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Middle East is a mixed bag as investors weigh oil's role in climate change


Carbon intensity will influence future investment

Lower CI may translate to higher crude price

Iraq's potential won't be overlooked

  • Author
  • Claudia Carpenter
  • Editor
  • Pritish Raj
  • Commodity
  • Coal Electric Power Natural Gas Oil Petrochemicals
  • Topic
  • Environment and Sustainability

With investors increasingly concerned about climate change, OPEC kingpin Saudi Arabia is promoting its crude oil reserves as some of the world's least polluting hydrocarbons.

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Several of its Middle East neighbors, such as Iran, Oman and Iraq, however, aren't able to make such a claim.

Taking into account life-cycle carbon emissions from pumping crude out of the ground to processing it in a refinery, Saudi Arabia's oil has one of the lowest carbon intensity, or CI, ratings among major global producers, largely due to its easy to access reserves and low flaring of associated gas.

Its CI of 4.6 g/MJ of CO2 equivalent, according to data from Stanford University, compares favorably to Iran's CI of 21.38, Oman's 13.84 and Iraq's 13.72.

That could advantage state-controlled oil giant Saudi Aramco, experts say, as investors look to reduce the carbon intensity of their portfolios and emphasize the environmental, social and governance performance of their companies.

A lower-carbon producer will have an easier time drawing outside investment, said Pete Compton, a senior consultant at S&P Global Platts Analytics.

"The market will likely begin to see carbon intensity as an attribute of the crude being traded," Compton said. "All else equal, carbon intensity becomes a value differentiator among crudes. Buyers will increasingly be willing to pay a higher price for a low carbon intensity crude, and vice versa."

High CI upstream projects risk reduced viability and possibly stranded or underutilized assets, Compton said, while operators in low CI fields and buyers and sellers of low CI grades have the opportunity to further monetize their assets, particularly if the market evolves to fix a price on carbon.

"All this is on the backdrop of long-term slowed growth in global oil demand, so competition among producers will become greater as it is," Compton said.

However, with oil still projected to make up for a significant portion of future energy consumption in the decades ahead, high CI oil fields may still have some life yet.

Alice Gower, director of geopolitics and security at consultancy Azure Strategy, said investors will also have to weigh more immediate returns on their capital when deciding which projects to support.

"There is an element of practicality that needs to be considered," Gower said. "The potential of countries such as Iraq will not be overlooked because of this issue, and while Saudi Arabia will use its low carbon status as an effective PR strategy, the fact remains that investors are interested because of the profit margins and volumes in question."

Saudi Aramco, which puts its production capacity at 12.5 million b/d and pumps about 10% of the world's crude supply, says its climate change strategy aims to grow its business using technology and innovation to lower its climate impact.

"The company is researching ways to reduce emissions through technology, such as making engines more efficient, better fuel formulations, carbon capture and sequestration and turning CO2 and hydrocarbons into useful products," Aramco said in a statement to Platts. It's investing in new energies, such as blue ammonia, it added.

ADNOC Carbon Intensity

Fellow Gulf producer UAE also has a relatively low CI, coming in at 7.32 g/MJ of CO2 equivalent, according to the Stanford University data.

Abu Dhabi National Oil Co., the UAE's biggest energy producer that pumps some 3 million b/d of crude, has long maintained a "zero intentional flaring" policy, which it said has reduced its volume of associated gas flaring by more than 90% since its founding in 1971.

"Our carbon intensity profile has reflected favorably in engagement with prospective investors and supports our position as a driver of responsible and sustained value creation for the UAE and partner of choice for some of the world's foremost institutional investors," ADNOC said in a statement to Platts.

Iran and Iraq, meanwhile, suffer in their CI ratings because of their large volumes of gas flaring.

Oman's CI is high because its crude production relies heavily on enhanced oil recovery, which includes energy intensive steam flooding.

Flaring is one of, if not, the biggest drivers in carbon intensity of crude oil production, along with the gravity of the crude itself, Platts Analytics' Compton said.

Iraq is the world's second highest flaring nation after Russia, according a World Bank study published July 21.

Iraq currently captures 1.5 Bcf/d of associated gas and wants to boost that figure to 2.7 Bcf/d by the end of 2023, deputy oil ministry Hamed al-Zobai said in a statement in October.

Iran burned some 16 Bcm (565 Bcf) of associated gas in 2019, according to the World Bank, though state-owned National Iranian Oil Co. reported in June that it had cut this amount by 25%.

On a per capita basis, the Middle East has some of the highest emitters of CO2, and it's the only region in the world where energy intensity has worsened, according to Carole Nakhle, founder and CEO of consultancy Crystol Energy.

"Just because the Middle East is dominated by national oil companies, and don't have public shareholders to answer to, doesn't mean they won't benefit from reducing their carbon footprint," she said. "The low carbon intensity of their crude will have bigger appeal to customers than other crudes with higher carbon footprint."