Guest Post: How Can Oil & Gas Transition to Carbon Negativity Using Alternative Finance?
By: Namita Vikas, Founder and Managing Director, auctusESG
Despite the fact that 90% of global emissions are now accounted for by net-zero targets post COP 26, global GHG emissions in 2030 are likely to be twice as high than that required to limit global temperature rise to 1.5°C. According to the IEA, global energy-related emissions reached 36.3 billion tonnes in 2021, the highest level recorded, out of which 18.2 billion tonnes were contributed by oil and gas (O&G).
Investors, financiers, financial institutions and O&G giants are growing increasingly cognisant of the impact of climate change. The Glasgow Financial Alliance for Net-Zero (GFANZ) brings together US $130 trillion of private capital for a net-zero transition by 2050 through asset managers, asset owners and financial services providers, including JP Morgan Chase & Co, the number one arranger of bonds for fossil-fuel companies. While such strategies demonstrate an industry-wide commitment to emissions reduction and net-zero transition, the reality seems to be different. Global oil consumption is expected to surpass 100 million barrels per day in the third quarter of 2022, in spite of an energy crisis resulting from the Russia-Ukraine conflict. Therefore, the emissions from the O&G sector are on a trajectory to rise if current operations do not involve climate action and financing for energy transition, which are already inadequate.
In this context, a need arises to examine whether carbon negativity is a better approach to help the O&G sector with its climate-friendly transition. It is especially needed as according to the UNEP’s Production Gap report, in 2030, governments’ production plans would result in 57% more oil and 71% more gas than is necessary to limit global temperature rise to 1.5°C. With the intensification of climate effects, everything under the gamut of carbon neutrality – financing, projects, policies – needs to align with carbon negativity.
Carbon negativity refers to greater sequestration of carbon as compared to carbon emissions released. Essentially, by sequestering more carbon than current emissions, carbon negativity goes beyond carbon neutrality. Carbon negativity for O&G warrants a phase-out of oil and gas production, exploration, and extraction, along with usage of carbon negative technologies like Carbon Capture, Utilisation, and Storage (CCUS) and alternative energy sources. Concerted and direct financing of these technologies is a crucial denominator underlining the carbon negative transition.
What can be done?
The IEA’s Net Zero Emissions by 2050 Scenario suggests supporting the development of alternative energy sources like green hydrogen and bioenergy, carbon capture utilization and storage (CCUS) technologies, etc. Green hydrogen has the capacity to reduce emissions of industry, aviation, and shipping. Bioenergy, another alternative energy source, has emerged as a major opportunity in low-carbon markets. Technologies like CCUS have also been mobilised for net-zero transitions. It involves capturing CO2 from carbon-intensive sources, like power grids or industries that use fossil fuels, and transporting it for reuse or to be permanently stored in geological formations. To achieve carbon negativity, these priorities need to be scaled up effectively and rapidly through increased capital allocation to each.
Private capital needs to be incentivised earnestly if we are to practise innovation and uptake of carbon negative sources and technologies. However, there are high risks involved in these scenarios, owing to their nascence and security concerns. CCUS projects, for instance, include high-risks relating to storage liability, cross-chains, revenue, leakages, and the like. Leak detection and prevention technologies, security technologies, measurement tools, etc. are fundamental to reconcile the limitations of CCUS, which private capital can sponsor.
The following solutions can bridge the gap between needful climate action and investor action:
An imperative aspect of pursuing carbon negativity is research and innovation. Since hydrogen, bioenergy and CCUS are still undergoing major developments, grants from governments or development funds are an effort to improve risk-sharing with project proponents to accelerate decarbonisation innovation. Steady developments have taken place in this aspect. For example, the grant of €88 million implemented by the EU Innovation Fund in 2021 to build upon Neste’s green hydrogen capacity, in order to decarbonise production at its refinery. In another instance, the Quebec government directed 5.9 million CAD to develop an advanced biofuels production project partly managed by Neste. Such grants solidify the establishment of carbon negative practices, subsequently assuring and attracting private capital investments.
Transition finance aims to help high-carbon sectors like O&G effectively transition to low-carbon emissions, with the possibility of carbon negativity in the long-term. With transition finance, O&G not only has ways to finance its decarbonisation journey but can also prevent asset-fleeing and protect itself from risks like increasing regulations and policies. Transition bonds have already had impactful issuances. For example, in March 2021, British gas utility, Cadent priced and agreed its second issuance of its transition bond to decarbonise its business activities and operations, and upgrade its infrastructure. ESG linked use-of-proceeds revenue bonds might also enable private capital to bridge the funding gap as they facilitate balance sheet relief.
Blended finance, which is the use of catalytic capital from various sources to finance essential sustainable development projects, holds immense potential to attract private investors towards O&G, by de-risking the sector. Large international microfinance institutions, bilateral funding agencies and international philanthropic foundations often participate in blended structures, along with government capital. The shared responsibility of funding serves to decrease credit risk for private investors, thereby scaling up private investments in emerging technologies. The Net Zero Teesside CCUS project, led by a consortium of O&G giants bp, Equinor, Eni, Shell, and Total, and initially funded by OGCI Climate Investments, aims to capture up to 10 million tonnes of CO2 annually. It received public and private funding last year under the Industrial Strategy Challenge Fund (ISCF), thereby de-risking and paving the way for private investment.
While these developments are a step towards carbon neutrality, they are contingent upon geopolitics, diplomacy, and scaling up of accessible energy for energy deficit nations. There is no one-size-fits-all as nations gear up to tackle GHG emissions in the deciding years to 2030. Financing a carbon negative transition in O&G stands to be a well-rounded approach to reducing overall GHG emissions, and therefore, needs to be focused upon.
About the author:
Namita Vikas, Founder and Managing Director of auctusESG, is a senior business leader with 30 years of diverse global experience in climate strategy and sustainability across sectors including banking, technology and FMCG, with a particular focus on sustainable, climate and green finance, climate action, ESG & Climate Risk Management.
auctusESG LLP is a global advisory and enabling firm, which provides specialized advice at the intersection of finance, investments, and sustainability. With a goal to accelerate global sustainable finance and climate transition, the firm works with asset owners, asset managers, companies, banking associations, governments, multilateral and bilateral agencies, and academia, to design and develop sustainable finance products, climate strategy, ESG and climate risk integration, and knowledge and innovation products on thematic areas. Find out more about auctusESG here.