• Oil-company executives are competing to make their portfolios cheaper and cleaner-

Jinjoo Lee, WSJ

NEW YORK
EnergiesNet.com 03 14 2023

Energy executives are all making the same shiny, new pitch: Let us keep drilling, and we’ll produce cheaper, less carbon-intensive oil and gas. Can they, really?

Exxon Mobil XOM 1.49%increase; green up pointing triangle Chief Executive Darren Woods said last week at industry conference CERAWeek by S&P Global that the company is one of the least emissions-intensive producers of fuel in the world. As long as there is gasoline and diesel demand, having Exxon make it will be a cleaner option, he said. While he was referring to the company’s refining operations, he touted a similar advantage in the company’s upstream activities, pointing to the Permian Basin as a source of cleaner hydrocarbons.

Likewise, Chevron CVX 2.91%increase; green up pointing triangle CEO Mike Wirth said at the conference that the company’s carbon intensity in the Permian is about half of its portfolio average. Nicolas Terraz, president of exploration and production at TotalEnergies TTE 2.33%increase; green up pointing triangle, said on a panel that the company is targeting all new upstream projects to have emissions below 19 kilograms (41.9 pounds) of carbon dioxide equivalent per barrel of oil equivalent. The current global average is about 23 kg (50.7 pounds) CO²e/boe, according to Wood Mackenzie. 

Fortunately for oil companies, profitability and low emissions frequently go together. A reservoir or field with a high density of hydrocarbons doesn’t need all that much energy to extract, said Deb Ryan, head of low carbon market analytics at S&P Global Commodity Insights, on the sidelines of the conference. Generally speaking, newer basins are less carbon intensive than older ones, which take more energy to extract from them. Moreover, those with access to electricity through transmission lines have a clean advantage compared with those that use diesel or natural gas to fuel their equipment. There are additional wrinkles: Some fields simply are gassier than others, which creates emissions if not handled correctly. 

Some of the least carbon-intensive barrels come from Norway, where operations are powered with hydroelectricity. Deep-water fields in the U.S. Gulf of Mexico and those onshore Saudi Arabia are also among the cheapest and cleanest per barrel because the wells are so productive, said Julie Wilson, research director of global exploration at Wood Mackenzie.

While the Permian isn’t the cleanest basin, its carbon intensity has improved over time as more operators started replacing valves to reduce methane leaks and piping them away for sale instead of flaring the gas, according to Ryan Duman, analyst at Wood Mackenzie. This was in large part an economic decision; last year, natural-gas prices averaged a tempting $6.54 per million British thermal units. Letting it leak or burn would have meant significant lost revenue.

The looming problem is that there is only a limited pool of cheap, clean hydrocarbons—something Wood Mackenzie calls “peak advantage.” The research firm estimates that truly cheap and low carbon-intensity sources of oil and gas can meet only about half of its base-case hydrocarbon demand forecast through 2050. It estimates that only 28% of resources in discovered, commercially viable fields can break even when Brent crude is as low as $30 a barrel and have emissions intensity of less than 20 kg of carbon dioxide-equivalent per barrel of oil equivalent.

If the race toward cheap and clean goes awry, energy companies could just end up playing hot potatoes, with well-capitalized major oil companies taking all the advantaged resources while smaller companies get stuck with dirtier assets, which they might not be able to afford to clean up.

Avoiding that fate probably involves a bit of medium-term compromise between cost and carbon intensity. Counterintuitively, oil companies may have to keep spending on exploration if they want a crack at cheaper, cleaner hydrocarbons. Newer fields aren’t only more hydrocarbon-dense but also tend to use newer, cleaner equipment, according to Wood Mackenzie. And as assets age, companies will have to tackle more expensive parts of carbon abatement, such as weaning equipment off fossil fuels and pursuing carbon capture. Another option is to invest in technology for biofuels, which are less carbon intensive but a lot pricier than fossil fuels today. 

Currently, price seems to matter more than carbon. Ms. Ryan said low-emissions barrels aren’t commanding higher prices at the moment. Investors aren’t putting premium valuation on cleaner producers, either. In the U.S., investors are valuing companies more on corporate governance and rates of return, Bob Fryklund, chief upstream strategist at S&P Global Commodity Insights, said on the sidelines of the conference.

Conveniently for everyone involved, cheap can also claim to be clean today. But if companies race single-mindedly to the cheapest and cleanest barrels, it is a competition that could well end up dirtying everyone involved.

Write to Jinjoo Lee at jinjoo.lee@wsj.com

Appearedon the WSJ in the March 14, 2023, print edition as ‘Clean and Cheap Oil Is a Heavy Lift’.