Carbon-accounted crude trades poised to gain traction as focus on emissions grows

Crude oil trading is set to undergo a major shift as the fossil fuel industry increasingly looks to offset its carbon emissions while navigating energy transition.

The spot market for trading carbon-accounted crude -- including carbon credits and measuring the carbon intensity of the oil -- is on the rise with S&P Global Platts launching a Market on Close assessment process for these transactions, similar to the window used to assess the Platts Dated Brent price benchmark.

The new assessment process for carbon-accounted crude introduced by Platts is already gaining traction after Occidental Petroleum received approval on Nov. 2 to enter the process, paving the way for more liquidity and transparency in these markets.

"It does represent a new stage in transparency but also really in having truly robust standards around what these terms mean in the market," said Jonty Rushforth, senior director of markets & energy transition at Platts.

These transactions could become more popular as more energy companies commit to net-zero targets and may offer a way for crude to stay environmentally relevant as global leaders meet at the UN Climate Change Conference in Glasgow to thrash out targets for reducing emissions.

Market transparency

More oil companies and trading arms have been in contact with Platts to enter this market. Rushforth said Occidental was the first example of "a market participant stating that they intend to pursue transparency in this space."

Platts has an MOC process for a wide variety of crude oil and refined products markets worldwide, including Dated Brent, assessed on the basis of activity seen in the daily North Sea crude MOC.

Companies wishing to bid, or offer, a cargo in the Platts MOC for carbon-accounted crude, will need to show that emissions associated with these liquids have been independently verified by a third party. Also, any trade incorporating offsetting through carbon credits, will need these credits to be of a sufficient quality.

"It addresses questions people have had around on how do you really know that the claims included in this trade are defensible," added Rushforth. "Well, you need verification and quality of credits for that, so that is what this answers."

Platts recently published its methodology and standards for its MOC assessment process covering carbon-accounted crude.

Carbon Accounting is a process used to measure the volume of greenhouse gases emitted by a particular entity or process over a particular period of time.

This follows, Occidental Petroleum's move in January this year when it delivered 2 million barrels of "carbon-neutral oil" to Reliance Industries in India. The US company said it was the energy industry's first major petroleum shipment in which greenhouse gas, or GHG, emissions associated with the entire crude lifecycle, from wellhead to combustion, were offset.

In April, Norway's Lundin sold 600,000 barrels of "certified carbon neutral" crude to Mediterranean refiner Saras, covering "life of field" emissions, and not combustion.

Carbon intensity

These trades will also focus on the carbon intensity of the crudes in question.

From October, Platts began publishing monthly carbon intensity calculations and daily carbon offset premiums for 14 major crude fields.

Carbon intensity as an attribute of the crude, is being viewed similar to the way the market looks at sulfur. The higher the carbon intensity of a crude, the lower will be its value, as this oil is crude produced at a relatively high rate of emissions.

These new assessments help producers, investors and shareholders better understand the emissions associated with producing different grades.

The Nov. 3 Platts Carbon Intensity Premium assessment for the Saudi Arabian giant Ghawar field was 24 cents/boe. In contrast, the CI Premium of Canadian oil field Cold Lake Blend, which produces an a very heavy blend, was assessed at $1.12/boe on Nov. 3.

According to the US Environmental Protection Agency, 2 million barrels of crude is equivalent to about 860,000 mt of CO2 emissions.

CO2 emissions per barrel of crude oil are determined by multiplying heat content times the carbon coefficient times the fraction oxidized times the ratio of the molecular weight of CO2 to that of carbon, according to the EPA.

Platts also began publishing daily assessments reflecting the Carbon Offsetting and Reduction Scheme for International Aviation, or CORSIA, carbon credit market, called Platts CEC, or Jan. 4.

The Platts CEC was assessed at $7.15/mtCO2e on Nov. 2.

The Platts CEC assessment reflects the most competitive CORSIA-eligible credit within the voluntary carbon credit market, and continues to be set by renewable energy credits, 2016 vintage, from larger-scale projects in India, China and Turkey.