Countries like the UK and Norway argue that cutting domestic fossil fuel production would only increase more high-carbon imports from elsewhere, but this logic is being increasingly challenged, writes Angeli Mehta

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Even as western countries moved quickly to slap financial sanctions on Russia over its invasion of Ukraine, Wood Mackenzie’s analysts pointed out that the sanctions announced so far are not intended to stop energy exports from Russia, though energy sanctions  “remain on the table” for the U.S. and the European Union.

Russia is the world’s second biggest producer of natural gas, and Wood Mackenzie warned that if Russian gas flows to Europe were stopped, it could trigger a global recession.

It’s been clear since the tents were pulled down at the end of the COP26 climate conference last year that the phrase “existential threat” from climate change has been replaced with “energy security”.

The UK’s deliberations may also be affected by the outcomes of several court cases

Even as COP26 president Alok Sharma reiterated the need to build out renewables, the Norwegian government offered 53 production licenses to oil and gas companies, whilst the UK quietly authorised a new North Sea oilfield.

Britain’s business secretary, Kwasi Kwarteng, tweeted that “shutting down the North Sea just increases foreign imports”. But does it?

His department has just concluded consultations on the design of a Climate Compatibility Checkpoint, which will be applied to all future licensing rounds.

Potential tests include the actual reduction in operational emissions, versus sector commitments; the impact on future emissions targets; and the global “production gap”, the difference between planned fossil fuel production and the level that is consistent with limiting global warming to 1.5 degrees Celsius.

Norway has issued new oil and gas licenses, and the UK authorised a new North Sea oilfield. (Credit: Carina Johansen/Reuters)

A recent assessment from the United Nations Environment Programme (UNEP) reveals that governments’ production plans and projections would lead to about 240% more coal, 57% more oil, and 71% more gas in 2030 than would be consistent with meeting the 1.5C warming goal in the Glasgow Climate Pact.

The UK’s deliberations may also be affected by the outcomes of several court cases, including one challenging its decision to finance a liquefied natural gas (LNG) project off Mozambique. In its grounds for objection, Friends of the Earth argued that Scope 3 emissions – indirect emissions that occur in a company’s value chain – were not quantified, and that there was a failure to consider the findings of the UNEP production gap report. A judgement is still pending.

Another is a decision made in a United States court in January. The judge cancelled oil and gas leases granted by the Federal government for drilling in the Gulf of Mexico. The rationale? That the government had failed to calculate the impact of oil and gas extraction from those fields on global greenhouse gas emissions.

BOEM said it didn’t know how to do the maths, but the judge countered it had the tools at its disposal

The licensing agency, the Bureau of Ocean Energy Management (BOEM) said it didn’t know how to do the maths, but the judge countered that it had the tools at its disposal – and moreover the calculations had already been made.

Pete Erickson is climate policy programme director for the United States offices of the Stockholm Environment Institute, and one of the lead analysts on the U.N. production gap report.

He says BOEM had calculated that if offshore production in the United States were to expand by its own estimate of 8.3 billion barrels of oil, domestic consumption would increase by 450 million barrels over the 50-year lifetime of the projects, releasing 190 million tonnes of CO2 emissions when the oil is burnt.

But what the licensing agency failed to take account of was the impact of a fall in U.S. oil imports on global markets, although its own modelling suggests that for every extra barrel produced by the United States, production elsewhere decreases by half a barrel.

(Credit: Dado Ruvic/Reuters)

Using the same parameters of demand and supply elasticity as in the agency’s modelling, Erickson calculated that the United States not importing 7.5 billion barrels of oil would result in an increase in global oil consumption of around 4 billion barrels, releasing another 1.7 billion tonnes of CO2. That’s almost 10 times the domestic increase in emissions and roughly equivalent to Russia’s entire emissions in 2017.

Likewise, says Erickson, the modelling shows that if U.S. oil production decreases by one barrel, production increases elsewhere by half a barrel, so the net effect is a decrease in global consumption of half a barrel. “The argument that if we don’t drill someone else will... is just not true. (Rather) if we don't produce it, someone else will produce half as much – and half as much is a big deal.”

The UK’s climate checkpoint consultation also considers the question of demand for oil and gas, but Erickson considers that a moot point. “You need to do everything you can to ramp down oil and gas production as quickly as the science suggests,” he says.

Statisticians forecast that U.S. oil and gas production will rise through this year to 2023

The problem is that governments don’t seem to be talking much about reducing demand. In the United States, for example, statisticians forecast that the country’s oil and gas production will rise through this year to 2023. A report from Oil Change International finds Canada’s top eight oil and gas producers are on track to increase output by nearly 30% this decade, resulting in a 25% increase in associated CO2 emissions.

Ottawa’s own reporting shows Canada has been on an upward emissions trajectory since 1991, driven “primarily by increased emissions from oil and gas extraction as well as transport”.

Its Natural Resources minister recently told the Financial Times that while the government would “aggressively” enforce sector emissions cuts, Canada needed to extract value from its resources, including the highly polluting oil sands, while oil demand continues. How it can do both might become clear this month, when the Environment and Climate Change ministry outlines Canada’s path to meeting its 2030 emissions reduction target. So far it appears to be relying on tough targets to reduce methane emissions to provide some headroom for the sector.

Canada’s top oil and gas producers are set to increase output by nearly 30% this decade. (Credit: Carlos Osorio/Reuters)

When the Norwegian government announced its most recent production licenses, it said new discoveries were crucial in developing the country’s petroleum industry.

In a statement, Amund Vik, state secretary at the Norwegian Ministry of Petroleum and Energy, told Sustainable Business Review that Norway will continue licensing and exploration in its waters. Thus, “we will be able to help cover the future global oil and gas demand with profitable oil and gas, produced efficiently and with low greenhouse gas emissions. There is no conflict between this petroleum policy and meeting our targets under the Paris Agreement.”

Norway’s government is being taken to court by environmental activists over earlier licensing rounds. While Greenpeace has lost its case in the domestic courts, judges have ruled that exported emissions are relevant.

Under the Paris accords, countries calculate their own emissions and set domestic targets, but, as courts are highlighting, what they do domestically has global impacts.

Main picture credit: Angus Mordant/Reuters


This article is part of the March 2022 issue of Sustainable Business Review. See also:

ESG Watch: Including gas in Europe’s green investment rules muddies waters for investors

Brand Watch: How brands are scrambling to bring clean-tech startups inhouse

From philanthropy to radical new business models in Latin America

What will SEC’s climate disclosure rules mean for U.S. companies?

UNEP  energy security  COP26  North Sea Oil  fossil fuel emissions  Stockolm Environment Institute  Paris Agreement 

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