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The Sunday Times: Why oil giants still say it’s got to be gas

The Sunday Times

What seemed like the perfect route to a low-carbon world now looks like a risky bet, writes John Collingridge

What do the former Redcar steelworks on Teesside, a university in the Midlands and forests in the Scottish Highlands have in common? Answer: Big Oil is praying they hold the key to its future.

Strikes by schoolchildren, the rise of “flight-shaming” and an exodus of investors have left the energy industry reeling. Oil giants’ multibillion-pound bet — that gas will power the global economy into a low-carbon future — now looks risky.

As the mood changes, Big Oil is making increasingly ambitious — and desperate — attempts to clean itself up and reduce or trap carbon emissions. For giants including Shell, Total and BP, that means carbon capture and storage (CCS) at Redcar, promoting hydrogen as an alternative fuel, such as a pilot at Keele University — and even planting forests in Scotland.

The oil majors have staked huge sums on the dash for gas, hoping lower carbon emissions from burning natural gas instead of coal would make it the fuel for a lower-carbon future. Their argument was that using abundant reserves of gas — which emits about half the carbon dioxide of coal — would allow for a gradual shift to renewables.

Weaning the world off fossil fuels is a mammoth challenge. Shale gas allowed America to switch away from coal, but oil, coal and gas still make up about 80% of global consumption, with renewables, nuclear and hydroelectricity comprising the balance. Energy demand and carbon emissions continue to grow, up 2.9% and 2% respectively last year, driven by the surging economies of America and Asia. China accounted for about 28% of the world’s carbon emissions, versus 15% from America and 1.2% from the UK.

However, this transition is nowhere near fast enough for the Extinction Rebellion movement — or politicians of various shades. Earlier this year, then chancellor Philip Hammond demanded that no new home be built with a gas boiler from 2025. Labour’s party conference called for the UK to achieve net zero carbon emissions by 2030 — bringing forward the Conservatives’ target by two decades.

Suddenly, those huge gas bets are starting to look precarious. Earlier this month, Bob Dudley, the outgoing boss of BP, gave a stark warning: “Gas is being increasingly marginalised — even vilified and demonised,” he said. “Gas has a vital role to play in the energy transition . . . To exclude gas — when so much is at stake — is to take a huge and unnecessary risk.”

Dudley added that without gas, the industry was being forced into trying “to achieve the energy transition with one hand tied behind our back”.

Fear among investors is evident in the oil giants’ share prices. BP and Shell are both trading on dividend yields of more than 6%, versus about 3% at the turn of the century, showing that the market has doubts over their long-term valuations and ability to maintain shareholder payouts. Shell’s promise of huge buybacks and dividends has not been enough to reignite its share price. Some institutions are turning their backs indiscriminately on the big oil companies, despite the diverging strategies between Europe’s majors and those in America, where climate change appears to sit far lower down the agenda.

Last week, the European Investment Bank came close to banning support for natural gas projects, but delayed its decision at the last minute.

Solving the carbon dilemma is hideously complex. While oil companies have been investing in renewable technologies — BP, for example, is pumping millions of pounds into solar company Lightsource — it remains a tiny fraction of their spending. Less than 5% of BP’s annual capital expenditure goes on renewables. Shell, meanwhile, is adopting what it calls “nature-based solutions” — planting about 1m trees in Scotland to generate carbon credits that offset its emissions.

But cleaning up gas is their most pressing concern — and arguably one of the most problematic. Carbon capture and storage is nothing new as a concept. It involves trapping carbon dioxide at the point of combustion in sites such as steelworks and power stations, then piping it deep underground. Depleted gas and salt caverns in the North Sea are seen as ideal.

Making the process commercially viable is another matter. While there are successful international CCS projects, there have been numerous abortive schemes in the UK. The government’s spending watchdog found in 2017 that ministers had spent £168m on two failed CCS trials over the past two decades.

CCS is laden with risk. A sceptical public need to be convinced that the carbon dioxide will remain trapped underground. Critics worry that storing gas at high pressure could fracture rock layers, creating huge potential liabilities.

Despite these worries, the niche technology is being embraced with fervour. BP and Shell are among a group of oil giants wanting to build a gas power station at the Redcar site on Teesside, trapping the carbon beneath the North Sea. Sinead Lynch, Shell’s UK chairwoman, said: “Carbon capture and storage is a necessity, not an option. The UK’s net-zero legislation brings it into sharp focus.”

Hydrogen’s sudden rise to prominence is no coincidence either. Oil companies want to inject it into the gas network, mixing it with natural gas in concentrations of up to 20% as a fuel for boilers and cookers. In a project sponsored by gas pipeline giant Cadent, Keele University in the Midlands is using hydrogen and natural gas to heat the campus.

The allure is easy to understand. Hydrogen is the ultimate clean fuel: the only residue from burning it is water. It is produced either by cooking natural gas in steam, or by electrolysis. Getting hydrogen that is produced from natural gas into millions of homes could provide oil companies with a stable model for decades to come. But, again, the challenges are myriad.

Hydrogen can make metal brittle, which could force the wholesale replacement of gas pipes. Using it might require different domestic boilers — plus producing it is very expensive, and not without its own carbon emissions.

The cost of paying for carbon capture and hydrogen could land, at least partially, in taxpayers’ laps. Ministers are consulting on a law change that would see households pay upfront for CCS projects, before they have been built.

Simon Virley, UK head of energy and natural resources at consultancy KPMG, said neither CCS nor hydrogen were currently “cost competitive”. “The oil majors have to invest in CCS and hydrogen if they are to demonstrate an enduring role for gas in a low-carbon energy mix,” he said. “So governments will need to intervene through a mix of subsidy, carbon pricing and regulation.”

A hefty bill for taxpayers could make the challenge of convincing protesters and politicians even harder.

“Demonising gas is going to cost the world the obvious solution for reducing pollution quickly and keeping the world’s economy going,” said an energy adviser.

“There is a solution. It’s not perfect. But in the medical profession, if you have a pill that works pretty well and you refuse to use it, you would be struck off. [In the energy industry] that pill is gas.”

As the Extinction Rebellion clamour grows, the oil giants face an almighty battle to prove that gas is the answer.

Investors turn fossil fuels into dinosaurs

Bank of England governor Mark Carney sent shock waves through the City four years ago by warning that investors in fossil fuel companies faced “potentially huge” losses from vast reserves that could become “literally unburnable”.

That warning was prescient. The fossil fuel risk has created a huge dilemma for investors. Some, such as Norway’s $1.1 trillion (£854bn) sovereign wealth fund — itself a product of the country’s huge hydrocarbon reserves — are selling their stakes in oil and gas explorers to protect against falls in the oil price.

As of about a year ago, almost 1,000 institutions with $6.2 trillion in assets had committed to dump fossil fuels, according to the consultancy Arabella Advisors.

Waltham Forest council’s £842m pension fund became the first local authority scheme to ditch fossil fuels in 2016.

The London Pension Fund Authority has banned new investments in oil and gas, and New York’s pension fund — a $210bn giant — is considering divesting itself of fossil fuels.

Others argue that simply selling out of companies involved in fossil fuels is irresponsible as it deprives investors of the opportunity to influence boardrooms.

Sarasin & Partners, a £14.3bn investment fund, has been calling on other investors to vote against directors who do not act fast enough on climate change.

Guy Jubb, the former head of governance at Standard Life, said: “Many of these companies are in the process of transitioning from old oil-based energy to new sustainable energy.

“Rather than seeking to divest from companies engaged in fossil fuels and other things that are no longer deemed appropriate, there is an argument for positively investing in them and increasing your stake so you can influence these companies and put more pressure on them.”

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