CERA: Industry aims to fuel world, lower GHG emissions

Feb. 14, 2008
The global oil and gas industry faces the simultaneous goals of producing more energy while lowering emissions of greenhouse gases, speakers told CERA's annual conference in Houston.

Paula Dittrick
Senior Staff Writer

HOUSTON, Feb. 14 -- The global oil and gas industry faces the simultaneous goals of producing more energy while lowering emissions of greenhouse gases (GHGs), speakers told Cambridge Energy Research Associates annual conference in Houston.

Natural gas, both pipeline gas and LNG, appears to be a fossil fuel favorite in industry's race to meet rising energy demand.

Michael Stoppard, CERA senior director of global gas, forecasts world LNG liquefaction capacity will grow by almost one-third to 341 billion cu m in 2 years. He expects 58 LNG ships will be added to the existing 251-vessel fleet during 2008.

Linda Cook, Royal Dutch Shell PLC executive director of gas and power, said LNG trading volumes will increase because of an anticipated increasing gap between domestic production and demand in the US, Europe, and other countries, including China.

"Recent studies indicate that by 2025, we could see a gap of 15 to 20 bcfd between US natural gas production and demand," Cook said. "The actual size of this gap will depend on the degree to which domestic production can be extended."

Cook called upon industry to develop new technology, improve energy efficiency, and unlock more difficult-to-reach resources. She called upon governments to provide industry access to areas now off-limits and to coordinate GHG emissions regulations.

Jim Mulva, ConocoPhillips chairman and chief executive officer, said energy producers have a responsibility to provide sustainable energy, saying industry's knowledge of fuels can help in research to reduce the carbon intensity of fuels. "Climate change and energy security are complex global issues," Mulva said.

Separately, Larry Nettles, attorney with Vinson & Elkins LLP, commented on anticipated US regulation on GHG emissions as well. Nobuo Tanaka, executive director of the International Eneryg Agency, discussed cost estimates on reducing GHG emissions worldwide.

Supply constraints
Industry must overcome various obstacles, agreed Shell's Cook and other oil company executives speaking at CERA. They noted that the US and Mexico have large prospective areas to which the oil and gas industry has restricted or no access.

"Essentially all of the US Atlantic and Pacific coasts and the eastern Gulf of Mexico are off limits for exploration," Cook said. "What little exploration has been done dates back 30 years—when we had no deepwater drilling capacity, no supercomputers, no submarine robots, and no 4D seismic models."

Sometimes, local opposition is the biggest problem, Cook said. For instance, Shell's attempt to drill in the Beaufort Sea off Alaska was blocked last year by a lawsuit questioning the drilling program's environmental impact.

"The US isn't alone in this," Cook said. "Local opposition exists in other places such as Canada, some countries in South America, the Netherlands, Ireland, and Australia."

ConocoPhillips's Mulva said that unconventional forms of energy, including oil shale, are available but that unconventional oil sources also could see access problems in the future.

"These are higher on the carbon-intensity curve, which adds to climate concerns and strengthens the antidevelopment movement," Mulva said. "This movement will only grow as we are forced to rely on more unconventional oil to meet consumer demand. The consequence could be even further restrictions on access—and the spiral downward would accelerate."

Escalating costs for upstream projects is another obstacle. Cook said industry has experienced significant cost increases and unplanned construction delays for major projects. Meanwhile, contractors sometimes add significant risk premiums to bids.

"This is unsustainable," Cook said. "Productivity needs to be improved. Delivery time for major equipment needs shortening. Costs need to come down, and uncertainty needs to be reduced. If the industry as a whole fails to do this, the pace of new projects will inevitably slow."

Because upstream projects are long term and require huge investments, Cook said oil companies base their financial decisions in part upon which governments are likely to honor contract commitments and provide stable investment climates.

GHG regulations
If governments are going to require the energy industry to reduce GHG emissions, Cook said industry should be allowed to do it in the most economic way possible.

She called for "wise and coordinated carbon dioxide legislation, taking into account the life-cycle impacts of energy sources and consumption." Cook said, "A tonne of CO2 emissions reduced in China is as good for the environment as one in the US."

She later told reporters she hopes GHG regulations can be coordinated at a national level in the US and then also coordinated on a worldwide level.

Mulva said the US government should strive for a national carbon management solution that will influence international policy as well. "The economy needs a carbon price signal," he said. "Most of the current US proposals are for cap-and-trade. Such a system should recognize that carbon offsets are available not only here, but worldwide.

"Another key step by government," Mulva said, "would be to make fossil fuels more environmentally acceptable. It could do this by promoting carbon capture and storage. To do so, government must first create a regulatory framework that incorporates sufficient economic incentives."

In a separate session, Vinson & Elkins attorney Nettles said he believes US regulations on GHG emissions will be pointed primarily toward fossil fuel producers, refineries, and the midstream gas business rather than toward vehicle manufacturers or consumers.

Congress is expected to pass legislation to limit GHG emissions, Nettles said, adding that it's more apt to come in 2009 than in 2008. The US Environmental Protection Agency then would be called upon to calculate the level of emissions from using various fuels.

"We're going to have an army of carbon accountants," Nettles told OGJ. "I can see jobs for fuel auditors in the future." He foresees the establishment of a federal GHG registry that would track emissions.

Nettles said a cap-and-trade system is likely to include allocation of free allowances each year to certain industries, such as coal-fired power plants. This would be provided for only a few years as a form of transition assistance.

The percentage of allowances distributed for free would decline each year at different rates for different industries and eventually would be replaced by an auction-allowance distribution system.

Current discussion among lawmakers indicates that oil and gas producers probably would get no allowances while refineries and gas processing plants would get only small allowances.

"It's a way to impose a tax on certain fuels without calling it a tax," Nettles said.

CERA Chairman Daniel Yergin told OGJ that economists generally favor a carbon tax over a cap-and-trade system. Yergin expects the US "will have some carbon regime within a few years."

IEA's Tanaka said international negotiations for a GHG emissions reduction target has generated much publicity, but he noted that the establishment of a target alone will not solve the problem.

The European Union, Japan, and Canada have pledged to reduce emissions by 50% in 2050. In December, 178 countries at the UN climate conference in Bali signed what Tanaka calls the "Bali roadmap, which takes up where the Kyoto treaty leaves off."

"What is needed is practical action to transform our energy system," Tanaka said, adding that improved energy efficiency is fundamental. In separate speeches, both Tanaka and Cook indicated the oil and gas industry can be a leader in improved energy efficiency.

The IEA believes a 50% cut in global emissions means the world would have to both reduce CO2 emissions from electric power generation and reduce the carbon intensity of transportation eightfold, Tanaka said.

"Our preliminary analysis suggests that investment of around $50 trillion would be needed for a 50% reduction in emissions, on top of what would be required under a business as usual scenario," Tanaka said. "This amounts to roughly 1% of total gross domestic product from 2005-50."

Contact Paula Dittrick at [email protected].