Research paper
Published 29 June 2020
Updated 14 December 2020
ISBN: 978 1 78413 387 0
The world is undergoing a transition away from fossil fuels towards renewable energy. However, the speed and depth of this transition is uncertain and controversial. This will have significant implications for Norway, one of the world’s largest exporters of both energy and capital.
The EU has consistently played a global leadership role over climate change, putting in place binding GHG reduction targets on its member states, promoting renewable energy and energy efficiency, and encouraging low-carbon investment and expenditure (through its structural programmes). At the end of 2019, the heads of state endorsed the objective of making the EU climate neutral by 2050 in line with the Paris Agreement. In March 2020, the European Commission presented a proposal to enshrine in legislation the EU’s political commitment to be climate neutral by 2050.16
The discussion of carbon neutrality builds on a long track record of climate targets. In 2014, the European Council agreed targets to reduce GHG emissions by at least 40 per cent by 2030 and, by 2050, to decrease emissions by 80–95 per cent below 1990 levels. As the energy system is responsible for close to 80 per cent of total GHG emissions in the EU, such aims will have a significant impact. In 2008, EU-wide targets were adopted to deliver a 20 per cent reduction in GHG emissions, a 20 per cent improvement in energy efficiency and to enable renewable sources to supply 20 per cent of energy. Subsequently, the EU stated that by 2030 renewable energy would account for at least 27 per cent of total energy production and that there must be a 27 per cent improvement in energy efficiency.17 In July 2018, the energy efficiency and renewable targets were revised in an agreement between the European Commission and Council, to at least 32.5 per cent and 32 per cent, respectively.18
The political will has caught on faster than many people expected and momentum behind targets for net-zero emissions will increase, but I don’t know about the 2050 timeframe. I don’t think the targets will kill fossil fuels but the industry will have to find ways to adapt; to become less carbon-intensive and find ways to offset and capture the carbon produced.19
Philip Cunningham
The EU as a whole is exceeding its GHG reduction targets. In 2017, emissions were at 22 per cent below 1990 levels, compared to a 2020 target of 20 per cent reductions.20 However, there has not been uniform success across the EU. In 2016, 22 member states met their annual Effort Sharing targets.21 In Belgium, Finland, Germany, Ireland, Malta and Poland, Effort Sharing emissions were higher than the national Effort Sharing targets. Malta has missed its target every year since 2013, while 2016 was the first time that Belgium, Finland, Germany, Ireland and Poland missed their Effort Sharing targets.
While the EU has raised the collective targets, current policies and industrial and consumer trends are insufficient to meet 2030 targets. Further legislative measures are needed: under present draft national plans, instead of at least 32 per cent, the share of renewable energy is only likely to reach between 30.4 per cent and 31.9 per cent in 2030 at the EU level.22 Growing public concerns over climate change are leading to greater individual action and pressure on policymakers and businesses to introduce new policies and practices. A survey undertaken for the European Commission and published in September 2019 indicates that 93 per cent of respondents think that climate change is a serious problem, with 60 per cent of respondents thinking it is one of the most serious problems facing the world. Almost all respondents (92 per cent, up three percentage points since 2017) think it is important that their national government sets ambitious targets to increase the amount of renewable energy used, such as wind or solar power, by 2030.23
While the views of citizens in the EU are clear, a global opinion poll undertaken by YouGov and released in September 2019 somewhat surprisingly had Norway at the bottom of a 28-country survey of the percentage of citizens who agreed with the statement that the ‘climate is changing and human activity is mainly responsible’ (35 per cent). It also came second to the US in terms of having the highest percentage of citizens who thought that the ‘climate is changing but human activity is not responsible at all’ (8 per cent).24 While there is a danger of reading too much into individual polls, the dependency of the Norwegian economy on fossil fuels is likely to affect public opinion about the need for a rapid energy transition driven by climate change.
It is also important to note that there is a wide range of public and political views within the EU about the need to act on climate change. The European Green Deal, published in a communication by the European Commission in December 2019, is said to ‘reset the Commission’s commitment to tackling climate and environmental-related challenges that is this generation’s defining task’. The European Green Deal is expected to ‘transform the EU into a fair and prosperous society, with a modern, resource-efficient and competitive economy where there are no net emissions of greenhouse gases (GHG) in 2050 and where economic growth is decoupled from resource use’. Key elements of the Green Deal include:25
With the world striving to meet decarbonization targets in line with the Paris Agreement, the global oil market will shrink considerably.26 One obvious implication of this is that there will be increasing competition between existing oil suppliers to secure their share of remaining supply, and to prevent their assets from becoming stranded or left undeveloped.27 For oil producers this will be a global race, which will almost certainly lead to price competition between producers and falling crude oil prices.
Unlike in previous eras, these lower prices are unlikely to be offset by rising oil demand for two reasons. First, as crude oil prices fall, consumer governments in the major markets will almost certainly pick up any slack created by falling crude oil prices by increasing sales taxes on oil products. For example, in 2014, before the crude oil price collapsed, 47 per cent of final oil product prices in the G7 countries were sales taxes; by 2018 this figure was 50 per cent. This trend is likely to be especially strong in Europe where there is a long-standing practice of taxing oil products. The second reason is the availability and affordability of alternative technologies, especially EVs.
The carbon intensity of different oils may also affect their competitiveness over time. A possible advantage for Norway is that the bulk of its reserves are dominated by light oil, which has a relatively low-carbon footprint although new reserves such as the giant Johan Sverdrup field are comprised of heavier oil and so will change the relative composition of Norway’s oil production over time.28 The bulk of conventional global oil reserves by contrast tend to be heavier and have a higher carbon footprint. The practical benefit for Norway of this is uncertain. Unconventional tight oil reserves also tend to be light. Large medium sour reserves are located in the Middle East and tend to have low technical costs of production, in the absence of a carbon price.
The expert interviews in the Annex reflect the varying degrees of uncertainty affecting future oil demand. Some suggest that there will be declining but still significant demand for oil in 2050, while others expect demand to drop by 2030 and little to no demand by 2050. The speed and scale of transition in the transport sector will be key. Estimates of sharply declining demand are underpinned by the expectation that EVs will reach price parity with internal combustion engine (ICE) vehicles within the next five years, and that electrification, hydrogen and oil-to-gas switching may ripple out through light, medium and heavy goods vehicles. The latter would reinforce the view set out in the interviews that the transition may happen faster than many in the energy establishment currently expect. A faster decline in oil demand would intensify competition between national oil companies with access to low-cost reserves and large international oil companies with relatively high-cost reserves, which may come under financial pressure sooner than anticipated.
There is still a need for oil. Even in the most ambitious scenarios of displacement by EVs, you still have a significant amount of oil being produced in 2040 or 2050. From a range of calculations from different analytical groups – the IEA or the EIA or independent groups and oil company scenarios – the lowest demand for oil appears to be 50 or 60 million b/d, instead of 100 million b/d: roughly half the consumption in 2019. Finding 50 million barrels of oil to produce per day still requires a lot of investment.
Adam Sieminski
Oil will have a steeper decline than many of the companies are anticipating, and my commission posits it down by 70 per cent or 80 per cent by 2050.
Adair Turner
As countries commit to net-zero, even the hard-to-reach sectors of their economies will need to decarbonize. In the marine and aviation sectors, electrification and decarbonization are either under consideration or are already occurring. In Norway, it is expected that there will be 70 battery-powered ferries by 2022, with development of hydrogen/electric ships also under way.29 The aviation sector is particularly difficult to decarbonize, but it is developing different supply options and improving energy efficiency, including biofuels, hydrogen and electrification for shorter distances.
Sustainable aviation fuels is a really exciting area, and one that does have significant opportunity for nations that either want to repurpose an oil and gas industry, or want to leap a generation and create a new industry that doesn’t exist today.
Paul Stein
The debate around EVs provides a good illustration of the uncertainty regarding the speed and scale of transition. EVs tick many boxes, including improvements in urban air quality and falling emissions,30 reduced security of supply concerns and potentially provide a source of decentralized battery storage. Rates of EV penetration will be heavily influenced by government policies, including investment in charging points and other core infrastructure, the introduction of end-date bans on ICE vehicle sales at national and city levels,31 and the relative price of oil-based transport fuels. On current trends, EV uptake may be rapid in Europe – especially in Norway – and even faster in China, where the development of a world-class EV manufacturing base is a strategic priority.
It’s hard to predict when the ICE will be phased out in Europe and elsewhere. The critical years will be 2022 to 2025.
Mark Campanale
Bullish oil market analysts believe that these trends will have limited impact on oil demand. They highlight the fact that passenger vehicles only account for around 20 per cent of oil consumption and that growth elsewhere in the transport sector, and non-energy uses of oil, will compensate for any fall in oil demand. This assumes that shifts in the passenger vehicle sub-sector will be slow, with EVs reaching price parity in the mid-2030s rather than the mid-2020s. It is also based on the assumption that transition in other sub-sectors will be even slower, given the expense and technical challenge of either electrifying medium and heavy-goods vehicles, or converting them to hydrogen or biofuel.32 Such analysis also fails to acknowledge modal shifts that are already happening, including urbanization and the growth of ride-sharing and electric two-wheelers, especially in emerging economies such as China and India.
The transition away from the ICE is happening much more rapidly in Norway than was imagined a couple of years ago, driven forward by technology. However, only about 50 per cent of the barrel is used in petrol or kerosene or diesel engines. As long as the underlying demand for the other 50 per cent continues to grow, oil projects will not be shut down, although its growth may be flattened by the reduction in demand from transportation in time.
Philip Cunningham
These trends have important implications for Norway. The pattern for Norwegian oil exports since 2000 is shown in Figure 2, with the decline in production since the start of the century simply reflecting the natural depletion of Norway’s fields. The prospects for future production, and therefore Norway’s export potential, will to some extent continue to depend upon the traditional factors that influence exploration and development, including the level of upstream investment interest coupled with technological developments, both of which can be influenced by government policy in terms of access to acreage and fiscal terms. It will also increasingly be influenced by issues such as where new projects sit on the cost-curve – and crucially at what stage this level of production cost becomes uncompetitive – as well as the domestic public opinion and the Norwegian government’s continued ‘social licence’ to produce. Both are explored below.
The destination of Norwegian exports is shown in Figure 3. Norway has a clear competitive advantage over other producers in terms of proximity to the European market. It also has a reputation as a reliable supplier that should help it maintain its market share. However, as a result of the energy transition described above, European oil demand is likely to fall rapidly and far faster than in other regions, given the green pressures on European governments, and more disruptive shifts in mobility, particularly in cities. If this became a reality, Norway and other European producers would have the option to export to other parts of the world, although the competitiveness of this would be affected by transport costs.
Shareholders in European oil and gas companies, linked utilities and industry tend to be far more aggressive than those in the US when it comes to holding the companies to account on climate change issues.
Shareholders in European oil and gas companies, linked utilities and industry tend to be far more aggressive than those in the US when it comes to holding the companies to account on climate change issues. In any case, competitive advantage in the crude oil market is almost entirely driven by price. Thus, Norway can expect falling oil revenues as a result of both lower volumes and lower prices driven by oversupply as other global producers try to avoid stranded assets.
Ultimately, Norway is in a good position to manage this decline. Unlike most oil-producing countries, it is in the process of diversifying its economy and is no longer as oil-dependent as many other producers. Further diversification is under way. Norway has also developed the world’s largest sovereign wealth fund, explored in further detail below. In its assessment of the country’s ‘adaptability’ in light of climate impacts – including a shrinking oil sector and declining oil revenues – Norway’s Climate Risk Commission found that it is relatively less exposed than most oil producers, given its high income and well-diversified economy, and is more adaptable, with the Norwegian economy continuing to evolve as it has done over the past century with similar long-term returns on capital and labour across sectors.33
Decarbonization pathways also suggest increasing competition between existing gas suppliers as they seek to secure markets between now and 2030. Gas is already facing strong competition from energy efficiency and price-competitive renewable energy, and the potential role of gas in the energy transition remains contested (see Annex).
Key issues that emerge include the credibility of natural gas as a lower-carbon fossil fuel. The emissions associated with gas are typically lower than those for oil and especially coal, and this should, in theory, mean that coal and oil leave the energy system first and that natural gas declines at a slower rate. Not all gas is equal, and there is growing international awareness and concern over methane leakage from gas production and infrastructure. Methane is a far more potent GHG than CO2 and in some cases – where there is significant methane leakage from already energy-intensive LNG, for instance – gas can have similar emissions to coal. The growing profile of fugitive emissions presents a potential competitive advantage for Norway, given its reputation for best practice in upstream emissions mitigation and tight infrastructure.
For 2030, there will probably be a slight increase in gas demand, as coal-to-gas switching has a lot of potential even with current carbon prices. Afterwards, that demand would fall, but how fast very much depends on the demand side.
Andris Piebalgs
Another issue is the lack of a strategy for decarbonizing gas systems. As previously mentioned, a strong case exists for gas to be a bridge to a lower-carbon energy system but there is little detail of the length or destination of this bridge. While gas will struggle to compete with renewable energy in new markets, there may be potential to displace coal and higher-carbon power sources with natural gas where infrastructure is already in place. However, this role is currently constrained by the lack of a clear strategy for decarbonizing gas systems or phasing out natural gas.
If natural gas is to have a role as a bridge fuel, then there needs to be a clear strategy in place to ensure the phasing-in of hydrogen gas – including biogas and blue and green hydrogen – as well as the phase-out of natural gas. This means policy measures and finance to support research and development (R&D) in green hydrogen, to stimulate market demand and, over time, to upgrade existing gas transport infrastructure and demand-side appliances so that they can handle ever-higher quantities of green gas blending. The European Commission’s forthcoming Gas and Decarbonisation Package could provide guidance here, alongside national energy and climate plans. The European Green Deal communication calls for the revision of the Trans European Energy Network regulation to ensure consistency with net-zero, including the fostering of the deployment of new innovative technologies and infrastructure such as hydrogen.34 For incumbent gas suppliers such as Norway, this could represent a significant market opportunity, but will require serious engagement with the end goal of net-zero.
Most of the analysis we’ve seen suggests that gas will continue to play a critical role in the energy transition, as a fully electric alternative is considerably more expensive. By 2030 natural gas will still be very significant in Europe, and we anticipate the beginning of decarbonization through some hydrogen facilities.
Dominic Emery
There is growing support, in governments and certain industries, for a greater, potentially significant, role for hydrogen in decarbonization, as an energy source – or more specifically as a vector, carrying energy from generation to supply – for heating, heavy-goods transport and industry.35
Hydrogen can be a substitute for natural gas in many energy and industrial processes. Furthermore, hydrogen can be blended with natural gas by up to 10 per cent in the existing natural gas network, and therefore reduce its carbon intensity, while using existing infrastructure. Alternative hydrogen is and can be used to create synthetic natural gas (SNG) produced from hydrogen and CO2.
The best strategy would be coal-to-gas switching as a first step, then blending 5 per cent or 10 per cent, then a real hydrogen/zero emission system. There is also a lot of expectation that renewable electricity could be transformed into clean hydrogen, but there is no clear regulatory process and the costs are high.
Andris Piebalgs
It is often overlooked that hydrogen is already today a huge industry, with around 70 million tonnes of hydrogen being produced every year for use in oil refining and chemicals. This is not a trivial amount: 70 million tonnes of hydrogen could in theory power around 500 million cars, which is half of today’s global car fleet.
Fatih Birol
The production of hydrogen using electricity, through electrolysis, could increase flexibility in a power system dominated by variable renewables. While there have been significant falls in the costs of battery production and therefore the short-term storage costs of electricity, in the longer term, seasonal storage – important in a solar-dominated power sector – may require different solutions. The creation of hydrogen and using existing gas storage infrastructure and knowledge may help to address the seasonality problem. Therefore, the greater use of hydrogen is seen as an attractive and some would say essential element of decarbonization.
However, this discussion of hydrogen’s potential is not new. In 2003, the then President of the European Commission Romano Prodi established a high-level group on hydrogen, with an intention that hydrogen and fuel cells would in the next 20 to 30 years considerably change economic growth patterns by bringing about a decentralized energy system.36 The conditions necessary to deploy hydrogen on a much larger scale are changing rapidly, with recognition of the need for new approaches in hard-to-reach heavy industry sectors and in heating, while falling costs of renewables are changing the power mix and increasing the importance of system flexibility. However, there are still many technological, economic and thermodynamic challenges to developing a hydrogen economy in Europe and beyond.
There are different ways of producing hydrogen, with quite distinct impacts. The most widely used technology currently requires fossil fuels, mainly natural gas reforming into hydrogen (H2) and carbon monoxide (CO) or CO2 in a steam methane reformer (SMR), a product that is widely known as grey gas (hydrogen produced from coal is also referred to as black gas). Annual hydrogen production uses 205 billion m3 of natural gas – 6 per cent of global consumption – and 107 million tonnes (Mt) of coal, with corresponding annual CO2 emissions of 830 MtCO2/yr.37
The costs of grey hydrogen are about €1.50 per kg ($1.65/kg). However, if the use of hydrogen is to be compatible with decarbonization objectives, then the CO2 produced would need to be captured and/or used – when this is done then the gas is often referred to as blue hydrogen. The costs of CCS/CCU are not fixed, but current estimates, according to the IEA, are ‘in the range of’ €50 to €70 per tonne of CO2. The IEA notes that the ‘price is lower in specific cases like ammonia production’, but it could add between €0.50 and €1.0/kg of hydrogen production ($0.55 to $1.10/kg), although scaling up and standardization are likely to lead to cost reductions.38
A carbon-neutral mechanism for the production of hydrogen is the electrolysis of water using zero-carbon energy sources, primarily solar or wind. This creates a product known as green gas,39 which accounts for 2 per cent of global hydrogen production. However, according to the IEA, if all the currently dedicated hydrogen production were produced through electrolysis this would result in an annual electricity demand of 3,600 terawatt-hours (TWh) – equivalent to 13 per cent of global consumption.
According to Bloomberg New Energy Finance (BNEF), green hydrogen costs may fall to as low as $1.40/kg by 2030 from the current range of $2.50 to $6.80. This would mean that ‘once the industry scales up, renewable hydrogen could be produced from wind or solar power for the same price as natural gas in most of Europe and Asia’.40 If hydrogen is to be widely used, the production of blue or green gas is clearly necessary to meet emissions reduction objectives; however, neither is currently economic and both have technology uncertainties. Moving towards economically viable hydrogen production will require government fiscal and/or policy support in order to go from the pilot to the deployment stage.
The gas industry and the Norwegians also have to engage on the long-term destination: about net-zero. This means engaging in discussions about how we get there – not just in the 2040s but action in the 2020s. This implies a discussion on the role for biogas and hydrogen, and how we phase them in.
Jess Scott
Hydrogen could play a role in decarbonizing both energy and industry, but it is neither technically nor economically guaranteed, and its environmental credibility is questionable given the production methods. Consequently, the EU, its member states and industries within it, are undertaking research, piloting and demonstration projects to help advance innovation and learning. Such action was recommended by the European Commission in its 2018 Clean Planet for All roadmap: these measures would be necessary for the EU in its goal of ‘regaining leadership and seizing the first-mover advantage’.41 In the UK, the Northern Gas Network is working with the city of Leeds to produce a blueprint for the city to decarbonize the gas system by using 100 per cent hydrogen.42 Europe already has more than 45 demonstration projects to improve power-to-gas technologies, where the main technology is an electrolyser.43
Renewable-based hydrogen and electric fuels will start competing with gas sooner than expected; low-cost electricity and developments in the heating sector have major implications for gas-exporting countries such as Norway.
Tomas Kåberger
While the growth of global LNG capacity has increased international gas trade, regional dynamics still matter far more for gas than they do for oil. This is largely due to gas infrastructure requirements and the expense of LNG transport. Competition between gas suppliers is therefore likely to be focused on a handful of regional markets, and in Norway’s case, within Europe. European gas demand has stagnated since the turn of the century, reflecting several factors. Europe is a mature market with limited opportunities for new gas uses. European population growth is low and in many countries, declining. Industry has meanwhile migrated from Europe towards lower-cost operating environments particularly in Asia. The huge energy efficiency gains experienced in Europe since the oil price shocks of the 1970s have also reduced demand. Nonetheless, as seen in Figure 4, Europe’s gas imports have increased as a result of declining domestic European gas production. Russia and Norway supply almost two-thirds of these imports, as Figure 5 shows.
Much of the increase in gas imports has come by pipeline from Russia, although Russian imports have raised several concerns. Most obvious were problems with high costs when the gas price was contractually linked to oil prices. There was also concern over security of supply where Ukraine was a major transit country. To some extent the pricing problem has been solved as Gazprom altered its pricing policy and aligned gas prices with the European hub prices generated by growing competition. Security concerns have also been to some extent mitigated by new pipelines, such as Nord Stream, which avoid transit problems. However, concern over dependence on Russian gas remains, particularly in Central and Eastern European countries, where Russia tends to be the supplier of last resort.
Europe’s trend towards rising imports has also been encouraged by the increased availability of lower-cost LNG as new plants come online in the US and Australia, among other countries. The trend towards increasing US LNG supply is likely to continue. On the supply side, more oil production from the US Permian Basin means more associated gas, which is pushing down the domestic price of gas in the US.44 This has the clear potential to feed growth in LNG capacity. On the demand side, European energy security concerns, particularly where Russia is concerned, are supporting plans for more LNG re-gasification plants. How Russia will react to this is an important question; Russia’s failure to diversify its economy45 leaves it extremely vulnerable to shifts in energy policy and to the energy transition more broadly.
While European gas demand is largely driven by power and industry, there is also a strong seasonal dimension to consider. Winter demand is roughly double that of summer, as a result of the need for heat in buildings. Traditionally, Europe’s climate change targets were considered the primary driver of policies supporting growing gas demand. With emerging net-zero targets, however, a critical question is the extent to which gas will remain a key supplier of heat in the EU, or whether gas demand will be dramatically reduced with the electrification of heat and the transition of gas systems to biogas and (green) hydrogen, as well as continued efficiency improvements in residential heat. Technological advances and policy commitments – particularly UK and EU targets for net-zero by 2050 – suggest the latter is increasingly likely.
It is in this context that Norway’s gas exports to Europe have gradually increased. In terms of European gas supplies, Norway is seen as an attractive option as it is a reliable supplier. Given that virtually all of Norway’s gas exports are by pipeline, transport is cheaper than LNG. It is also seen as coming from a tight system compared to Russian supplies and those from the Middle East and North Africa (MENA) region and Central Asia, where there has not been the same investment in the mitigation of fugitive emissions. Similar concerns will apply to US LNG exports, given the existing scale of flaring and the recent rollback of federal regulations on fugitive emissions.
In many ways, if the gas is available, Norway is likely to be seen as the supplier of choice for the EU. Competition from LNG is much more likely on a spot basis, depending on relative prices and weather conditions. As with oil, Norwegian gas supplies towards 2050 will depend upon investor interest and government policies on gas depletion – including access to acreage and fiscal terms – and increasingly on the cost of production and civil society acceptance (both discussed in greater detail below). It will also depend on how the debate around fugitive emissions develops within Norway and internationally, and the scope that regulations define for gas as a bridge fuel.
There is an increasingly active civil society debate around Norway’s plans to open new acreage for exploration. Growing civil society pressure has already forced greater scrutiny of new oil and gas exploration, and the Norwegian government was forced to abandon plans to open the Lofoten Islands to oil exploration, in light of the environmental risks that development would pose to the area’s pristine natural environment. Norwegian academics and civil society groups have also been at the forefront of international calls for supply-side policy measures designed to limit fossil fuel supply. These include the Lofoten Declaration, which has been signed by more than 300 organizations and which calls for wealthy countries to halt oil development and manage the decline of existing production,46 and more recent calls for a supply-side climate treaty.47
As a high-income, high-capacity oil and gas producer, Norway is well placed to set an example of international leadership in three areas.
The first is Norway’s management of its existing oil and gas production, and particularly the importance of producing the cleanest oil and gas supplies possible. Norway is already a leader where the strict management of upstream emissions is concerned, and through the integration of renewable energy and CCS, is making progress towards the decarbonization of oil and gas production. Leadership in these technologies could provide a competitive advantage for Norway, both in terms of the cost and carbon-intensity of its production. In 2020, Equinor announced plans to reduce the absolute GHG emissions from its operated offshore fields and onshore plants in Norway by 40 per cent by 2030, 70 per cent by 2040 and to near-zero by 2050. This implies annual cuts of more than 5 million tonnes by 2030, corresponding to around 10 per cent of Norway’s total CO2 emissions.48 The Norwegian Oil and Gas Association launched a similar ambition on behalf of the whole oil and gas industry in Norway, with a 40 per cent reduction by 2030 compared to 2005, and near-zero by 2050.49 The 2030 target will be realized through large-scale industrial measures, such as energy efficiency, including through digitization and the launch of several electrification projects; further reductions will require the development of new technologies and new value chains.
As a high-income, high-capacity oil and gas producer, Norway is well placed to set an example of international leadership in the hydrocarbons sector.
These commitments sit within a fast-evolving landscape of climate commitments from the oil and gas sector, including net-zero carbon emissions and scope 3 targets. In 2019, the Spanish oil and gas company Repsol become the first major producer to announce its intention to achieve net-zero carbon emissions by 2050, and in recognition of this, wrote-down the value of its fixed assets by €4.8 billion.50 In February 2020, BP announced its target of becoming a net-zero carbon emissions company by 2050, or sooner, including achieving this goal across its production and operations, halving the carbon intensity of its products and investing in low-carbon technologies, and restructuring the company to deliver this.51 The credibility of these commitments will become clearer later in 2020, when BP announces details on how they will be implemented. In April 2020, Shell followed suit, announcing its commitment to become a net-zero company by 2050.
The second area in which Norway can lead the way is in its decisions regarding the continued exploration and the expansion of oil and gas production. The exact scale of Norway’s resource base continues to be debated, particularly in the Barents Sea, which is a focus for exploration activity. At a global level, however, the production of proved and probable reserves already far exceeds a 2°C carbon budget – or the amount of carbon that can be produced while remaining below 2°C. As such, the continued exploration and expansion of oil and gas carries climate-related risks, both for the Norwegian economy and for international climate commitments. In its recent assessment of cost-curves for production under different scenarios, the non-governmental organization (NGO) Carbon Tracker placed the break-even price for oil production at around $60 per barrel under a 2°C scenario, and well below $40 under a 1.6°C scenario.52 Climate-risk assessments against such cost-curves across the Norwegian continental shelf – where the cost of production ranges from as low as $20 on the new Johan Sverdrup field, to well above $6053 – have emerged as a key recommendation of the Norwegian Climate Risk Commission.
The third area in which Norway can lead in the energy transition is in a move away from fossil fuels globally, and evolving attitudes to exported (i.e. scope 3 or value chain) emissions. Norway is not a major emitter of GHG, not least because its power sector relies largely on hydropower, and it plans to become carbon-neutral by 2030. However, this only considers domestic emissions, and does not include the emissions associated with Norway’s oil and gas exports, which are accounted for in their country of consumption. While some maintain that greater awareness is needed for a ‘polluter pays’ principle, including through carbon trading systems, scope 3 emissions are clearly becoming part of the conversation where the oil and gas sector’s transition is concerned. In this context, there is some inconsistency between Norway’s position as a climate leader at home, and as a fossil fuel exporter abroad.
Norway has demonstrated leadership in transparency and good governance of the oil and gas sector. A continued emphasis on reliable data and disclosures around the upstream emissions associated with the sector, the resilience of oil and gas sector plans in light of national and international climate commitments, and exported emissions and Norway’s international reputation as a climate leader are all crucial to supporting an informed civil society debate on Norway’s choices as a responsible oil and gas producer, and an international climate leader.
The Norwegian sovereign wealth fund (SWF) has led on fossil fuel divestment, having announced divestment from coal companies and, more recently, from pure oil exploration and production companies. Reducing exposure to fossil fuel assets makes sense, given Norway’s existing exposure to oil and gas prices, as a producer country. However, such divestments – dumping shares in small oil and gas exploration companies while maintaining holdings in international oil companies, for example – have raised questions regarding the effectiveness of such moves in managing financial risk. Norway’s leadership within the One Planet Group of SWFs could help advance understanding here, through the development of frameworks for the disclosure of climate-related financial risks.
The step that the Norwegian Sovereign Wealth Fund has taken in no longer investing in coal is not sufficient but a significant signal that coal is the worst perpetrator in the fight against climate change.
Zoe Knight
There is also growing recognition that divestment must be coupled with the reallocation of capital to clean areas of the economy. With the world’s largest SWF of more than $1 trillion, Norway’s largest export is ultimately capital. The decisions it makes in terms of managing climate-related risks and adopting sustainable investment approaches carry real weight in international capital markets. Norway has been active in the development of Paris-compatible sustainable finance taxonomies at the EU level, and through the One Planet Group, which is considering the reallocation of capital in support of the energy transition, as well as the integration of climate-risk factors. By ensuring transparency and supporting international alignment in these areas, Norway can play an important role in managing climate risk and financing transition.
As an EU commissioner for development, it was clear that some Asian or African countries attempted to get fast access to energy sources and receive favourable conditions to invest in coal. The SWF should look at where to prioritize investments, and this should be in renewable electricity worldwide.
Andris Piebalgs
Linked to this is the debate about the SWF’s future strategy. The SWF will be considering where to prioritize investments, and this could include investment in low-carbon technologies and infrastructures, particularly in fast-growing emerging and developing economies. Through blended finance mechanisms, for instance, renewable energy and other sustainable investments could be de-risked, and could provide an alternative to fossil fuel infrastructure for countries with access to energy resources. The question of whether the SWF should invest in new industries at home may also arise over time. SWFs do not typically invest in the domestic market, given their role in hedging against national exposure to price volatility, and the risk of overheating the economy, but there may be a case for reassessment over time.
The economy will need new industries to substitute employment and income that has been generated by oil and gas over decades. Using the fund to support industrial development in Norway could be a way to speed this up.
Tomas Kåberger
The deployment of renewable energy and the decarbonization of electricity is occurring at a much greater pace than in the heat and cooling sectors and in transport. This is mainly due to the availability of technology and the limited impact on consumers. This has led to the development and deployment of solar and wind at scale, which has resulted in falling renewable energy prices and lower subsidies. Globally, as the prices of renewables have fallen, their deployment has accelerated, leading to a virtuous circle of further deployment. Initially government or consumer subsidies were the motivating and economic force behind renewable deployment. Now, it is often purely economics that drive sales, with solar and wind being built without financial support in the EU and other parts of the world. This raises new challenges for governments, industry and regulators, as the integration of higher percentages of variable renewables into the grid requires new governance structures and technologies.
Subsidies and now lower levelized costs of electricity from renewables have transformed the power mix in the EU. In 2018, 93 per cent of new electricity capacity came from just three renewable sources, wind (10.1 GW or 49 per cent), solar PV (8 GW or 39 per cent) and solid biomass (1.1 GW or 5 per cent). Since 2000 an additional 168 GW of wind and 115 GW of solar has gone on the European grids, compared to 97 GW of gas and decreases of 18.8 GW of nuclear, 42.9 GW of coal and 41.1 GW of oil generation.54 In terms of power generation, renewables in 2017 provided 30.75 per cent of the EU’s electricity (17.5 per cent of total energy consumption). An additional 15 per cent of the EU’s energy will need to come from renewables if its 2030 target is to be met, a considerable escalation of deployment. Within the power sector, it is likely that by 2030, between 55 per cent and 70 per cent will need to be renewably sourced, according to those interviewed for this project. Eurelectric now assumes that 80 per cent of the EU’s electricity can come from renewables by 2045, and by that time wholesale power prices are expected to reach €70 to €75 per MWh, which is significantly lower than other existing projections.55
The deployment of renewable energy and the decarbonization of electricity is occurring at a much greater pace than in the heat and cooling sectors and in transport. This is mainly due to the availability of technology and the limited impact on consumers.
The Norwegian target for renewable energy deployment by 2020 is 67.5 per cent of total energy, up from 61 per cent in 2010. The renewables percentage within heating and cooling generation was 33.3 per cent in 2005 and 36.4 per cent in 2010. This figure is expected to increase to 43.2 per cent in 2020. The renewables proportion of electricity was 97 per cent in 2005 and 96.9 per cent in 2010 (see Figure 8). For 2020, a renewable percentage of 113.6 per cent has been calculated for electricity production (as a result of electricity exports).56 The renewables share of the transport sector was 1.2 per cent in 2005 and is estimated at 4.1 per cent in 2010 and is expected to increase to 10 per cent in 2020.
As the price of renewable energy continues to fall, it may not only change the power mix, but potentially the locations of heavy industry. Manufacturing bases and factories are often located close to sources of cheap energy, although other factors also affect location choice.57 If the price of solar or wind power continues to fall – with solar contracts in Portugal, for example, reaching a low of €20/MWh58 or offshore wind in the UK falling to as low as £39.65/MWh (€44.43)59 – this may have implications for existing clusters of heavy industry across Europe, including those in Norway.
Today, many renewable technologies are cost-competitive with conventional energy sources, and by 2020 all commercially available renewable technologies in many parts of the world will be cheaper than fossil fuels. However, the open question is: will the transition be fast enough to effectively stop climate change and limit the temperature increase to 2°C?
Reiner Baaker
To date, the decline of coal power in European countries has tended to boost demand for renewables rather than for gas. As referenced above, the EU has progressively raised its renewable energy targets, most recently to at least 32 per cent by 2030. National renewable energy plans, the implementation of the EU Emissions Trading System (ETS) and support for carbon prices – at the EU level with the introduction of the Market Stability Reserve and at the national level in some countries with the introduction of carbon floor prices – have helped to squeeze coal out of the market. The UK’s commitment to a coal phase-out by 2025 was underpinned by the introduction of a carbon floor price and the rapid expansion of renewable energy (particularly wind). The cost of wind power in the UK fell below market prices and effectively became subsidy-free for the first time in September 2019.60 Looking ahead, it is likely that the power sector will go directly from coal to renewables, unless they have other interests in gas.
In addition to climate, efficiency and renewable energy targets, the EU has introduced a target for the installation of electricity connections – interconnectors – between member states. This proposes that by 2020 at least 10 per cent of an EU member state’s peak demand can be met from interconnectors (i.e. that the electricity can be imported from another country), with the intention of this rising to 15 per cent by 2030.
Most Norwegian electricity flows into the Nordic market, which covers Denmark, Finland, Sweden and Norway, and is divided (even within each country) into different price zones. Within the market, Norway is a net exporter of power, as can be seen in Figure 9. The only other major international link is to the Netherlands with the NorNed interconnector. This came into operation in 2008 and is now a major export route for Norwegian power (approximately one-third of net exports in 2018). On average over the last three years Norway has seen a net export of around 13 TWh of power annually. This equates to about 11.9 per cent of total electricity generation in the country.61 Norway’s significant hydropower capacity is seen as not only a regional resource, but increasingly of strategic value for Europe, especially with the need for greater flexibility with changing supply and demand technologies should there be sufficient infrastructure, adequate price signals and domestic support.
Norway has an important role as an exporter of electricity to the European market, which is in both our interests. It is also CO2-free, which is why we are so interested. We would like the Finnish to do more as well but they believe that it will raise prices domestically.
Pierre Schellekens
Significantly more electricity exports outside the Nordic regional market are expected with the planning and construction of new interconnectors to the German and UK markets. In total, an additional 4.2 GW of interconnectors could be in operation within a decade – compared to 6.1 GW currently in operation (see Table 1). This could have impacts on power prices in Norway and potentially the Nordic region. The interconnectors, particularly to the UK market, also offer an important mechanism to increase the use of offshore wind, as they can become the backbone of an offshore grid network, connecting various marine renewable energy resources.
|
Connection to |
Size |
Status (expected start-up) |
|---|---|---|
|
Denmark |
1.6 GW |
Operational |
|
Finland |
100 MW |
Operational |
|
Netherlands – NorNed |
700 MW 450 kv HVDC |
Operational |
|
Russia |
100 MW |
Operational |
|
Sweden |
0.6 GW |
Operational |
|
Sweden |
0.7 GW |
Operational |
|
Sweden |
0.25 GW |
Operational |
|
Sweden |
2.15 GW |
Operational |
|
Germany – Nordlink |
1.4 GW 500 kv HVDC |
Under construction (2020) |
|
UK – NSN |
1.4 GW 515 kv HVDC |
Under construction (2021) |
|
UK – NorthConnect |
1.4 GW 500 kv |
Pending licence |
Source: Global Transmission Report (2019), ‘Data & Statistics’, https://www.globaltransmission.info/archive.php?id=1424 (accessed 30 Mar. 2020).
Note: HVDC = high voltage direct current.
Interconnection is just one mechanism for achieving grid flexibility. Other means are flexible demand, greater supply flexibility from conventional generators, and static and mobile storage (in EVs). Currently, grids are generally the most economic instrument to balance supply and demand, but significant changes are taking place with all of these new technologies and operational and control equipment. The relative economics of each will change over time. Most notable has been the fall in battery costs, both for mobile and stationary storage. BNEF have tracked the cost of lithium-ion battery packs and note that the costs have fallen from $1,160/kWh in 2010 to $373/kWh in 2015 and then to $176/kWh in 2018.62 The uncertainty over technology costs and potentially political and policy uncertainties, such as Brexit, may delay the deployment of large infrastructure projects, such as the construction of interconnectors.
A more connected power sector is necessary for greater renewable deployment. As has been the big discussion in the clean energy package, the first thing we need to do is to use the interconnectors that we have… The power sector will become massively decentralized but the major players that you see today will continue to exist; some may merge, some disappear because they don’t choose the right strategies.
Kristian Ruby
There is an increasing reliance on and an anticipated role for smaller and decentralized energy sources, particularly solar PV. These trends may appear contradictory. While there is likely to be a rise in prosumers (consumers who generate their own electricity and exchange it on the grid), many urban areas will be unsuitable for sufficiently large-scale generation and so heavy industry in these regions will require significant high-voltage transmission systems. Large-scale, particularly offshore, renewables that are capitalizing on falling technology costs will also rely on long-distance and high-voltage transmission grids. It is likely that the renewable-dominated power sector will be both decentralized and well-interconnected and therefore investment in the distribution system is as important as investment in the transmission system – if not more so.
While the EU and Norway have targets for improving energy efficiency, the decarbonization of the energy sector is likely to lead to the gradual electrification of transport and, more slowly, of heat and/or the increased use of hydrogen. This will have multiple impacts on the existing power sector, including changing demand, consumption patterns and centres of demand.
Electricity accounts for 19 per cent of total final energy consumption globally, while in the OECD and Europe, it is slightly higher at 21.4 per cent. However, meeting carbon reduction targets will lead to significant increases in electricity generation as well as an increased share of total energy consumption. According to the IEA, global consumption could rise from 23,000 TWh to between 34,000 TWh and 37,000 TWh, depending on the extent of energy efficiency, by 2040.63
Global EV electricity demand could rise 200-fold by 2040, to more than 1,400 TWh.64 In the EU, under some scenarios cited in analysis funded by the European Commission, the number of EVs could rise from less than 1 million in 2018 to 35 million in 2030 and 190 million by 2050. This could lead to an additional power demand of 356 TWh – 34 per cent of final energy demand in passenger vehicles – and 10 per cent of total power demand by 2050.65 Norway has been at the forefront of EV deployment globally, with a share of 47 per cent of worldwide light vehicle sales in the first quarter of 2019, up 10 percentage points from 2018 – although for the first time, Germany has overtaken Norway in absolute sales numbers.66 Norway’s experience in encouraging sales of EVs and their grid integration, especially in areas of high deployment, offers important policy and regulatory experience for the EU and beyond.
For Norway, using electric cars makes good sense and although Norway represents just a fraction of the world’s vehicle market, its successes and lessons learned in electric mobility deployment can be inspirational to many other countries and regions.
Fatih Birol
It would be good to see Norway doing an outreach programme to other countries: talking about lessons learnt, how things could be done more cheaply, and so on. They could put more thought into public transport and sharing, so EVs become not just something for personal users, and consider what is needed to incentivize sharing and to disincentivize individual vehicles.
Jess Scott
The buildings sector accounts for around 32 per cent of global final energy consumption, using the equivalent of more than 35,000 TWh of electricity per annum. In Europe, 71 per cent of all energy is used for space heating of residential building stock alone. The decarbonization of the heating sector is likely to be driven by broad efficiency and supply options, some of which will be electrified, such as heat pumps. Other options are likely to see the greater use of renewable energy, including solar and biomass. Analysis for the European Commission suggests that electrical space heating in the residential sector could grow from around 5 per cent in 2015 to between 22 per cent and 44 per cent in 2050, depending on the deployment of different technologies.67
Scenarios based on current policies tend to anticipate some demand growth for gas to 2030 followed by a slight decline to around today’s level by 2050. By contrast, 2°C pathways tend to show little demand growth to 2030 and a sharper reduction of around one-third of demand by 2050. The pathway taken will depend on how fast and how orderly the energy transition is, and the role of CCS and negative emissions technologies (NETs). CCS and NETs play a critical role in energy scenarios, often increasing the ‘available’ carbon budget by 50 per cent or more.
CCS is an interesting one as it provides a fall-back for reaching net-zero if there isn’t the reliability or abundance of renewable supply.
Philip Cunningham
In a net-zero world, all gas supply would have to be decarbonized (by CCS) and/or replaced with biogas or green or blue hydrogen. The failure of CCS to materialize at the speed or scale anticipated would have severe implications for future gas demand, yet this risk is not typically made clear to decision-makers in government or business.
Despite considerable political support for CCS, the global roll-out has not occurred. In 2008, the G8 announced strong support for the launch of ‘20 large-scale CCS demonstration projects globally by 2010’ with the aim of beginning broad deployment of CCS by 2020.68 The EU in 2007 committed to having 12 ‘demonstration plants of sustainable fossil fuel technologies in commercial power generation’ operating by 2015, as part of plans to use CCS with new fossil-fuel power plants by 2020.69 To date, however, none of these plans have come to fruition.
Although further, and in some cases more ambitious, targets to reduce emissions have been introduced over the past decade, CCS is not widely seen as a viable solution. This is in part due to a lack of progress and the clear failure to meet agreed objectives, but also – at least in the electricity sector – because the economics of CCS become less attractive as the costs of alternatives fall.
We do not see a big role for CCS in electricity. You might see some CCS for electricity outside Europe but there isn’t a compelling need for it inside Europe. There is, however, a need for CCS in two areas – heavy industry and industry that has process-related emissions.
Pierre Schellekens
The prospects for CCS appear to hinge, at least in the short term, upon industry rather than the power sector, and there is a view that it will be essential in hard-to-abate industrial sectors. CCS could have a role in those industrial processes that emit CO2 that are not related to energy use, such as in the production of clinker during cement fabrication. Norcem Brevik cement plant and Fortum waste management facility in Oslo are linked to the Northern Lights transport and storage-project, led by Equinor with key partners Shell, and Total; the national parliament is expected to make a decision on investment in CCS at Norcem, Fortum and Northern Lights in 2020/21. Its sponsors describe it as the world’s first full-scale cross-border CO2 storage project, using gases from industry and the subsequent ship transportation and sub-seabed storage. In 2020, the state-owned enterprise Gassnova, which manages a CCS project in Norway, will review progress made in the Northern Lights project and make its recommendations to the government, allowing for investment decisions by private partners and approval by the parliament. If approved, construction is scheduled to take three years, becoming operational in 2023/24.70
The Norwegians have pipelines everywhere and depleted oil fields and reservoirs, so whether the route of the money goes via the Norwegian gas industry or wherever is unclear.
Michael Liebrich
Heavy industry, with its high energy costs, is susceptible to international competition on energy and carbon prices. As a result, there is an argument that unilateral action on heavy industry will only result in the offshoring of production, rather than a change in global production. To create a level playing field between producers on energy and carbon emissions, global production standards must be introduced and enforced, along with border carbon tax adjustments for the importation of products, or pricing carbon on a global basis. The European Green Deal communication states that the Commission will propose a ‘carbon border adjustment mechanism, for selected sectors, to reduce the risk of carbon leakage’.71
However, even if CCS is developed at scale and the economics improve, unless carbon is adequately priced, CCS will always be more expensive than not capturing the carbon. Therefore, there is a growing realization that creating a use for the CO2 will significantly improve the economics of CCS. The trend now is therefore towards carbon capture, use and storage (CCUS). An increasing number of governments and industries are researching and developing CCUS programmes, which include using CO2 to create synthetic fuels; using micro-organisms, similarly to photosynthesis, to create ethanol; or incorporating the gas into concrete. Understanding the energy required, the economics and the environmental implications of these processes is often still in its infancy, and therefore extensive research and piloting will be required.
CCS will have to play a much bigger role. Real growth points will be some time in 2040 to 2050, and it will be a steady start to 2030 and then a much more rapid growth to 2050.
Dominic Emery
Given the market opportunities of CCS and CCUS, globally many countries and companies are engaging in their development, for example, such as the US and China. Public subsidies for industrial CCS are likely in the EU,72 with a focus on support for transporting carbon to enable industry clusters and entire carbon storage and use value-chains. In this context Norway is seen as potentially globally important, given its experiences in marine environments and piping as well as with heavy industry. Norway also has depleted offshore oilfields suitable for sequester. It has also put in place a relatively large industrial CCS project that captures carbon from the Oslo waste incinerator and a cement plant, then transports the CO2 and stores it deep under the Norwegian North Sea.
Heavy industry has sought to be energy efficient, in order to be economically competitive. The threat of higher energy prices and the introduction of, or rise in, carbon prices have also accelerated action. However, the prospects of a net-zero economy will require more transformative action from industry and for changes in the way, and the extent to which, products are used. These changes include:
Energy production and consumption: Some heavy industries are seeking to ensure that the energy they use is renewable by becoming prosumers (producing and consuming their own power). Others are seeking to become more flexible in their operations in order to help maintain the supply-and-demand balance.
Shift to a circular economy: Many sectors are now looking to develop a more circular approach, whereby they consider not only the recycling and reuse of their products but their processes of production and service provision.
As the price of renewable energy continues to fall, companies in heavy industry may look to shift their production base, which has traditionally been located near low-cost energy sources. Flexible production methods and the variability of solar and wind will become less significant as cheap capital, greater automation and variable power prices may lead to production being located where the power supply is cheapest. Alternatively, short-term storage costs may continue to fall or the cost of long-distance transmission decrease. Any of these scenarios casts doubt over the continued competitiveness of heavy industry and their power sources in northern Europe.
The marine environment will become increasingly important for renewable energy. Existing technologies, such as seabed-mounted wind, are seeing dramatic falls in costs. In recent contracts, prices in the UK were settled at £39.65/MWh (€44.43/MWh) – below the current market price of electricity – down from £120/MWh (€134/MWh) in 2015.73 New technologies, such as floating wind farms, are opening in deeper water with the advantages of higher wind speeds and being further from populations. If floating wind farms follow the trend of both onshore and other offshore wind, then wider experience and economies of scale will rapidly lead to falling costs and greater competitiveness, enabling deployment at significant levels. The European Commission has stated that between 230 GW and 450 GW of offshore wind will be necessary for the EU to meet its 2050 net-zero carbon targets, while capital expenditure on offshore wind including grids will need to rise from around €6 billion a year in 2020 to €23 billion by 2030, and thereafter up to €45 billion.74
Offshore wind farms are so captivating because the real estate is almost infinitely large: if you go for floating offshore where you can get to very high capacity factors, the cost can come down to wholesale prices in the next 10 or 20 years. But looking out to the 2050 horizon, why not put industry offshore where the power is?
Michael Liebrich
Marine developments also play an important role in the economic development of coastal communities, which have also been left behind as traditional industries, primarily fishing, have diminished.
