20 Jan Applying Digital to the EU Green Deal
The European Union has announced a sweeping Green Deal with far-reaching implications for oil and gas. Here’s my assessment of its impacts on the industry.
EU Green Deal
The EU Green Deal was announced to much fanfare in December 2019, and contains a sweeping agenda to green up the continent by 2050. By green up, I mean zero emissions, or carbon neutral, and the Deal would appear to have broad support — 93% of Europeans see climate change as a serious concern.
The Deal sets out 5 transformative goals:
- to sign into law a binding requirement for member nations to act on climate change and to spur investment
- to decarbonise the energy sector
- to renovate buildings to reduce their energy use and costs
- to help European businesses become world leaders in the green economy
- to implement cleaner, cheaper and healthier forms of private and public transportation
While the Deal highlights these key areas where policies will be developed to achieve carbon neutrality, fossil fuels are so essential to western life that any new policies will have spillover impacts on the sector. It’s likely that the EU will require its member nations to tabulate the carbon emissions in the entire supply chain, not just those that occur on European soil, lest its economy craftily shifts its carbon footprint off the continent, which would defeat the purpose of the policies.
No more farting around, it would seem. No more foot dragging. No more excuses. And it explains why European oil champions such as Shell and Repsol have already announced their own goals to transform their carbon footprints.
The details of the Law are not finalized, but the intent is clear. EU member nations will become legally bound to achieve the 2050 target. What the EU members will do is bring into force the rules to achieve the outcomes that they need to be legally compliant. In practice, for example, to obtain a permit, a new business venture will need to demonstrate how its activities will not negatively impact the national target. National industrial policy will need to incorporate carbon neutrality as a key feature. State owned companies, national funding agencies, and sovereign wealth funds, will quickly invest accordingly so as to demonstrate progress.
I would expect EU businesses to be compelled to state in their circulars how they intend to become compliant with the Law. Importers will come under scrutiny to demonstrate that they are not simply exporting their carbon business model overseas beyond the reach of the Law.
By implication, companies that sell into an EU supply chain (car parts, electronics, foodstuffs), are going to be pressed into accounting for their carbon emissions, and into reducing their carbon footprints.
The production and consumption of energy accounts for fully 75% of the EU’s carbon emissions, so the energy industry is going to get the lion’s share of the pressure to change.
Specific goals outlined in the Deal include:
- Achieve 50% reduction in GHG from a baseline in 1990 by 2030, and carbon neutrality by 2050
- Connecting up grids to better utilize renewable energy sources
- Boost energy efficiency
- Decarbonise the gas sector
- Develop the offshore wind sector
No new investment
The adoption of the Deal likely spells the end of new greenfield long life fossil fuel asset builds in Europe. Three decades seems like a long time, but not in the land of oil and gas, where horizons are often measured in decades. For example, to build a new LNG export plant typically takes 5-7 years (except in Canada, who aim to be world leaders in prolonged approval cycles), and such facilities are expected to be operational for at least 20 years, and ideally longer.
Environmentalists now know that a few years’ determined delays will be all that’s needed to kill off new projects. Investments in new coal, oil and gas reserves will need to formally address the potential for those assets to become stranded. Any existing reserves on the books that cannot be brought to market promptly may need to be written down.
To stay in business, fossil fuel energy companies will need to become carbon competitive with their zero carbon peers (the sun and the wind), which means achieving net zero emissions. Existing fossil fuel energy businesses (coal power, gas power plants) will need to wind down, convert to some other purpose such as renewable power generation, or find relevant offsets such as carbon capture and storage, or plant trees as carbon sinks. Companies will need strategies to progressively transition, or face extinction.
I don’t think the Deal spells the end of the oil and gas industry. There’s still a need for plastics, and some transportation fuels (jet fuel) have no alternatives yet. But the pressure to change is suddenly very and legally real.
The Deal sets out a specific goal to develop a true circular economy, to address the stress that industry overall imposes on water resources, industry’s high emissions footprint, and shortcomings of the recycling industry.
Products that are harmful, do not allow for reuse or repair, or recycling, will be kept out of the market. Companies will need to offer proof of any green claims.
Key industries that will be targeted include steel making, cement, textiles, construction, electronics and plastics. Of these, the oil and gas industry is a big buyer of steel and cement, a consumer of construction services, and the source of virtually all virgin plastic. Oil and gas is also a major producer and consumer of water (steam generation, fracking, reservoir stimulation, drilling fluids). The Deal will force reusable and recyclable packaging by 2030, putting downward pressure on virgin plastic demand. New business models based on the sharing economy (goods and services for rent) will be expected to play a role in all industries, including oil and gas.
Impact on Oil and Gas
As the cement industry confronts its dual carbon problem (it consumes fossil fuel for heat to create cement, and the cement manufacturing process releases additional GHGs), I can see replacement cement products emerging. Oil and gas will need to stay in lock step with the cement industry so that new low-carbon cement products also meet the facilities standards of oil and gas.
The drive to create the circular economy for plastics will both impact the demand for virgin plastics, as well as the demand for plastics better suited to recycling. Industry will be compelled to find better methods of recycling plastic. No matter how you look at it, the demand for plastic raw materials is now much more uncertain as it is dependent on these unknowns.
The construction industry is one of the more laggardly in adopting change, but the Deal now creates the conditions for the European construction sector to take a lead in transforming for a green future. Others will be left behind.
Implications for Digital
The EU, its member states, and companies operating in the EU need to rethink their supply chains, and not just for products, but inputs, byproducts and emissions. Today’s oil and gas practices are not up to the task of this kind of detailed monitoring and compliance.
Expect digital solutions to emerge in such areas as:
- Water tracking and monitoring to substantiate water usage
- Air emissions tracking and monitoring to measure GHGs
- Energy consumption monitoring and optimization
- Full lifecycle plastics tracking
- Shared assets and new business models
- Supply input tracking and tracing to provide evidence of green credentials
The Deal wants to achieve a 90% reduction in GHG from transportation by 2050. Road transport is 72% of GHGs, aviation and shipping are 27%, and rail about 1%. Big changes are coming to road transportation and specifically personal transportation. Rail transportation will likely increase.
Interestingly, the Deal does not specifically encourage Europeans to drive less, but a few of the tactics look to achieve that outcome.
Here are some of the proposed tactics:
- Impose much tougher vehicle pollution standards. Tougher standards motivates the auto industry to shift to electric drive trains (a shift that is already underway), and removes the option for consumers to opt out of EVs.
- Bring an end to subsidies for transport fuels. Subsidized fuels encourage trucking instead of rail and water trade. Presumably a few markets are still subsidizing fuel for their citizens, though you wouldn’t know it from the pump prices in the major European cities.
- Change road pricing. Low tolls encourage road use. By ramping up tolls, the EU hopes to push more rail and water trade over trucking. Tolls also make some road trips more costly than rail travel, and so encourage more use of public transit.
- Overhaul the vehicle refueling landscape. The Deal anticipates the need for an additional 1m public charge stations to enable dramatically more electric vehicles. Today’s fuel business will need to react and quickly, likely by adding charge stations and refueling infrastructure for new cleaner fuels (hydrogen).
The Impacts on Oil and Gas
Clearly the goal of the Deal is to target the 99% of the transportation sector that is fueled by petroleum and convert it to something else, presumably not petroleum. But assuming 50% of the refining capacity in Europe produces transportation fuels (which is admittedly a thuggish average), the implications on oil refinery infrastructure are severe — bluntly, half of the oil refineries in Europe are surplus to need. The problem is that it’s half of each refinery since a barrel of crude oil naturally produces a share of diesel, gasoline and kerosene. It would take a lot of investment in kit capable of reformulating all these unwanted products into feedstock for plastics and lubricants, if there was a market, and if the investment would pay off (see earlier point about plastics).
Implications for Digital Oil and Gas
I anticipate several new avenues of investment in digital to help oil and gas through the transition.
- Refining infrastructure optimisation. The industry will need new models for oil and gas that anticipate shrinking, not growing, demand.
- Mobility as a Service. The Green Deal sees the opportunity to create new businesses based on mobility as a service. A good example is the Whim service in Finland.
- Smart mobility. Today’s vehicles are better than ever at avoiding accidents and staying in their lanes, but have yet to communicate in a sophisticated way to avoid traffic congestion, or optimize overall traffic volumes.
I’ve barely completed a cursory review of the EU Green Deal, but it is clear that the energy industry is headed towards government mandated transformation, and the opportunities for digital innovators to support the transformation are very robust.
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