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Carbon intensity set to be major driver for the future of crude

The need to pursue aggressive decarbonization has become ever more urgent, with the Intergovernmental Panel on Climate Change's most recent report underscoring that climate change will almost certainly breach the 1.5 degree C objective set out in the Paris Climate Agreement within the next 30 years.

Comprehensive and immediate action to manage and reduce the emissions generated by human activity will require a complete re-think about how we look at the carbon intensity of those things that we rely on every day.

While progress has been made in exploring alternatives to fossil fuels in power generation, transportation and industrial use, the world is expected to remain reliant on them for some time to come, which means that the oil industry is going to have to start reckoning with the relative climate impact of the fuels they produce and the crudes they opt to use.

Many oil producers have already started to do this, looking for ways to diversify their portfolios away from a reliance on oil and gas and toward the fuels of the future, focusing heavily on investment in hydrogen and renewable energy. Companies like TotalEnergies, Shell and BP have all announced plans to cut 100% of their carbon emissions by 2050, while other producers like Occidental, which operates in the Permian Basin, have set their 100% reduction target for 2040. Eni and Equinor have set their targets for 2030. Repsol, which has the loftiest goal, plans to reduce 100% of its carbon emissions by 2025.

Select IOC emissions reduction targets

However, if any of this is going to be possible, changes have to start being made now, and made aggressively.

How the industry plans to manage this, though, raises some additional questions. In early 2021, Oxy sold the first "carbon neutral" crude cargo — building on a strategy pioneered by the LNG industry in 2020 — shipping 2 million barrels of crude to Indian refiner Reliance, offsetting the emissions generated across the full life cycle of the cargo with voluntary carbon credits certified by the Verified Carbon Standard, or VCS.

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.

While both these cargoes claim carbon neutrality status, the differences in their scope raise real questions about what carbon neutrality really means when applied to high-carbon commodities trading.

Depending on which segment of the life cycle is in question, it could have an immense impact on the total carbon dioxide emissions that are observed. Some market participants are looking at the entire supply chain, while others are looking at only a specific section. Figuring out which segments are considered when summing up the emissions is a vital piece of the puzzle.

For example, "well-to-tank" commonly refers to the crude production, transport, refining, as well as the refined products' transportation to the storage tank, whereas "tank-to-wheel" refers to the storage tank to end-use combustion. For context, only about 20% of the total emissions from crude occur in the well-to-tank segment. Most of the emissions occur during the end-use segment of the supply chain.

Homing in on carbon intensity

The other major question facing the industry is how effective carbon offsetting really is in the absence of emissions savings throughout upstream production and, critically, how to effectively measure that.

This is where the carbon intensity of the production process can become its own attribute of the crude itself, like the density of the crude and how much sulfur is included. This avenue has a much longer timeline as not only does carbon intensity have to be transparent, but the way that price differentiation will occur will take time as well.

The industry sees this as the end goal but getting to a point where carbon intensity is thought of as an equal attribute to API and sulfur will take evolution from the market. As a first step to add transparency to what the carbon intensities are for different crudes around the world, S&P Global Platts has begun to work on what an upstream calculation will look like.

Carbon intensity is the calculation for how many kilograms of carbon is emitted in the production of one barrel of crude. Carbon intensity differs across the board when looking at various crudes from around the world. To add transparency to this space, Platts has calculated the CI for several different fields.

When calculating carbon intensity, Platts has taken a bottom-up approach and is looking at the production-to-storage terminal section of the life cycle. Emissions during the exploration and drilling stages are not accounted for at this time. For example, Platts' Upstream Carbon Intensity Assessments for the US Permian Basin crude include the measurement of carbon intensity from well-head, including venting/flaring, through pipeline and into storage on the Gulf Coast. We do not include any emissions or emissions effects from activities that happened prior to "today" — i.e., we are calculating today's emissions to deliver today's barrel.

In addition to the individual carbon intensities for each field, Platts also publishes Carbon Intensity premiums for each one of these. The CI premium represents the $/b calculation to offset the emissions of the crude using a removal-based credit.

Carbon intensity premium

The more the carbon intensity is of a particular crude, the higher the carbon intensity premium will be to account for the price of carbon removal. This is a calculated carbon intensity premium based on the price of the Carbon Removal Credit, or CRC, assessment and its goal is to increase transparency into the CI of each crude and how that relates to the premium that the crude has to be sold for to take into account the removal of the carbon associated. As the market evolves, crudes with lower CIs will be the premium barrels in the market as companies make strides to lower their greenhouse gas footprint.

Taking the first steps in the right direction

The interest from the market on carbon intensity and the evidence of trades to account for carbon emissions is a step in the right direction. It is obvious when looking at the IEA's roadmap to net zero by 2050 that other technological advances in addition to lower fossil fuel use are a key piece of the puzzle. The IEA's net zero scenario relies on the use of carbon capture and storage to help tackle emissions from existing energy sources and provide a solution for industrial sectors where emissions are hardest to reduce.

Carbon markets, both voluntary and compliance-based, will work in tandem to accelerate the investment into projects that will reduce or avoid greenhouse gas emissions for years to come. In turn, this will also open the door to accelerate technological advancements as these markets become more sophisticated over time.

When looking at the bigger picture and all that is necessary to become net zero by 2050, being aware of carbon intensity when it comes to existing commodities is just the first step. Although it's a first, surely it is one that is absolutely necessary.

This piece was first published in September 2021 as part of our special report Igniting the spark of energy transition

Igniting the spark of energy transition | S&P Global Platts Special Report