan Stern at Oxford Institute for Energy Studies]. A set of shortcomings dealing with the issue of Energy Security. There is a tendency to think that oil and gas are the same. They’re not. The framework, the actors and the networks, trade statistics, policies [much different for gas than for oil]. [In the UK for example we are seeing] a rapid increase in import dependence [and in other countries]. Need to [pay] particular understanding on what will happen in far-flung places. Today, the US-China agreement could influence gas demand. [In the literature on gas, some anomalies, perhaps]. Academics may not understand markets. [What we are seeing here is] the globalisation of UK gas security – primarily Europeanisation. There is growing uncertainty [about] the material flow of gas. [Threshold] balance in three sectors – strong seasonality, impact of climate and temperature [on gas demand]. The Russian agreement with Ukraine [and Europe] – the one thing everybody was hoping for was a warm winter. While the gas market is important [industrial use and energy use], domestic/residential demand is still very significant [proportion of total demand], so we need to look at energy efficiency [building insulation rates] and ask will people rip out their gas boilers ? For the UK, we are some way across the gas bridge – gas has enabled us to meet [most of] our Kyoto Protocol commitments. Not long until we’ve crossed it. Our coal – gone. With coal gone, what fills the gaps ? Renewable electricity – but there is much intermittency already. We’re not saying that import dependency is necessarily a problem. Physical security is not really the problem – but the [dependence on] the interconnectors, the LNG (Liquefied Natural Gas) imports – these create uncertainties. The UK also plays a role as a gas exporter – and in landing Norwegian gas [bringing it into the European market]. I’m a geographer – have to have at least one map – of gas flows [in and out of the country]. The NTS (National Transmission System – the high pressure Natural Gas-carrying pipeline network – the “backbone” of the gas transmission and distribution system of National Grid] has responded to change – for example in the increasing sources of LNG [and “backflow” and “crossflow” requirements]. There are 9 points of entry for gas into the UK at the moment. If the Bowland Shale is exploited, there could be 100s of new points of entry [the injection of biogas as biomethane into the gas grid would also create new entry points]. A new challenge to the system. [The gas network has had some time to react in the past, for example] LNG imports – the decision to ramp up the capacity was taken a long time ago. [Evolution of] prices in Asia have tracked the gas away [from the European markets] after the Fukushima Dai-ichi disaster. And recently, we have decided to “fill up the tanks” again [LNG imports have risen in the last 24 or so months]. Very little LNG is “firm” – it needs to follow the market. It’s not good to simply say that “the LNG will come” [without modelling this market]. The literature over-emphasises the physical security of the upstream supplies of gas. [The projections have] unconventional gas growing [and growing amounts of biogas]. But it’s far too early to know about shale gas – far too early to make promises about money when we don’t even have a market [yet]. Policy cannot influence the upstream especially in a privatised market. The interconnectors into the European Union means we have to pay much more attention to the Third EU Energy Package. Colleagues in Oxford are tracking that. The thorny question of storage. We have less than 5 bcm (billion cubic metres). We’d like 10% perhaps [of the winter period demand ?] Who should pay for it ? [A very large proportion of our storage is in one place] the Rough. We know what happens – we had a fire at the Rough in 2006… Everyone worries about geopolitics, but there are other potential sources of problems – our ageing infrastructure […] if there is a technical problem and high demand [at the same time]. Resilience [of our gas system is demonstrated by the fact that we have] gas-on-gas competition [in the markets] – “liquid” gas hub trading – setting the NBP (National Balancing Point). [There are actually 3 kinds of gas security to consider] (a) Security of Supply – not really a problem; (b) Security of Transport (Transit) – this depends on markets and (c) Security of Demand – [which strongly depends on whether there is a] different role for gas in the future. But we need to design enough capacity even though we may not use all of it [or not all of the time]. We have mothballed gas-fired power plants already, for reasons you all know about. We already see the failure of the ETS (European Union Emissions Trading Scheme) [but if this can be reformed, as as the Industrial Emissions Directive bites] there will be a return to gas as coal closes. The role of Carbon Capture and Storage (CCS) becomes critical in retaining gas. CCS however doesn’t answer issues of [physical energy security, since CCS requires higher levels of fuel use].

[Question from the floor] Gas has a role to play in transition. But how do we need to manage that role ? Too much focus on building Renewable Energy system. What is the impact on the current infrastructure ? For managing that decline in the incumbent system – gas is there to help – gas by design rather than gas by default.

[Question from the floor, Jonathan Stern] [In your graphs/diagrams] the Middle East is a major contributor to gas trade. We see it differently. The Qataris [could/may/will] hold back [with expanding production] until 2030. Iran – our study [sees it as] a substitute contributor. Oil-indexed gas under threat and under challenge. If you could focus more on the global gas price… [New resources of gas could be very dispersed.]Very difficult to get UK people to understand [these] impacts on the gas prices [will] come from different places than they can think of.

[Question from the floor] Availability of CCS capacity ? When ? How much ? Assumptions of cost ?

[Question from the floor : Tony Bosworth, Friends of the Earth] Gas as a bridge – how much gas do we need for [this process] ? What about unburnable carbon ? Do we need more gas to meet demands ?

[Answer – to Jonathan Stern – from Christophe McGlade ?] The model doesn’t represent particularly well political probabilities. Iran has a lot of gas – some can come online. It will bring it online if it wants to export it. Some simplifications… might be over optimistic. Your work is helpful to clarify.

On gas prices – indexation versus global gas price – all the later scenarios assumed a globalised gas price. More reasonable assumptions.

On CCS : first [coming onstream] 2025 – initially quite a low level, then increasing by 10% a year. The capital costs are approximately 60% greater than other options and causes a drop in around 10% on efficiency [because making CCS work costs you in extra fuel consumed]. If the prices of energy [including gas] increase, then CCS will have a lesser relative value [?].

On availability of gas : under the 2 degrees Celsius scenario, we could consume 5 tcm (trillion cubic metres) of gas – and this can come from reserves and resources. There are a lot of resources of Natural Gas, but some of it will be at a higher price. In the model we assume development of some new resources, with a growth in shale gas, and other unconventional gas. Because of the climate deal, we need to leave some gas underground.

[Answer from the panel] Indexation of gas prices to oil… Further gas demand is in Asia – it’s a question of whose gas gets burnt. [Something like] 70% of all Natural Gas gets burned indigenously [within the country in which it is produced]. When we talk about “unburnable gas”, we get the response “you’re dreaming” from some oil companies, “it won’t be our fossil fuels that get stranded”. LNG models envisage a different demand profile [in the future, compared to now]. When China [really gets] concerned about air quality [for example]. Different implications.

[Question from the floor, from Centrica ?] What’s in the model for the globalised gas price – Henry Hub plus a bit ? There is not a standard one price.

[Question from the floor] On the question of bridging – the long-term bridge. What issues do you see when you get to 2030 for investment ? [We can see] only for the next few years. What will investors think about that ?

[Question from the floor] [With reference to the Sankey diagram of gas use in the UK] How would that change in a scenario of [electrification – heat and transport being converted to run on electrical power] ?

[Question from the floor] Stranded assets. How the markets might react ? Can you put any numbers on it – especially in the non-CCS scenario ? When do we need to decide [major strategy] for example, [whether we could or should be] shutting off the gas grid ? How would we fund that ? Where are the pinch points ?

[Answer from the panel] On the global gas price – the model does not assume a single price – [it will differ over each] region. [The price is allowed to change regionally [but is assumed to arise from global gas trading without reference to oil prices.] Asian basin will always be more expensive. There will be a temperature differential between different hubs [since consumption is strongly correlated with seasonal change]. On stranded assets – I think you mean gas power plants ? The model is socially-optimal – all regions working towards the 2 degrees Celsius global warming target. The model doesn’t limit stranded assets – and do get in the non-CCS scenario. Build gas plants to 2025 – then used at very low load factors. Coal plants need to reduce [to zero] given that the 2 degrees Celsius targets are demanding. Will need gas for grid balancing – [new gas-fired power generation assets will be] built and not used at high load factors.

[Answer from the panel] Our report – we have assume a whole system question for transition. How successful will the Capacity Mechanism be ? UKERC looking at electrification of heating – but they have not considered the impact on gas (gas-to-power). Will the incentives in place be effective ? The Carbon Budget – what are the implications ? Need to use whole system analysis to understand the impact on gas. Issue of stranded assets : increasingly important now [not at some point in the future]. On pinch point : do we need to wait another three years [for more research] ? Researchers have looked more at what to spend – what to build – and less on how to manage the transition. UKERC have started to explore heat options. It’s a live issue. Referenced in the report.

[Question from the floor, from Richard Sverrisson, News Editor of Montel] Will reform to the EU ETS – the Market Stability Reserve (MSR) – will that be enough to bring gas plant into service ?

[Question from the floor] On oil indexation and the recent crash in the crude price – what if it keeps continuing [downwards] ? It takes gas prices down to be competitive with hub prices. [What about the impact on the economic profitability of] shale oil – where gas driving related prices ? Are there some pricing [functions/variables] in the modelling – or is it merely a physical construct ?

[Question from the floor, from Rob Gross of UCL] On intermittency and the flexibility of low carbon capacity. The geographical units in the modelling are large – the role of gas depends on how the model is constrained vis-a-vis intermittency.

[Answer from the panel, from Christophe McGlade] On carbon dioxide pricing : in the 2 degrees Celsius scenario, the price is assumed to be $200 per tonne. In the non-CCS scenario, the price is in the region of $400 – $500 per tonne [?] From 2020 : carbon price rises steeply – higher than the Carbon Floor Price. How is the the 2 degrees Celsius target introduced ? If you place a temperature constraint on the energy system, the model converts that into carbon emissions. The latest IPCC report shows that there remains an almost linear trend between carbon budget and temperature rise – or should I say a greenhouse gas budget instead : carbon dioxide (CO2), methane (CH4) and nitrous oxide (N2O). The emissions pledges of the [European Union ?] have been adopted by this model – also the development of renewable energy and fuel standards. No exogenous assumptions on carbon pricing. On intermittency – the seasonality is represented by summer, winter and intermediate; and time day generalised as morning, night, evening and peak (morning peak). [Tighter modelling would provide more] certainty which would remove ~40% of effective demand [?] Each technology has a contribution to make to peak load. Although, we assume nothing from wind power – cannot capture hour to hour market. The model does build capacity that then it doesn’t use.

[Answer from the panel] On carbon pricing and the EU ETS reform : I wouldn’t hold my breath [that this will happen, or that it will have a major impact]. We have a new commission and their priority is Poland – nothing serious will happen on carbon pricing until 2020. Their emphasis is much more on Central European issues. I don’t expect [us] to have a strong carbon price since policy [will probably be] more focussed on social democracy issues. Moving to a relatively lower price on oil : Asia will hedge. Other explorters currently sticking to indexation with oil. The low price of wet gas (condensate) in the USA is a result of the over-supply, which followed an over-supply in NGLs (Natural Gas Liquids) – a bumpy road. Implications from USA experience ? Again, comes back to watching what is happening in Asia.

[to be continued…]

UKERC : Gas by Design

Today I attended a meeting of minds.

It’s clear to me that the near-term and mid-term future for energy in the United Kingdom and the European Union will best be centred on Natural Gas and Renewable Electricity, and now the UK Energy Research Centre has modelled essentially the same scenario. This can become a common narrative amongst all parties – the policy people, the economists, the technologists, the non-governmental groups, as long as some key long-term de-carbonisation and energy security objectives are built into the plan.

The researchers wanted to emphasise from their report that the use of Natural Gas should not be a default option in the case that other strategies fail – they want to see a planned transition to a de-carbonised energy system using Natural Gas by design, as a bridge in that transition. Most of the people in the room found they could largely agree with this. Me, too. My only caveat was that when the researchers spoke about Gas-CCS – Natural Gas-fired power generation with Carbon Capture and Storage attached, my choice would be Gas-CCU – Natural Gas-fired power generation with Carbon Capture and Re-utilisation – carbon recycling – which will eventually lead to much lower emissions gas supply at source.

What follows is a transcription of my poorly-written notes at the meeting, so you cannot accept them as verbatim.

Jim Watson, UKERC = [JW]
Christophe McGlade, University College London (UCL) = [CM]
Mike Bradshaw, Warwick Business School = [MB]

[JW] Thanks to Matt Aylott. Live Tweeting #FutureOfGas. Clearly gas is very very important. It’s never out of the news. The media all want to talk about fracking… If we want to meet the 2 degrees Celsius target of the United Nations Framework Convention on Climate Change, how much can gas be a part of this ? Is Natural Gas a bridge – how long a ride will that gas bridge be ?

[CM] Gas as a bridge ? There is healthy debate about the Natural Gas contribution to climate change [via the carbon dioxide emissions from burning Natural Gas, and also about how much less in emissions there is from burning Natural Gas compared to burning coal]. The IPCC said that “fuel switching” from coal to gas would offer emissions benefits, but some research, notably McJeon et al. (2014) made statements that switching to Natural Gas cannot confer emissions benefits. Until recently, there have not been many disaggregated assessments on gas as a bridge. We have used TIAM-UCL. The world is divided into 16 regions. The “climate module” seeks to constrain the global temperature rise to 2 degrees Celsius. One of the outcomes from our model was that export volumes [from all countries] would be severaly impacted by maintaining the price indexation between oil and gas. [Reading from chart on the screen : exports would peak in 2040s]. Another outcome was that gas consumption is not radically affected by different gas market structures. However, the over indexation to the oil price may destroy gas export markets. Total exports of natural gas are higher under the 2 degrees Celsius scenario compared to the 4 degrees Celsius scenario – particularly LNG [Liquefied Natural Gas]. A global climate deal will support gas exports. There will be a higher gas consumption under a 2 degrees Celsius deal compared to unconstrained scenario [leading to a 4 degrees Celsius global temperature rise]. The results of our modelling indicate that gas acts as a bridge fuel out to 2035 [?] in both absolute and relative terms. There is 15% greater gas consumption in the 2 degrees Celsius global warming scenario than in the 4 degrees Celsius global warming scenario. Part of the reason is that under the 4 degrees Celsius scenario, Compressed Natural Gas vehicles are popular, but a lot less useful under the 2 degrees Celsius scenario [where hydrogen and other fuels are brought into play].

There are multiple caveats on these outcomes. The bridging period is strictly time-limited. Some sectors need to sharply reduce consumption [such as building heating by Natural Gas boilers, which can be achieved by mass insulation projects]. Coal must be curtailed, but coal-for-gas substitution alone is not sufficient. Need a convincing narrative about how coal can be curtailed. In an absence of a global binding climate deal we will get consumption increases in both coal and gas. In the model, gas is offsetting 15% of coal by 2020, and 85% by 2030. With Carbon Capture and Storage (CCS), gas’s role is drastically reduced – after 2025 dropping by 2% a year [of permitted gas use]. Not all regions of the world can use gas as a bridge. [Reading from the chart : with CCS, gas is a strong bridging fuel in the China, EU, India, Japan and South Korea regions, but without CCS, gas is only strong in China. With CCS, gas’s bridging role is good in Australasia, ODA presumably “Offical Development Assistance” countries and USA. Without CCS, gas is good for Africa, Australasia, EU, India, Japan, South Korea, ODA and USA.]

In the UK, despite the current reliance on coal, there is little scope to use it as a transition fuel. Gas is unlikely to be removed from UK energy system by 2050.

[Question from the floor] The logic of gas price indexation with the oil price ?

[CM] If maintain oil indexation, exports will reduce as countries turn more towards indigenous at-home production of gas for their domestic demand. This would not be completely counter-balanced by higher oil and therefore gas prices, which should stimulate more exports.

[Point from the floor] This assumes logical behaviour…

[Question from the floor] [Question about Carbon Capture and Storage (CCS)]

[CM] The model does anticipate more CCS – which permits some extra coal consumption [at the end of the modelling period]. Gas-CCS [gas-fired power generation with CCS attached] is always going to generate less emissions than coal-CCS [coal-fired power generation with CCS attached] – so the model prefers gas-CCS.

[to be continued…]