Doha, December 2021
COP26: Pressure Mounts on Oil and Gas Producers
COP26 means a lot more scrutiny for oil and gas producers, adding momentum to their growing focus on measuring and preventing greenhouse gas emissions from production and transportation.
While there was no global agreement to control the use or production of oil and gas, the UN Conference of the Parties (COP26) in Glasgow in early November increased the pressure on producers to address greenhouse gas emissions. For a start, there was no trace of the climate scepticism that went with previous conferences, and there was little disagreement about the end goal of full decarbonisation, or at least carbon neutrality.
In the run up to the event, many more countries added their names to those already signed up to net zero by 2050 or 2060 (2070 for India). There was also progress on methane emissions (see below), sustainable finance, electric vehicles, reduced coal use, marine transport, and transition aid to developing countries. However, it is unlikely the commitments will avoid a rise in global temperatures of more than 1.5 degrees Celsius, so delegates have agreed to revise their plans annually.
Those pushing for swifter action, mostly from the richer, developed world, faced push-back from some developing countries. India and China ensured the final text called for the “phasing down,” rather than “phasing out” of unabated coal power. And South Africa and Nigeria, which are heavily dependent on coal and oil, led a group that blocked the dropping of fossil fuel subsidies. The International Energy Agency (IEA) estimates fossil subsidies amounted to $180 billion globally in 2020, but these include some worthy cases, such as cut-price LPG in India - which alleviates fuel poverty, biomass pollution and deforestation.
The event also saw the official launch of the Beyond Oil and Gas Alliance, led by Denmark and Costa Rica, which aims to phase out oil and gas completely. The initiative was joined by France, Greenland, Ireland, Sweden, Wales, and the Canadian province of Quebec, and adds to pressure on producers. California and New Zealand signed on as associate members, committing to taking “concrete steps’’ to reduce oil and gas production.
Gas Gets Off Lightly
COP26 was fairly easy on gas/LNG, which was seen by many as a key transition fuel and flexible compliment to renewables. It was noted that relatively cheap gas in the US and UK had helped with much of the decarbonisation progress there so far. However, the sustainable finance deals may mean some gas projects struggle to secure funding, and some countries Nationally Determined Contributions may restrict gas development. In addition, there were some important deals that affect gas more than other fossil fuels. Top among these was the Global methane pledge (GMP), which over 100 countries – including the US, China, and the EU - signed. Methane is a powerful greenhouse gas with an impact 84 times that of CO2 in the first 20 years of its life in the atmosphere (it dissipates after 80 years). It is responsible for about 0.4 degrees of global temperature rise to date, and tackling it is perhaps the most immediate way of limiting global warming. The oil and gas sector is responsible for about 30% of man-made methane emissions and under the GMP will have to cut that by at least 30% by 2030 – although this is still not enough to cap global warming at 1.5 degrees, which the IEA says requires a cut of at least 45%.
The full list of participants includes Argentina, Canada, Ghana, Indonesia, Iraq, Italy, Nigeria, Pakistan, Mexico, and the UK. Countries that have not signed are mostly big gas producers such as Qatar, Russia, Turkmenistan, UAE, and Saudi Arabia, but also India. However, Qatar Energy has set a 2030 methane intensity target of 0.2%, which may be enough for Qatar to qualify.
The US and EU estimate that if all countries cut methane emissions in line with their pledge over the next decade, it could reduce warming by at least 0.2 degrees by 2050. More significant reductions would take place after 2030. But, as with CO2 abatement, some of the signatories are likely to need support to implement the GMP goals.
There was also pressure on gas from those in the marine transport sector that are keen to skip LNG development and accelerate a switch to even lower or zero carbon fuels such as green hydrogen, ammonia, or methanol. A number of countries adopted the Clydebank Declaration, which will develop green shipping corridors by 2025. And companies including Amazon, Ikea and Unilever committed to using only zero-carbon freight from 2040. The International Maritime Organisation is currently targeting a 50% cut in greenhouse gas emissions from the global fleet by 2050 compared with 2008 levels, following a 40% reduction in carbon intensity by 2030, but there is growing industry and political pressure to raise the 50% goal to 100%.
LNG’s Greenhouse Gas Emissions
With gas facing no direct constraints from COP26 and if anything bolstered as a transition fuel, the focus has moved to reducing or offsetting emissions from production, transportation and even combustion – to make carbon-neutral gas and LNG. Only a few tens of LNG cargoes have been declared carbon neutral to date, but the number is expected to grow quickly in the wake of COP26.
Progress is being made in a number of areas. For example, alongside COP26, Qatar Energy, Chevron and Singapore's Pavilion Energy announced the development of a method to calculate GHG emissions for LNG cargoes from wellhead-to-discharge terminal. Qatar Energy plans to reduce the carbon intensity of LNG facilities by 25% by 2030 and reach net zero emissions from routine flaring during production. The three companies say their methodology is expected to enhance transparency and improve the accuracy of emission calculations.
The International Group of Liquefied Natural Gas Importers (GIIGNL) has come up with a similar system that includes emissions from combustion as well1. Under its rules a carbon neutral shipment must provide clear, transparent data and attempt to reduce emissions from production and transportation. Any remaining emissions - including scope 3 emissions when the customer consumes the fuel - have to be offset with carbon credits. However, many environmentalists are sceptical about the use of such credits. At the conference, campaigner Greta Thunberg was particularly dismissive of carbon offsets, describing them as "greenwash”.
Voluntary carbon offsets could also become much more expensive. Calls in the months running up to COP26 for greater scrutiny over their quality have already raised prices sharply this year, making it far more costly to implement neutrality pledges – as demand rises, prices are likely to rise further given the limited supply of nature based and some other types of offsets.
LNG Market Growth
China and India are key growing markets for LNG, and this may be enhanced following their commitment to “phase down” coal. In India, the central government is now firmly targeting a 15% share for gas in India’s overall energy mix by 2030 – although in power generation this is likely to be conditional on competitive prices. In transport, the Indian government has identified 1,000 locations across India to set up LNG outlets in the next three years.
And while Nigeria has adopted a net-zero-by-2060 target, it has also been stressing the role of gas, and remains concerned about some of the pledges to curb finance to gas projects made at COP26. Nigeria says it will continue to rely heavily on gas for energy stability until at least 2040 without exceeding its allocation of emissions.
While the agreements at COP26 may still not be enough to limit warming to 1.5 degrees, delegates have agreed to meet annually to try and get closer. This means tighter rules are now a possibility each year, especially if the world continues to experience increasingly frequent extreme weather events.