Fuel for Thought: Crude’s carbon qualities crucial to oil industry’s future amid energy transition

The market value of a crude grade has traditionally been defined by its density and sulfur content, but as the oil sector looks to better understand the emissions associated with producing different grades, carbon intensity could become the most important characteristic of them all.

A crude's carbon intensity is expected to become viewed similar to the way the market looks at sulfur today: The higher the carbon intensity of a crude, the lower its value will be, especially for oil produced at a relatively high rate of emissions.

Light sweet crudes currently tend to trade at a premium to heavy sour ones because they easily crack into the most-demanded products of gasoline and diesel. But as countries and companies commit to decarbonization targets, transport fuels may no longer remain the dominant force, as carbon intensity is expected to emerge as the new standard determining the quality of a crude grade.

In October, S&P Global Platts began publishing monthly carbon intensity calculations and daily carbon offset premiums for 14 major crude fields including the giant Ghawar field in Saudi Arabia, Iraq's key Kirkuk field and the offshore Johan Sverdrup field in Norway. Platts assessments expanded to cover 84 major crude fields across the globe Nov. 15.

Keen to hit net-zero emission targets, oil producers and industry players have become increasingly focused on reducing the carbon intensity of their upstream operations in recent years. Energy majors such as BP and Shell have pledged to prioritize upstream spending on lower-carbon oil and are expected to increasingly sell their stakes in higher-carbon projects.

The upstream carbon intensity assessments consider the production, flaring and venting, maintenance activities, production processing and transport to the storage hub to identify the main sources of emissions, relevant to specific operations.

The Nov. 9 Platts Carbon Intensity Premium assessment for the Saudi Arabian giant Ghawar field was 27 cents per barrel of oil equivalent. In contrast, the CI Premium of Canadian oil field Cold Lake Blend, which produces an a very heavy blend, was assessed at $1.21/boe.

Understanding carbon's impact

As the vapor trails disappear around the skies at the UN Climate Change Conference in Glasgow, leaders would do well to look at the important steps the industry is taking to better measure and understand its carbon impact, especially since even under the most ambitious future energy scenarios crude will play a significant role.

S&P Global Platts Analytics sees global oil demand peaking near 2040 at around 111 million b/d before slipping to 108 million b/d in 2050 under a most likely scenario.

Moreover, those upstream projects which boast of low production costs and lower carbon intensity are likely to remain more competitive in a shrinking oil market.

"If we are able to trace carbon, measure it and value it in a more transparent way, you will have those low-cost, low-carbon integrated digitalized producers dominating in market share and the highest cost producer will be at the tail end of what is a plateauing market," Leila Benali, the minister of energy transition and sustainable development of Morocco, told Platts earlier this year when she was the chief economist at the International Energy Forum.

According to the US Environmental Protection Agency, 2 million barrels of crude is equivalent to about 860,000 mt of CO2 emissions.

Many oil and gas companies are already looking to reduce their carbon footprint by employing many different strategies, such as reducing flaring, shifting to less-carbon-intensive production, creating more low-carbons fuels, investing in carbon offsets, and adding carbon capture, among other avenues, to stay viable.

Potential trading shift

The new quality assessment lays the foundations for an ecofriendlier form of crude oil trading.

Oil trading is set to undergo a major shift as the fossil fuel industry increasingly looks to offset its carbon emissions while navigating energy transition.

The spot market for trading carbon-accounted crude, including carbon credits and measuring the carbon intensity of the oil, is on the rise. Platts has launched a Market on Close assessment process for these transactions, similar to the window used to assess the Platts Dated Brent price benchmark, and the new assessment process is already gaining traction.

By early November, Macquarie Commodities Trading and Occidental Petroleum both received approval to participate in the Platts carbon-accounted crude MOC, paving the way for more liquidity and transparency in the markets.

"It does represent a new stage in transparency but also really in having truly robust standards around what these terms mean in the market," said Jonty Rushforth, senior director of markets and energy transition at Platts.

More oil companies and trading arms have been in contact with Platts to enter this market. Rushforth said Occidental was the first example of "a market participant stating that they intend to pursue transparency in this space."

Platts has an MOC process for a wide variety of crude oil and refined products markets worldwide, including Dated Brent, assessed on the basis of activity seen in the daily North Sea crude MOC. Companies wishing to bid, or offer, a cargo in the Platts MOC for carbon-accounted crude will need to show that emissions associated with these liquids have been independently verified by a third party. Also, any trade incorporating offsetting through carbon credits will need these credits to be of a sufficient quality.

Platts recently published its methodology and standards for its MOC assessment process covering carbon-accounted crude.

Carbon Accounting is a process used to measure the volume of greenhouse gases emitted by a particular entity or process over a particular period of time.

This follows Occidental Petroleum's move in January in delivering 2 million barrels of carbon-neutral oil to Reliance Industries in India. The US company said it was the energy industry's first major petroleum shipment in which greenhouse gas emissions associated with the entire crude lifecycle, from wellhead to combustion, were offset.

In April, Norway's Lundin sold 600,000 barrels of certified carbon neutral crude to Mediterranean refiner Saras, covering "life of field" emissions, and not combustion.

There are many dangers to sidelining oil in the energy transition conversation, but a better understanding of crude quality could help bring clarity to the debate and the hydrocarbon's crucial role within it.