World leaders are doubling down on an energy transition that will rely more heavily on renewable sources of energy as we move closer to key climate commitments.
Investment in the energy transition is well underway, with daily news reports announcing new projects for wind, solar, hydro-generation, battery and other storage technologies, hydrogen, bio-based fuels, and carbon capture and storage.
The reality for energy markets is that the global economy is still largely dependent on oil and natural gas as primary energy sources; renewables need to scale significantly to replace them.
Analysts at S&P Global Platts forecast in their baseline scenario that, despite global efforts to reduce greenhouse gas emissions (GHGs), global oil demand will continue to grow slowly throughout this decade and then plateau just below 115 million b/d of oil between the late 2030s and first half of the 2040s.
In the face of forecast oil demand growth, an increased global focus on environmental, social and governance (ESG) factors is encouraging oil and gas market participants to produce, invest in, and trade in energy resources with lower associated emissions.
Market demand is growing for “low-carbon” oil and gas supplies, which are fossil fuel resources produced with a lower rate of GHG emissions.
Markets, in turn, play a key role in facilitating the valuation, trade, and delivery of these lower-carbon resources. New technologies and trading tools offer the energy sector different options to address emissions from current, transition, and future energy sources, and to do so much more quickly and with less risk.
Meanwhile, the data sets generated by tracking and monitoring energy sources and their emissions and other ESG attributes are growing in size and number. In this new context, it is not only the tools for handling the data that are important but the quality and reliability of the data itself. Assigning market value correctly and incentivizing the right investments and shifts in the energy system depend on it.
Carbon intensity and crude trading
Carbon intensity (CI) is one metric the market has started to employ 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 required to offset emissions of lower-CI crudes.
As demand grows for low-carbon oil, CI measurements like those calculated by S&P Global Platts Analytics could impact the traded price of oil, particularly in terms of differentials between crude grades and lower-carbon varieties of the same grade of crude. The market could apply CI as an attribute of the crude, like sulfur.
Just as higher sulfur content devalues crude, the market could equally come to devalue crude produced at a relatively high rate of emissions. In the not-too-distant future, the market for low-carbon oil could mature and price in upstream CI, with crudes of lower CI trading at a premium to those of higher CI.
Having ascertained the CI for individual production fields, there is scope for more in-depth analysis of the implications – including price impacts.
Impacts to the global supply curve will be quantifiable, as well, by incorporating the cost of addressing or offsetting emissions in the cost of production. In a market seeking low-carbon oil and limiting capital and market demand for high-carbon production, fields with high CI production would see carbon-inclusive production costs rise.
Targeting cleaner gas supply
There is growing awareness of the role of methane in global warming, with more than 100 signatories to a pledge to reduce emissions of the GHG. Methane, the main component of natural gas, has global warming potential around 85 times that of CO2 over a 20-year period.
The recent launch by Platts of methane performance certificate (MPC) price assessments now enables trading of lower-emission natural gas production in the US. Importantly, the certificates use dynamic sets of measured data monitored and audited by an independent third party, moving away from predecessor standards based on self-reported data.
MPCs are the beginning of a journey to reduce methane intensity along the entire value chain.
Broader standards for natural gas are also emerging in the US, encompassing not only methane but other ESG attributes. And amid growing interest among both consumers and end-users, several midstream operators announced recently that they would start dedicating physical pipeline capacity for certified gas.
Armed with more reliable and comprehensive information about the carbon footprint and methane emissions of specific crude and natural gas resources, market participants will be able to identify and use the lowest 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, enabling the renewables and sustainable fuels markets to be monetized more easily.
Technologies like artificial intelligence and blockchain can help improve processes and speed of trading in commodity and energy markets
Digital innovation in energy trading
All this new data requires new technologies and faster delivery mechanisms to ensure the market can adequately respond. Desktop and application programming interface (API) delivery of core energy data enables traders to not only see the value of transition commodities, but to trade them with the best information in real time.
APIs allow data to be accessed, integrated and queried in the way that best suits the user to power digital transformation – and unlock new value. They are one of a number of delivery channels employed by Platts, which also offers its pricing data, news, and analytics via the Platts Dimensions Pro desktop platform and mobile application.
In combination with such data delivery systems, technologies like artificial intelligence (AI) and blockchain can help improve processes and speed of trading in commodity and energy markets. They also enable companies to model the complex global integrated energy system and navigate the flood of data generated by increased monitoring of commodity and energy supply chains.
The same technologies have great potential to support trading of assets critical to the energy transition, increase transparency and facilitate emissions reductions in supply chains through more efficient use of resources.
For example, in the maritime sector, numerous digital initiatives are emerging to track fuels and traffic and monitor GHG emissions, while blockchain can also ensure traceability in the supply chain for key energy transition raw materials such as battery metals.
AI is also being leveraged in the voluntary carbon market, bringing much-needed transparency. In partnership with Viridios, Platts launched six AI-driven Carbon Credit ‘CARBEX’ Indices as well as their respective monthly averages. Viridios’ AI software is trained using Platts commodity data, in addition to Viridios’ own extensive database of carbon credit transaction data. The software generates values for a range of carbon credits, based on historic relationships between a broad data set of carbon credit transactions and related commodity prices.
These market developments signal that we are at a new juncture in the energy transition. Fossil fuels continue to be a mainstay of many economies, while renewable energy sources are growing at a rapid pace and “non-physical” commodities like carbon credits and other environmental attributes are creating fresh opportunities and challenges.
From enabling trade of environmental attributes, to analyzing and relating multiple factors that impact value, technology will play an ever-greater role in valuing the commodities and energy products that will drive decarbonization.
Without high-quality, timely data that is easily accessible and analyzable, technology will be insufficient, and this will remain a core concern of the energy sector for years to come. In the short and long term, energy transition will be fueled by information.
This piece was first published in the December 2021 issue of S&P Global Platts Insight magazine