The Crude Report: Net Zero ambitions

Author Argus

The ongoing UN Cop 26 climate summit in Glasgow and the actions that President Joe Biden's administration is taking to implement his ambitious energy transition agenda are of direct relevance for the US oil and gas industry — a net zero emissions pledge by the US and other countries would result in a significantly lower share for fossil fuels in the energy mix. But oil, gasoline and natural gas prices are at seven-year highs, giving Biden’s critics an opening to push back against his decarbonisation agenda.

In this episode of The Crude Report, Argus Air Daily editor Michael Ball, senior reporter Chris Knight and associate editor Haik Gugarats discuss potential outcomes of the climate summit on the US oil and gas industry and policies that Biden has presented to fulfil his net zero emissions goal for the US.

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Transcript

Haik Gugarats: Welcome to The Crude Report. My name is Haik Gugarats – I'm associate editor at Argus Media, and I'll be talking today with my colleagues, senior reporter Chris Knight, and Argus Air Daily editor Michael Ball.

Mike, the first week of COP26 is behind us. What are your key takeaways from the summit so far? Is it living up to expectations or fears from the US energy industry?

Michael Ball: Yeah, I'd say in some ways it's living up to expectations, at least in the sense that none of the early announcements we heard last week are really what I call surprises, at least from the US perspective. UK prime minister Boris Johnson, who is co-hosting the COP has, for months, called for the conference to result in action on what he calls, "Coal, cars, cash, and trees." And he got pledges on some of those last week, I think three, coal, cash, and trees, two of which the Biden administration offered direct support on financing for developing nations to address climate change and funding to help end global deforestation.

The US did join a group called The High Ambition Coalition pledging to end use of unabated coal-fired electricity, just meaning that it doesn't have carbon capture or some similar technology. It says, "Stop that use within line of preventing a more than 1.5 degrees Celsius rise in global temperatures." It also supported events to funding overseas coal projects, echoing a previous pledge made through the G7. So, not much of a surprise there.

Notably, the US did not join a group of countries that has pledged to outright end their use of coal-fired generation. And it also reiterated its pledge to cut methane emissions by 30% and convinced more countries to join those efforts. But these steps on coal and methane are already known or were expected heading into the COP. Biden has long called for a zero-emissions US grid by 2035, and that could include the use of coal or gas that has carbon capture or some similar technology.

And methane has been a focus of recent regulatory and legislative wrangling by Democrats in Congress. One other key part I would highlight for the first week for US companies is the COP's work on Article six of the Paris Climate Agreement. And this is gonna set the rules for international trading of carbon credits and offsets. A lot of US companies are getting into the voluntary carbon markets right now to help with their net-zero emissions pledges or other emissions reduction goals. And this is gonna affect how those markets will operate and potentially their ability to meet those goals.

Our colleagues in Glasgow covering the COP have reported that there is some optimism that the lingering issues around Article six, which have been unresolved for about, what, six years now, may finally cross the finish line this week. And one of the big issues there is the counting of the offsets, and that is who gets to claim credit for the emissions reductions to ensure there's no double counting. There are some countries that wanna be able to take credit for preserving, say, a rainforest, while selling the credit to another country or company that could also claim the emissions reductions. If some of those rules don't get resolved soon, at least at this COP, I think some US companies that are using offsets will face additional criticism of greenwashing or that sort of thing and will come under increasing pressure to reduce their own emissions directly, at least maybe until some of this stuff gets more resolved.

Haik: Thank you. And Chris, one of the new things that did come out last week was an EPA rule for cutting methane emissions from the oil and gas sector. Can you talk about what its main points are and what's the US industry's reaction so far?

Chris Knight: Yeah, so the Biden administration is going after methane with particular rigor. Because methane is a short-term climate pollutant, meaning it packs a larger punch over a shorter timeframe. So, if you get methane out of the atmosphere quicker, you're going to see a lot bigger effect than just going after a normal greenhouse gas like CO2.

So the EPA rule that came out last week would go after the potentially 300,000 or more existing oil and gas wells, and other oil and gas facilities in the US. And it's modeled after some rules that were developed in Colorado and other states. It would basically require industry to monitor for leaks regularly. It would require industry to replace devices called pneumatic controllers that basically, by design, leak natural gas into the atmosphere as a way to power them. There's other equipment that would require operators to replace.

But one of the wrinkles about going after methane from existing sources is that it uses a part of the Clean Air Act that hasn't been used that often. It's called Section 111(d) of the Clean Air Act. And this has a very long lead time. It gives a lot of role to states to implement it. And what it would say is that states have to follow a framework for implementing these emission cuts. And that could take anywhere from probably three to four years. So EPA itself doesn't project any major emission reductions until 2026. That is the long way of answering that the methane emission reductions would be big from this rule, but they could take some time and they could be subject to a lot of legal challenges.

One final wrinkle on the methane front is that, in a recent $1 trillion infrastructure bill that President Biden is supposed to sign in the coming days, they included $4.7 billion for going after oil and gas wells that have been abandoned by their owners. And so that would direct money to reduce some methane emissions in the near term.

And then as far as how the oil and gas industry is taking the proposed methane regulations, it's split right now. The larger producers are supportive of the methane regulation. And we heard from BP, they said they actually explicitly supported this regulation. Some of the smaller producers have been most concerned that these regulations could require them to close marginal and low-producing wells. As a sort of nod to that, the EPA said that the smallest types of wells could be exempted from this. Mostly they would need to do a one-time survey for leaks, but after that, they wouldn't have to do routine surveying of their facilities. So we'll see in the coming weeks how the oil industry reacts to these proposed rules. But overall, right now, it's been mostly supportive of the idea of regulating methane.

Haik: Mike, one of the recent developments is the Supreme Court decided to hear a challenge to EPA's authority to regulate greenhouse gases from stationary sources. Is it expected to affect Biden's regulatory agenda?

Michael: Absolutely. I mean, with the Democrats having to drop what was called the clean electricity payment program from the budget reconciliation bill, and that was a measure that would have tried to cut power sector emissions by about 80% over the next decade, by basically paying utilities to use more zero, low-emission sources. The administration is gonna have to rely more heavily on its regulatory powers if it wants to achieve that same goal, it seems. And so this case could have a lot of effect on that.

The case at its core deals with the EPA's authority under that same Section 111(d) that Chris just mentioned, which deals with the regulating of existing stationary sources. So technically power plants, and refineries, and so forth. But this case, at the moment, just deals with the power plant emissions. But it could go beyond that.

You've got 20 states and a few coal companies that say EPA's authority under this part of the law, as it relates to power plants, is either extremely limited or nonexistent. And what they're trying to do is head off a new regulation similar to the Clean Power Plan that EPA created under President Obama, which was later repealed by the Trump EPA and replaced with a less aggressive program called the Affordable Clean Energy Rule. And what these states and companies are doing is appealing a DC circuit court of appeals decision from earlier this year that overturned the Trump rule and said EPA actually has fairly broad authority when it comes to power plants. And that seemed to open the door to maybe another Clean Power Plan type of regulation.

And so, you know, if this case sticks to those issues as it relates to power plants, it may not affect EPA's authority much beyond that sector. But, within the case, there's also this question that has been raised about whether EPA has the authority to issue rules of vast economic and political significance without a specific nod from Congress. And that could really blow up the sort of scope and reach of this case quite a bit, depending on what the court decides to do.

I mean, I'm not a lawyer, so it's probably best to leave some of the predictions up to them. But I do think the fact that the court took this case is probably a bad omen to some degree for EPA. It hasn't even proposed any regulation yet and we've got the court taking up this case. But the agency has promised to do something and issue a rule that accounts for all the legal fighting that has taken place for over the past five or six years. So we may see something on that in the near future.

Clearly, a lot will depend on how the court rules. If the six-three conservative majority decides to go big, that could spell trouble for the Biden agenda. Because you could have a decision that goes well beyond just the power plant authority. But I know there's also some creative lawyers out there and many groups have been pushing for EPA action under other parts of the Clean Air Act besides 111(d), so, this may not be the end of things.

Chris: And if I could just interject here to talk about how this relates to the oil and gas rule. One of the reasons you might be optimistic the oil and gas rule could survive, whereas EPA's authority to go after power plants might be more limited, is that, with the oil and gas sector, this is a very cut and dry EPA rule. With the power sector regulation, it's a complicated structure, it resembled cap and trade under previous iterations. Whereas with the oil and gas sector, this is telling companies they need to reduce their emissions. It's telling companies, they need to monitor for emissions. That's kind of the bread and butter of the Clean Air Act.

The only novel aspects of it is that it would use this other section of the Clean Air Act that hasn't had much testing so far.

One thing to add to this is that one of the reasons that Democrats have been thinking about using the budget law they're considering to go after methane, and specifically adding a $1,500 per metric ton methane fee, is because of all this legal uncertainty. Democrats are worried that methane regulations could be caught up in court for years and that oil and gas companies would not have really a huge incentive in the near term to reduce those emissions without some more prodding. So, if they go forward with this $1,500 per metric ton fee, that gives them some near-term reductions. Under some of the earlier drafts we've seen, that methane fee would start to apply as early as 2023. So that would happen even if the Supreme Court invalidates EPA's authority to go after methane from oil and gas companies.

Haik: Chris, there was a bit of a dissonance in President Biden's messaging in Glasgow. So, on one hand, his administration is working with other countries on an energy transition that would scale back fossil fuel production in the long run. At the same time the President is asking Opec to pump more oil now. How's the White House clearing the circle on those competing short-term, long-term goals?

Chris: So the Biden administration's perspective is pretty similar to a lot of recent Democratic presidents, including President Obama. The idea they have is that, while the world should be transitioning away from fossil fuels and moving toward renewable energy and electric vehicles, we live in a world we live in right now.

And there's no benefit to having the public suffering with really high prices for energy. If you're a middle-income worker in Pennsylvania, you can't switch to renewable energy overnight. Even the wealthiest people in the world can't switch very quickly or very easily. So they see high energy prices as basically just a tax on the middle class.

And so their philosophy is that in the near term, they'd like to see stable markets. They'd like to see prices remain affordable. And one of their big concerns is that if prices spike up, people would say, "Well, the transition to green energy is not so great. It's costing me a lot when I fill my gas tank. It's costing me a lot to heat my house." And so this person might say, "I don't want to do any sort of green transition." Over the long term, they're still committed toward the COP26 goals.

They're still committed toward transitioning to a net-zero electric grid by, I believe, 2035. But they say that's gonna take time.

A lot of the policy lovers, they have all the clean energy tax credits that are in this large budget bill. Those ones start to take effect or have an influence on the energy sector for either one or two years, or even longer. So their idea is that, in the short-term, pump more, in the long-term, they wanna use these incentives and policy mechanisms to transition the US and the world toward renewables and away from fossil fuels.

Chris: Haik, I'm curious, how is this dual message being perceived in Saudi Arabia and other major oil producers? Do they see the irony to Biden's kind of conflicting messages?

Haik: Yes. One part of the message, on net-zero emissions and the energy transition, is actually quite well accepted. And Saudi Arabia just a couple of weeks ago unveiled its own plans to reach the net-zero emissions goal by 2060. The UAE has set 2050 as its target. Their programs are quite detailed. In Saudi Arabia's case, the interesting thing is it still sees itself as producing oil, there is a role for oil in their net emissions goals. And their energy minister says that it's something that other countries, including the US, can actually take as a role model. That's a direct quote. So that net emissions part is accepted.

However, on Biden's request to produce more oil now, that part of the message actually seems to have fallen on deaf ears, at least for now. Opec+ at its early November meeting decided to stick to its original plan to increase production, as was decided earlier in the year by an additional 400,000 b/d, every month. The White House has been asking to produce more. But the question here is, there are actually few Opec countries that have spare capacity. And really, it's Saudi Arabia, Iraq, Kuwait, and the UAE. And they just don't see the demand increasing as fast as the US says it is increasing. There is a lot of uncertainty that is being cited by the producers’ alliance. And so they just are taking things a lot easier than the White House would like them to do. So, we will see how effective the White House diplomacy will be in the coming weeks and months.

And with that, we have come to the end of this podcast. You can find our stories and more in-depth coverage of politics, and policy, and geopolitical news, and insights as it specifically relates to oil and emission markets in Argus Air Daily, Argus Americas Crude and Petroleum Argus. You can find out more information on all other services at www.argusmedia.com. And we have also established a special news hub for the COP26 Climate Summit. Thanks for tuning in and we hope you'll join us on the next episode of The Crude Report.

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