Despite COVID’s shock to global health and economic growth, 2020 brought some good news for Europe. Record levels of clean power, cross-border commitments to clean energy, and massive stimulus packages linked to decarbonization (especially in the heavy industries) are all worth celebrating.
Accenture’s recent research, “European industries can grow with green”, shows how cement, steel and chemicals, as well as emerging industries related to datacenters and battery manufacturing can dramatically reduce carbon emissions without compromising their cost competitiveness.
But a well-rounded discussion about the decarbonization of industries must toss oil and gas into the mix. Refining, which is responsible for 80 percent of all European oil and gas sector emissions, accounts for more direct emissions in Europe than the metals or cement sectors. In fact, in terms of emissions, oil and gas falls behind only chemicals and power generation. Even more critically, the refining sector supplies fuels for the road transport sector, which in turn is responsible for nearly 900 million tons of CO2/year. That’s nearly three times that of the heavy material manufacturers combined (Figure 1).
Source: Accenture analysis with EEA data
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Emissions related to refining are not the hardest to abate. The aviation and shipping sectors have a tougher go of it, given they are naturally restricted by space and weight limitations. So do steel and cement producers, whose very high-temperature processes are not easily replaced with low-carbon technology alternatives. In contrast, refineries are rather flexible on their feedstock and have the added advantage of possessing massive industrial sites with existing infrastructures capable of supplying lower-carbon fuels.
This is not to say decarbonization will be easy for refiners. Hardly. Refiners in Europe are already under intense pressure, thanks to declining growth and margins. Investor funding for major transformations will be hard to find. As a result, their decarbonization transitions need to focus on continuously improving performance and thinking beyond boundaries of traditional refining assets.
Scope 1+2: Step up green power and efficiency for higher margins
Refining uses just oil and gas, right? No. Let’s not forget about the electricity needed to power refinery pumps, compressors and lights. It accounts for nearly 10 percent of the sector’s energy consumption. While some of that electricity can be co-generated with steam via thermal processes, there is still the need for stable—and usually costly—electricity supplied through the local grid.
Switching to reliable, 100 percent renewable power presents a sizeable opportunity. Structured purchasing power agreements (PPAs) between heavy industry and solar/wind park operators are becoming increasingly common. They not only reduce operators’ consumed electricity “Scope 2” emissions, but also save energy costs. According to our analysis, the steadily decreasing costs for green power can enable the refining industry to save up to €3 billion per year by 2030. That can translate to roughly 75 percent savings off the average industrial price for electricity, along with five million tons of CO2 per year (Figure 2).
Source: Accenture modeling on CO2 savings (mTCO2) and net value (€bn), extended from net value analysis for Energizing Industries (2020), conservative scenario assuming carbon price of 50 EUR/tnCO2, PPA electricity price of 30 EUR/MWh, Brent price of 65 USD/barrel and 80% of hydrogen production driven by refineries, assuming 2x end demand growth for H2 mainly in industrial sectors while incumbent H2 production still based on SMR by 2030.* Traditional fuel demand decline + lower-carbon power mix for avg grid electricity.
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What’s more, electricity consumption is likely to go up dramatically in refineries of the future, with existing refinery sites and infrastructures re-purposed for a cleaner, green hydrogen alternative. Inclusive of additional capital costs, we expect green hydrogen production to become financially attractive by 2030. With the electricity costs for the energy-intensive electrolysis decreasing rapidly, this can create a net value opportunity worth at least €1 billion for the refiners, while also enabling them to avoid 18 million tons of CO2 emissions (Figure 2).
It’s worth noting that the success of electrolysis assumes abundantly available, low-cost green electricity. In the scenario of tighter wholesale market controls for electricity and/or lagging new generation capacity, another form of clean hydrogen production becomes highly interesting. The economic viability of carbon capture storage and utilization (CCUS) is likely to reach a tipping point around 2030, even with high electricity prices and moderate carbon prices, and even before considering revenues from additional sales of the captured CO2 for other industrial uses. With a higher carbon price, the size of the blue hydrogen prize increases considerably. Better yet, blue hydrogen’s value is not dependent on the availability and cost decreases of green electricity.
Finally, further efficiency increases in operations are possible. Today, efforts to reduce a refinery’s carbon footprint are centered around process efficiency improvements. Actions such as modernizing aging equipment and improving regular controls continue to be worth billions of euros each year, with an investment payback window of just a few years and the possibility of reducing emissions by more than 10 percent.1
While traditional actions may reach their limits over time, new digitally enabled actions can boost carbon-detection and predictive maintenance processes. Digital technologies also enable wider value chain optimization by, for example, improving product mix to respond to real-time demand fluctuations, which can enable parallel efficiencies in both costs and emissions.
Scope 3: New assets for new demand
As the case of hydrogen shows, it’s not only about securing margins from today’s refining products demand. While heavy freight companies responsible for one fourth of all road transport emissions in Europe2 have no alternatives to diesel today, new transport fuels are coming. In contrast to the electric engines powering a growing share of the light-duty vehicles in Europe, many B2B customers of oil retailers and refiners will see a real opportunity in biofuels and hydrogen.
Indeed, low-carbon fuels pose major opportunities for European refiners and retailers to meet new demand and also reduce the indirect (Scope 3) emissions from their products. By building on their existing infrastructures for fuel production and retailing, companies can tap new growth opportunities, boost margins and find alternatives to declining fossil fuel demand in a post-COVID world.
Another key takeaway: Lower-carbon fuels are becoming the lower-cost option for refiners’ customers. Decreasing production costs and emerging CO2 taxes on conventional fuels are narrowing the price premium for customers. That will make green hydrogen-powered fuel-cell trucks, as well as renewable diesel in pure form, an attractive option by 2030. At that time, Europe could theoretically be able to abate all of its ~200 million tons of road freight emissions (Figure 3).
Source: Accenture modeling, extended from analysis for Energizing Industries (2020), assuming carbon price of 50 EUR/tnCO2 and Brent price of 65 USD/barrel, green raw H2 price of 2 EUR/kg by 2030 and 30% lower fuel duties for H2.
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Overall, the reinvention of oil companies will require smart actions (not tradeoffs) in the areas of carbon, customers and competitiveness. I am confident the industry is up to the challenge. As I patiently wait for a resurgence of European travel, mobility and industrial production in 2021, I’m encouraged by the new daily smart moves I’m seeing industrial companies—including oil and gas—take to prepare for the post-pandemic decarbonization imperative in Europe.
Disclaimer: The views and opinions expressed in this document are meant to stimulate thought and discussion. As each business has unique requirements and objectives, these ideas should not be viewed as professional advice with respect to the business.
1 Accenture Analysis