Easwaran Kanason

Co - founder of NrgEdge
Last Updated: December 17, 2021
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Business Trends
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In the wake of the COP26 in Glasgow, Australia’s international reputation has taken a bit of a bruising. Having been accused of ‘hiding behind others’ and being a ‘colossal fossil’ in driving the climate change transition towards minimising global warming levels, Australia has defended its positions, which include the continued mining of coal and an entrenched focus on fossils fuels, as necessary for its economic development.

That is, admittedly, the reality for most countries, even Australia’s peers that have committed to stronger pledges and decarbonisation plans. Rhetoric may count for much in terms of ambition, but Scott Morrison’s administration is also balancing alternatives. Recently the government unveiled an offshore acreage release for a very different purpose. Instead of demarcating areas for potential exploration and production of oil and natural gas, the bidding round is instead for exploration of potential greenhouse gas storage opportunities.

Following up from a GHG storage release in 2014, the 2021 round encompasses five areas identified as prospective locations for carbon and greenhouse gas emission storage in the Northern Territories and Western Australia, including the Bonaparte, Browse and Northern Carnarvon basins. Such acreage is important, given that the future of the energy industry depends not just on the development of renewables and a transition from traditional fossil fuels, but also to compensate for ongoing emissions by capturing, sequestering and storing greenhouse gases as a balance with the aim of having net zero carbon emissions. CCS – or carbon capture and storage technologies – is the bedrock that underpins, for example, Shell’s ambition of becoming a net carbon zero company by 2050 and well as powering the hydrogen revolution through the production of blue hydrogen.

In the words of Keith Pitt, Australia’s Minister for Resources: “Australia has the capacity to continue to be an energy export leader, at the same time as providing a regional hub for the storage of greenhouse gases. Carbon capture, use and storage is one of the priority technologies we are developing. The proximity to gas fields and existing infrastructure provides opportunities for industry partnership and collaboration, further industrial development and the creation of jobs.” In other words, Australia currently has no desire to eliminate coal and fossil fuels are a source of economic development, but will aim to compensate for that, and assuage its critics – by becoming a decarbonisation hub in parallel. Potentially, this means that Australia itself will be on track to become a net carbon zero nation by 2050 as it has announced. But this scope of that target is the issue: compensating for domestic fossil fuels and coal production through CCS would meet Scope 1 and perhaps Scope 2 emission targets as defined by GHG accounting protocols. But most of Australia’s oil, gas and coal is exported: to China, to Japan and to other parts of Asia. And that makes targeting Scope 3 emissions tough. Unless, of course, Australia can provide the framework for importing sequestered carbon to be stored.

And that seems to be the idea behind this offshore GHG storage acreage release. Unlike other major CCS projects that are direct collaborations between industry players and governments, the usage of an auction format is interesting. It allows for competitive bidding that could encompasses plans far grander than a project-based emit-and-capture approach, such as Chevron’s Gorgon carbon dioxide injection project. That CCS project, which is one of the world’s largest, is designed to capture and store up to 4 million tonnes per annum of CO2 from operation of the Gorgon LNG project, though teething problems and operational issues have prevented it from operating at full capacity. But the ambition of the GHG acreage auction seems to be far broader, aimed at complementing the slate of recently announced company projects. Like Chevron’s stated intention to invest US$28 million in Western Australia lower carbon projects as a complement and offset to Gorgon, Santos’ US$165 million Moomba CCS project in South Australia and (also Santos, in collaboration with Italy’s Eni) the potential Timor Sea CCS development that straddles jurisdiction of Australia and Timor Leste.

Bids for the current auction are due to be submitted to regulator National Offshore Petroleum Titles Administrator by 10 March, 2022. Interest in the auction will be closely watched, given that it will indicate potential and scale of driving this programme forward. And that potential is vast. Given that Australia is a continent onto itself, it has massive areas – both offshore and onshore – that it can leverage upon. That scale in a major consideration, since gains in technology and the presence of stable geological storage basins that have already been exploited can bring down the cost of CCS projects, providing a cutting-edge natural competitive advantage. The Australian Petroleum Production and Exploration Association has welcomed the release, stating that it would be a significant job creator and a significant step towards reducing emissions. The presence of one of the world’s largest natural gas industries also means that Australia can pivot from producing LNG to producing blue hydrogen, which is seen as the future of clean energy. Provided, of course, that the unavoidable GHG associated with hydrogen production can be captured and storage cleanly and competitively.

If successful, it could be easy to imagine that such an auction could become a regular, perhaps annual round. Potentially, it could also be married with traditional acreage auctions, providing a framework for net zero-focused bidding where exploration is balanced with sequestration from the start. That might not be enough to silence Australia’s most vocal critics, especially those that advocate the eventual elimination of coal and fossil fuels but it is a pragmatic and practical approach that balances development and sustainability. And that pragmatism is what will ensure that the ambitions of COP26 can be met, not just political rhetoric.  

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Saudi Aramco Moves Into Russia’s Backyard

International expansions for Saudi Aramco – the largest oil company in the world – are not uncommon. But up to this point, those expansions have followed a certain logic: to create entrenched demand for Saudi crude in the world’s largest consuming markets. But Saudi champion’s latest expansion move defies, or perhaps, changes that logic, as Aramco returns to Europe. And not just any part of Europe, but Eastern Europe – an area of the world dominated by Russia – as Saudi Aramco acquires downstream assets from Poland’s PKN Orlen and signs quite a significant crude supply deal. How is this important? Let us examine.

First, the deal itself and its history. As part of the current Polish government’s plan to strengthen its national ‘crown jewels’ in line with its more nationalistic stance, state energy firm PKN Orlen announced plans to purchase its fellow Polish rival (and also state-owned) Grupa Lotos. The outright purchase fell afoul of EU anti-competition rules, which meant that PKN Orlen had to divest some Lotos assets in order to win approval of the deal. Some of the Lotos assets – including 417 fuel stations – are being sold to Hungary’s MOL, which will also sign a long-term fuel supply agreement with PKN Orlen for the newly-acquired sites, while PKN Orlen will gain fuel retail assets in Hungary and Slovakia as part of the deal. But, more interestingly, PKN Orlen has chosen to sell a 30% stake in the Lotos Gdansk refinery in Poland (with a crude processing capacity of 210,000 bd) to Saudi Aramco, alongside a stake in a fuel logistic subsidiary and jet fuel joint venture supply arrangement between Lotos and BP. In return, PKN Orlen will also sign a long-term contract to purchase between 200,000-337,000 b/d of crude from Aramco, which is an addition to the current contract for 100,000 b/d of Saudi crude that already exists. At a maximum, that figure will cover more than half of Poland’s crude oil requirements, but PKN Orlen has also said that it plans to direct some of that new supply to several of its other refineries elsewhere in Lithuania and the Czech Republic.

For Saudi Aramco, this is very interesting. While Aramco has always been a presence in Europe as a major crude supplier, its expansion plans over the past decade have been focused elsewhere. In the US, where it acquired full ownership of the Motiva joint venture from Shell in 2017. In doing so, it acquired control of Port Arthur, the largest refinery in North America, and has been on a petrochemicals-focused expansion since. In Asia, where Aramco has been busy creating significant nodes for its crude – in China, in India and in Malaysia (to serve the Southeast Asia and facilitate trade). And at home, where the focus has on expanding refining and petrochemical capacity, and strengthen its natural gas position. So this expansion in Europe – a mature market with a low ceiling for growth, even in Eastern Europe, is interesting. Why Poland, and not East or southern Africa? The answer seems fairly obvious: Russia.

The current era of relatively peaceful cooperation between Saudi Arabia and Russia in the oil sphere is recent. Very recent. It was not too long ago that Saudi Arabia and Russia were locked in a crude price war, which had devastating consequences, and ultimately led to the détente through OPEC+ that presaged an unprecedented supply control deal. That was through necessity, as the world faced the far ranging impact of the Covid-19 pandemic. But remove that lens of cooperation, and Saudi Arabia and Russia are actual rivals. With the current supply easing strategy through OPEC+ gradually coming to an end, this could remove the need for the that club (by say 2H 2022). And with Russia not being part of OPEC itself – where Saudi Arabia is the kingpin – cooperation is no longer necessary once the world returns to normality.

So the Polish deal is canny. In a statement, Aramco stated that ‘the investments will widen (our) presence in the European downstream sector and further expand (our) crude imports into Poland, which aligns with PKN Orlen’s strategy of diversifying its energy supplies’. Which hints at the other geopolitical aspect in play. Europe’s major reliance on Russia for its crude and natural gas has been a minefield – see the recent price chaos in the European natural gas markets – and countries that were formally under the Soviet sphere of influence have been trying to wean themselves off reliance from a politically unpredictable neighbour. Poland’s current disillusion with EU membership (at least from the ruling party) are well-documented, but its entanglement with Russia is existential. The Cold War is not more than 30 years gone.

For Saudi Aramco, the move aligns with its desire to optimise export sales from its Red Sea-facing terminals Yanbu, Jeddah, Shuqaiq and Rabigh, which have closer access to Europe through the Suez Canal. It is for the same reason that Aramco’s trading subsidiary ATC recently signed a deal with German refiner/trader Klesch Group for a 3-year supply of 110,000 b/d crude. It would seem that Saudi Arabia is anticipating an eventual end to the OPEC+ era of cooperative and a return to rivalry. And in a rivalry, that means having to make power moves. The PKN Orlen deal is a power move, since it brings Aramco squarely in Russia’s backyard, directly displacing Russian market share. Not just in Poland, but in other markets as well. And with a geopolitical situation that is fragile – see the recent tensions about Russian military build-up at the Ukrainian borders – that plays into Aramco’s hands. European sales make up only a fraction of the daily flotilla of Saudi crude to enters international markets, but even though European consumption is in structural decline, there are still volumes required.

How will Russia react? Politically, it is on the backfoot, but its entrenched positions in Europe allows it to hold plenty of sway. European reservations about the Putin administration and climate change goals do not detract from commercial reality that Europe needs energy now. The debate of the Nord Stream 2 pipeline is proof of that. Russian crude freed up from being directed to Eastern Europe means a surplus to sell elsewhere. Which means that Russia will be looking at deals with other countries and refiners, possibly in markets with Aramco is dominant. That level of tension won’t be seen for a while – these deals takes months and years to complete – but we can certainly expect that agitation to be reflected in upcoming OPEC+ discussions. The club recently endorsed another expected 400,000 b/d of supply easing for January. Reading the tea leaves – of which the PKN Orlen is one – makes it sound like there will not be much more cooperation beyond April, once the supply deal is anticipated to end.

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Market Outlook:

-       Crude price trading range: Brent – US$86-88/b, WTI – US$84-86/b

-       Crude oil benchmarks globally continue their gain streak for a fifth week, as the market bounces back from the lows seen in early December as the threat of the Omicron virus variant fades and signs point to tightening balances on strong consumption

-       This could set the stage for US$100/b oil by midyear – as predicted by several key analysts – as consumption rebounds ahead of summer travel and OPEC+ remains locked into its gradual consumption easing schedule 

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