Does electrification offshore reduce global emissions?

Reaching Norway’s climate goals will be difficult and more expensive if the oil and gas industry is not electrified. The question is to what extent are savings offset by increased emissions elsewhere. Our analysis of lasting market effects shows that such projects reduce Norwegian, European and global emissions.

Johan Sverdrup-feltet

Norway’s ambition is to cut greenhouse gas emissions by at least 55 per cent in 2030 relative to 1990 levels. The Norwegian government’s Hurdal policy platform envisages that all of these savings will be achieved domestically. Projects to electrify offshore installations and their associated onshore facilities account for almost 20 per cent of the emission reductions needed to meet the country’s climate goal for 2030.

Emissions from the oil and gas sector are subject to the EU Emissions Trading System (ETS) which caps total emissions from ETS sectors (including power generation, industry, petroleum and aviation). Electrification cuts emissions offshore, but may increase emissions in the power sector or through increased gas consumption owing to the increase in power demand and increased gas exports from Norway. This has led many to doubt the global emission effects of offshore electrification.

Electrification projects result in expected and lasting changes in these markets and the markets themselves are dynamic, i.e., capacity adapts in response to expected changes in supply and demand. An assessment of global emission effects should therefore, account for how the markets will adapt.

Market effects

Our analysis, based on quantitative and qualitative assessments, shows that electrification projects reduce global emissions:

Power market effects: The increased power demand due to electrification projects is known to the market in advance and represents a lasting change in demand – just like electrification projects onshore or increased power demand from new green industry. The market’s primary response is therefore to increase investments in new renewable or low-emission generation capacity in Norway and/or the rest of Europe.

Effect on the ETS Electrification reduces an offshore installation’s demand for allowances and increases demand for power generation. Our market modelling shows a net reduction in total demand for allowances of between 60 and 90 per cent of the emission cut achieved offshore (see figure). This lowers the expected ETS price and implies that some of the most expensive mitigation measures will be postponed or cancelled but also that more allowances will be saved. This increases the probability that more allowances are transferred to the Market Stability Reserve and are permanently cancelled, and that the emission cap is subsequently reduced. Overall therefore, European emissions are reduced.

Figure: The net reduction in ETS emissions from an illustrative offshore field and Melkøya is between 60 and 90 per cent

Figure: The net reduction in ETS emissions from an illustrative offshore field and Melkøya is between 60 and 90 per cent

Emission cuts from electrification depend, among other things, on transmission losses in the connection cable and the energy efficiency of the non-electrification alternative, usually local energy production using gas. Higher efficiency reduces the net savings somewhat, as seen in the Melkøya example.

Gas market effects: According to Rystad Energy, 90 per cent of increased gas exports from Norway to Europe replace LNG imports. The remaining 10 per cent reflects additional consumption in the ETS and non-ETS sectors. Owing to comprehensive climate policies in the non-ETS sectors, the effect on emissions is likely to be negligible.

The increased supply of gas to regions outside of Europe tends to depress global gas prices somewhat, partly reducing LNG production and partly increasing consumption. Global LNG production has a higher climate footprint than both pipeline gas and LNG from Norway. Increased gas consumption is likely to replace a mix of fossil and renewable energy and, overall, to have a small impact on net emissions.

Electrification projects should be carried out if they are profitable

If Norway’s emission target is to be achieved, a wide range of measures must be implemented across all sectors. The target is met cost-efficiently by undertaking those measures that yield the highest CO2 cuts per NOK. The abatement costs for offshore electrification projects range from negative (in other words, it is cheaper than the non-electrification alternative regardless of the CO2 cost) to very high. There is also significant variation in the cost-effectiveness of onshore projects in the industrial and transport sectors.

An abatement measure is beneficial if the abatement cost is lower than the expected CO2 price, which in Norway is the general CO2 tax level, at least until the ETS allowance price surpasses it. Owing to the recent tightening of the ETS, prices are expected to rise rapidly.

The projects yield relatively large cuts per MWh

The energy transition requires large amounts of renewable power generation for electrification and power demand is expected to grow much faster than supply in the near term. However, when it comes to emission cuts per MWh, many of the oil and gas electrification projects are as effective as those on land in the industrial and transport sectors. If we are to use electricity where it yields the largest emissions cuts, no reason exists to shelf offshore projects in general.

The report “Electrification of the oil and gas sector – does it have a global climate effect?” was commissioned by Offshore Norge.

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