World leaders are stepping up efforts for an energy transition that will rely more on renewable energy sources as we move closer to key climate commitments.
Investment in the energy transition is well underway, with daily reports announcing new projects for wind, solar, hydrogen, batteries and other storage technologies, hydrogen, biofuels and capture and storage carbon.
The reality for energy markets is that the global economy is still largely dependent on oil and natural gas as primary energy sources; renewable energies must evolve considerably to replace them.
S&P Global Platts analysts predict in their baseline scenario that, despite global efforts to reduce greenhouse gas (GHG) emissions, global demand for oil will continue to grow slowly throughout this decade and then decline. will stabilize just below 115 million barrels / day of oil between the end of the 2030s and the first half of the 2040s.
Faced with the expected growth in demand for oil, increased global focus on environmental, social and governance (ESG) factors encourages players in the oil and gas market to produce, invest and market energy resources with associated lower emissions. .
Market demand is growing for “low carbon” oil and gas supplies, which are fossil fuel resources produced with lower GHG emissions rates.
Markets, in turn, play a key role in facilitating the valuation, trade and delivery of these low carbon resources. New technologies and trading tools provide the energy sector with different options to tackle emissions from current, transitional and future energy sources, and to do so much faster and with less risk.
Meanwhile, the datasets generated by tracking and monitoring energy sources and their emissions and other ESG attributes are increasing in size and number. In this new context, it is not only the data processing tools that are important but the quality and reliability of the data itself. The correct attribution of market value and the incentive for the right investments and changes in the energy system depend on it.
Carbon intensity and crude trading
Carbon intensity (CI) is a measure that the market began to use to measure GHG emissions from specific types of crude oil production. Oil produced with a lower amount of GHG emissions per barrel of oil has a lower CI than crudes produced with higher emissions.
Therefore, fewer voluntary carbon credits would be needed to offset the low CI crude emissions.
As demand for low-carbon oil increases, CI metrics such as those calculated by S&P Global Platts Analytics could impact the traded price of oil, particularly in terms of differentials between grades. of crude and low-carbon varieties of the same grade of crude. The market could apply CI as an attribute of crude, such as sulfur.
Just as higher sulfur content devalues crude, the market could also come to devalue crude produced at a relatively high emissions rate. In the not-so-distant future, the low-carbon oil market may mature and price in upstream CI, with lower CI crudes trading at a premium to those of higher CI.
After determining the CI for the individual production fields, it is possible to further analyze the implications, including the impacts on prices.
The impacts on the global supply curve will also be quantifiable by incorporating the cost of addressing or offsetting emissions into the cost of production. In a market in search of low carbon oil and limiting capital and market demand for high carbon production, fields with high production of IC would see production costs including carbon increase.
Targeting a cleaner gas supply
There is a growing awareness of the role of methane in global warming, with more than 100 signing a pledge to reduce GHG emissions. Methane, the main component of natural gas, has a global warming potential about 85 times that of CO2 over a 20-year period.
Platts’ recent launch of methane performance certificate (MPC) price assessments now allows for low-emission natural gas production to be negotiated in the United States. Importantly, certificates use dynamic sets of measured data monitored and audited by an independent third party, deviating from previous standards based on self-reported data.
PPMs are the start of a journey to reduce methane intensity throughout the value chain.
Wider standards for natural gas are also emerging in the United States, encompassing not only methane, but other ESG attributes. And amid growing interest from consumers and end users, several middleman operators recently announced that they will begin dedicating physical pipeline capacity to certified gas.
Armed with more reliable and comprehensive information on the carbon footprint and methane emissions of specific crude and natural gas resources, market players will be able to identify and utilize the least emitting assets.
A host of new standards and price indicators for sustainable and renewable fuels, voluntary carbon credits and carbon credit pricing and allowance assessments now exist, allowing renewable energy and sustainable fuel markets to be more easily monetized. .
Technologies such as artificial intelligence and blockchain can help improve the processes and speed of trade in the commodities and energy markets
Digital innovation in energy trade
All of this new data requires new technologies and faster delivery mechanisms to ensure that the market can respond adequately. Delivery of basic energy data through the desktop and app application programming interface (API) enables traders to not only see the value of transition products, but exchange them with the best information in real time .
APIs enable data to be accessed, integrated and queried in the way that works best for the user to fuel digital transformation and unleash new value. They are just one of the many delivery channels employed by Platts, which also offers its pricing data, news, and analytics through the Platts Dimensions Pro desktop platform and mobile app.
In combination with such data delivery systems, technologies such as artificial intelligence (AI) and blockchain can help improve the processes and speed of trade in the commodities and energy markets. They also allow companies to model the complex integrated global energy system and navigate the flood of data generated by increased monitoring of raw material and energy supply chains.
The same technologies have great potential to support the exchange of assets essential to the energy transition, increase transparency and facilitate emission reductions in supply chains through more efficient use of resources.
For example, in the maritime sector, many digital initiatives are emerging to track fuels and traffic and monitor GHG emissions, while blockchain can also provide traceability in the supply chain of key raw materials from the industry. energy transition such as battery metals.
AI is also exploited in the voluntary carbon market, providing essential transparency. In partnership with Viridios, Platts launched six AI-based CARBEX carbon credit indices along with their respective monthly averages. Viridios AI software is trained using Platts product data, in addition to Viridios’ extensive database of carbon credits transactions. The software generates values for a range of carbon credits, based on historical relationships between a large set of carbon credit transaction data and related commodity prices.
These market developments signal that we are at a new turning point in the energy transition. Fossil fuels continue to be the mainstay of many economies, as renewable energy sources develop at a rapid rate and “non-physical” commodities like carbon credits and other environmental attributes create significant benefits. new opportunities and new challenges.
From facilitating the trade of environmental attributes, to analyzing and linking multiple factors that impact value, technology will play an increasingly important role in valuing raw materials and commodities. energy products that will lead to decarbonization.
Without up-to-date, high-quality, easily accessible and analyzable data, the technology will be insufficient, and this will remain a central concern of the energy sector for years to come. In the short and long term, the energy transition will be fueled by information.
This article first appeared in the December 2021 issue of S&P Global Platts Insight magazine