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LNG to Become Big Oil’s Largest Source of Carbon Emissions Growth by 2025, Says Wood Mackenzie

With global demand increasing, liquefied natural gas (LNG) by 2025 will be the largest source of carbon emissions growth for the biggest oil and gas companies, according to an analysis by Wood Mackenzie.

Big Oil majors that include ExxonMobil Corp., BP plc, Royal Dutch Shell plc and Total SA have been boosting their LNG portfolios and laying plans for more export projects as the world’s thirst for natural gas grows. However, converting gas into LNG to enable transport is energy-intensive and consequently, emission-intensive, according to the natural resources consultancy.

“As part of the study, we looked at 25 majors, national oil companies and internationally focused large caps,” said co-author Amy Bowe, director of upstream consulting.

Gross emissions from the assets examined are growing slightly faster than production, at about 17% to 2025 versus 15% for production.

“This is being driven largely by the higher intensity of primary growth themes -- heavy oil, oilsands and LNG,” Bowe said. “Conventional onshore assets are still the largest single source of emissions and production to 2025, but they represent a declining share in each case.

“In contrast, LNG emissions are forecast to realize the largest and fastest absolute increase, with liquefaction emissions also growing at the fastest rate of all the sources, about 43% versus 22% production growth.”

The report, “Positioning for the Future,” is considered the first comprehensive study specifically about carbon emissions in the upstream sector. Wood Mackenzie used data drawn from internal databases of upstream information to form the perspective.

“The carbon emissions targets set by the Paris Agreement, together with potential policy changes, are starting to influence investors’ capital decisions and shape companies’ long-term corporate strategies,” said co-author Gavin Law, head of gas and power consulting.
The international agreement reached in late 2015 by close to 200 countries requires participating nations to submit emissions reduction plans and review those plans every five years, to lay the foundation for keeping a global temperature rise below 2 C above pre-industrial levels. (President Trump has signaled the United States will withdraw from the landmark accord.)

The financial markets and energy industry have focused on how supply and demand for oil and gas, as well as other forms of energy, may change in a low-carbon future. Indirect effects are important, but a perspective on companies’ direct exposure and risk is crucial, Law said.

“More countries are placing a price on carbon or  imposing carbon-related regulations,” Law said. “This increases cost. It has never been more important to understand the value at risk.”

Upstream operators are keen to understand the impact of climate policies “and the move to a low-carbon future could have on their portfolios...This study is our response.”

Bowe said the “most intriguing finding was that, on the whole, the risk is less than we expected.”

When assessing the regulatory risk, researchers found that most of the upstream emissions -- 64% -- were dispersed between countries with a medium-to-high risk of sector-specific carbon regulations.

“As a result, under a $40/metric ton carbon dioxide (CO2) cost, which we believe represents a realistic average, the value of companies’ upstream assets could be reduced by up to 7%, depending on the regulatory regime,” Bowe said.
“However, we expect this will actually be closer to 2% under the most likely fiscal and regulatory scenario. In this scenario, liquid asset costs would increase by about 80 cents/bbl on average, although the impact could be more than twice that for high-intensity operations.”

Under Wood Mackenzie’s “most likely scenario, total value at risk would be an estimated $45 billion. This is far less than many expect in terms of the direct impact of carbon costs on company portfolios.”

Wood Mackenzie also determined that asset mix influences a company’s emissions intensity. Portfolio emissions intensities range from 1.8 to 8.0 grams of CO2/megajoule of production, with the majors having the highest emissions intensity on average, but the least variation as a group, while the large caps are most diverse.

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