M54GED Impacts of Petroleum Exploration,

Extraction and Transport

Dr Adrian Wood (GE516)

Lacking fuel for cooking, a child dries cassava over burning gas
Niger Delta
 Session: A critical reappraisal of the environmental and financial impact
of a rapidly evolving oil and gas sector.
By the end of this session you should be able to: Using recent data,
critically assess the environmental and financial impact of a rapidly
evolving oil and gas sector.

Non-renewable fossil fuels made up more than four-fifths of U.S.

energy consumption. One quadrillion Btu = 45 million tons of coal, or
1 trillion cubic feet of natural gas, or 170 million barrels of crude oil.
What has been in the news recently regarding the twin topics and
petroleum and pollution?

Hess Corp. (HES) will spend more than $45

million in new pollution controls as part of a
settlement to resolve alleged Clean Air Act
violations at its Port Reading, N.J., refinery.

What types of pollution do you associate

with an oil refining?

The controls are estimated to reduce

emissions of nitrogen oxide by 181 tons per
year and result in additional reductions of
volatile organic compounds [VOCs as
organic compounds that have boiling points
roughly in the range of 50 to 250 °C]
 What are we looking at here?
Methane hydrates are crystals
full of methane gas found both
offshore and under the
permafrost. Low temperatures
and high pressure cause
methane and water to
crystallize into ice-like deposits.

• Canada is abandoning a 15-year program that was researching

ways to tap a potentially revolutionary energy source, just as Japan
is starting to use the results to exploit the new fossil-fuel frontier:
methane hydrates.
• Canada and Japan have been partners in the quest to extract
methane from hydrates. Since 2000, Natural Resources Canada has
invested more than $16 million in the venture. Japan spent around
$60 million between 2002 and 2008 to finance production tests in
the Canadian Arctic.
EPA Report Confirms Oil and Gas Sector is Among Nation's Worst
Climate Polluters [U.S. Environmental Protection Agency]
A new report issued by the EPA in late April highlighted the oil and
gas sector as the top industrial source of methane pollution:
• Methane is a highly potent heat-trapping pollutant that the oil
and gas industry vents and leaks from equipment and operations
throughout the exploration, production, transmission, and
distribution phases.
• In 2011 - 32.2 million metric tonnes C02eq were produced from
Natural Gas Systems.

Hydraulic fracturing results in far

more upfront methane release
than traditional drilling methods
Shale gas 'worse than coal' for climate (BBC) - US researchers found that
shale gas wells leak substantial amounts of methane, a potent greenhouse
gas. "Compared to coal, the footprint of shale gas is at least 20% greater
and perhaps more than twice as great on the 20-year horizon.

Shale gas better than coal (GLG Group) - With the number of abandoned
coal mines and open pit mining there are more opportunities for methane
to leak into the environment than in a controlled drilling environment
[Gerson Lehrman Group - provide independent consulting services to
companies around the world].
 Preparing a drilling string - A
study has said fracking at over
2km below the surface was
'incredibly unlikely' to lead to
water contamination

Professor Davies said: "What everyone's interested in is: how far can
fractures go upwards from that depth? Could they go far enough to
intersect and contaminate aquifers with fracking fluids or create pathways
for methane to contaminate aquifers
A new study revealed the process, which uses high-pressure liquid pumped
deep underground to split shale rock and release gas, caused fractures
running upwards and downwards through the ground of up to 588 metres
from their source.
 The implications of the natural gas boom in the United States?
• What has been happening to natural gas prices over the last three year?
Since mid-2009, it has been increasingly clear that the amount of natural
gas supplied via hydraulic fracturing (popularly known as will
create an oversupplied domestic natural gas market. The resulting low gas
prices depress contract pricing for long-term power sales to utilities.

See MIT Energy Initiative

Future of Natural

Fatih Birol, chief economist of the IEA said: "If gas prices come
down, that would put a lot of pressure on governments to
review their existing renewable energy support policies ... We
may see many renewable energy projects put on the shelf.
 The advent and continuing
improvement of advanced crude
oil production technologies
continue to lift projected
domestic supply.
Domestic production of crude oil
increases sharply through 2019,
when production reaches 7.5
million bpd.

U.S. dry natural gas production

increases throughout the
projection period outpacing
domestic consumption by 2020
and spurring net exports of
natural gas.
There are, and will be, numerous knock-on effects caused by fracked gas
and oil:

Thermal coal miners will cut

benchmark annual contract prices
by more than 17 per cent from last
year as a glut in the US natural gas
market weighs on coal.

A switch from coal to gas should

result in lower CO2 emissions.

Overseas markets, by contrast, have been booming. "The international

export market is where long-term growth for the industry might come
Jim Rollyson, an energy analyst with the advisory firm Raymond
James.
A group of Nigerians in the United States
marked Earth Day Sunday by calling on
President Goodluck Jonathan to implement
recommendations from a U.N. environmental
report on the Ogoniland, in oil-rich
Niger Delta region.
Full report available at: http://www.guardian.co.uk/environment/interactive/2011/aug/04/un-
environmental-impact-ogoniland

The report said drinking water

supplies and agricultural land
in oil-rich Niger Delta
have been damaged by 50
years of crude oil spills. It said
the cleanup could cost more
than $1 billion.
A new inventory report on greenhouse gases has confirmed that
Canadian emissions levels continued to drop in most sectors for 2010
except in the oil-and-gas industry's booming oil sands activities.

View of the Syncrude oil sands extraction facility near Fort

McMurray, Alta.
Canada is required to submit the inventory to the international community
as part of its obligations under the United Nations Framework Convention
on Climate Change, and the latest figures show that the country's overall
annual emissions increased by 0.25 per cent in 2010 to the equivalent of
about 692 Mt of carbon dioxide emissions [who emits more per capita?]

A comparison of CO2
emissions per capita
between Canada, the
United Kingdom and
Nigeria

Separate figures released by the Canadian Association of Petroleum

Producers show that annual emissions increased in 2010 by 14 per cent for
the oil sands sector.
 What is revealed in this
image?

A ghost crab eats oil from the Gulf of Mexico spill, shown glowing
yellow-orange under ultraviolet light, at Gulf Islands National Seashore
near Pensacola, Florida.
What has been the most expensive pollution event in the history of
the oil and gas industry?

Exxon Valdez event (1989)

spilled between 260,000 to
750,000 barrels of crude oil in
Prince William Sound, Alaska.

What was the cost?

In the case of Baker v. Exxon, a jury awarded $287 million for actual
damages and $5 billion for punitive damages [$ 9.9 billion at 2013 values],
On December 6, 2002, the judge announced that he had reduced the
damages to $4 billion,
Exxon appealed again - Judge Holland to increase the punitive damages to
$4.5 billion, plus interest. On December 22, 2006 damages award was cut
to $2.5 billion.
The punitive damages were ruled to an amount of $507.5 million. As of 15
December 2009, Exxon paid all owed punitive damages, including lawsuit
costs, plus interest, which were further distributed to thousands of
plaintiffs.
Exxon recovered a significant portion of clean-up and legal expenses
through insurance claims associated with the grounding of the Exxon
Valdez
Kuwaiti oil fires - fires started in January and February 1991 and the last
one was extinguished by November 1991.

These Landsat images

show before, during
and after the release of
1.5 billion barrels of oil
into the environment,
the largest oil spill in
human history (NASA's
Goddard Space Flight
Center).

The cost of dousing the Kuwaiti oil fires was more than $1.5 billion, as
over 700 wells were capped.
As of March 2011, cleanup is far form over. According to Arab News,
the Saudi government set contracts worth 700 million Saudi Riyal (over
$180 million) to rehabilitate the environments.
 When eventually capped
on 15 July 2010, the
Deepwater Horizon oil
spill had discharge an
estimated 4.9 million
barrels of crude oil (or
780,000 m3)

On November 15th 2012 BP agreed to pay $4.5 billion over five years to
settle all the criminal liabilities resulting from the rig explosion and oil spill,
$6.5 billion it has paid on claims from individuals and businesses that
suffered and $7.8 billion to settle further claim,
Total cost to date $19 billion, however, BP has set aside $42 billion to pay
fines, compensate victims and clean up or $10,550 per barrel.
By way of comparison, Saddam Iraq was ordered to pay
reparations of $52 billion ($88 billion in money) for invading
Kuwait.
Bonga sits about 75 miles (120 kilometers) off Nigeria's coast. It can produce
about 200,000 barrels of oil and 150 million cubic feet of gas a day.
On the 20th December 2011 an oil spill occurred: Shell announced that the
Bonga spill likely was less than 40,000 barrels, or 1.68 million gallons.
Two Nigerian government agencies told a parliamentary hearing on 28th
March 2013 that Royal Dutch Shell should pay a total of $11.5 billion in
compensation for damage caused by an oil spill at its offshore Bonga field.
This would equate to around $287,500 per barrel compensation and thus
the largest such claim in history!
 Who is this man?

Lord Nicholas Stern, former

World Bank chief economist
and author of the landmark
Stern review of the economics
of climate change (2006)

Stern and his team set out to examine "the economic impacts of climate
change" and "the economics of stabilising greenhouse gases in the
atmosphere" plus the policy challenges of creating a low-carbon
economy and managing adaption to a changing climate.
The review warns that to stop dangerous climate change the world should
spend 1% of global GDP a year, starting immediately

Global GDP = $US 70,201,920,000,000 / 100 = $US 702 billion

 Speaking yesterday in London (2008), Stern said
evidence that climate change was happening
faster than had been previously thought.
...consequently, get below 500ppm... would
cost around 2% of GDP.
or $US 1.4 trillion per annum for the next 20 or
30 years.

Modelled global temperature relative

to 1986 2005 for various scenarios run
for the forthcoming IPCC 2013 report.
Worse-case scenario
Modelled global temperature relative
to 1986 2005 for various scenarios run
for the forthcoming IPCC 2013 report.
Worse-case scenario

Failure to do this would lead to damage costing much more, the report
warned - at least 5% and perhaps more than 20% of global GDP...
...that equates to $US 3.5 trillion to $US 14 trillion
So, we have far more oil, coal and gas than we can safely burn. The
challenge really comes down to this: fuel is enormously useful, massively
valuable and hugely important geopolitically, but tackling global warming
means leaving most of it in the ground by choice!
 A coal-fired power station in
Gelsenkirchen, Germany, at
2300 MW it is one of the most
powerful coal-fired power
stations in Europe.
20,000 tonnes of coal are
burned daily, producing 10
million tonnes of CO2 per year.

There are three facts that tell you all you

really need to know about climate science
and politics:
1. There is a broad consensus among the
world's most prestigious scientific bodies
that the world is warming;
2. There is agreement that the world must
limit the global temperature increase to 2C;
3. The amount of warming is roughly
proportional to the total amount of carbon
emitted.
In order to stabilize CO2 concentrations at about 450 ppm by 2050,
global emissions would have to decline by about 60% by 2050.
Industrialized countries greenhouse gas emissions would have to
decline by about 80% by 2050.
What are the projections in the Annual Energy Outlook 2013
(AEO2013) regarding energy-related CO2 emissions through to 2040?

Emissions from motor gasoline

are lower as a result of the
adoption of fuel economy
standards, biofuel mandates, and
shifts in consumer behaviour.
Emissions from coal use in the
generation of electricity are
lower as power generation shifts
from coal to lower-carbon fuels
The Global CO2 budget - scientists estimate that humans can emit is roughly:
565 more gigatons [GtCO2eq] or 565,000,000,000 tonnes CO2eq
...of carbon dioxide into the atmosphere by mid-century and still have some
reasonable hope of staying below two degrees climate .

What number describes the amount of carbon already contained in the

proven coal and oil and gas reserves of the fossil-fuel companies, i.e. the
fossil fuel we are currently planning to burn:
2795 more gigatons [GtCO2eq] or 2,795,000,000,000 tonnes CO2eq

We have five times as much oil and coal and

gas on the books as climate scientists think is
safe to burn.
 Are there solutions to deliver
the cuts (blue dashed line) that
will stop our planet from
experiencing dangerous climate
change?

What are these solution and

how will they impact the
various fossil fuel industries?

CO2 emissions since 1850 (red); exponential

growth (blue); cuts to hit climate target
(dashed).
Annual global CO2 emission (Gt) pathways from 2012 to 2050
based upon EIA projections. Key areas of reduction achieved
through: Efficiency, Fuel Switching, Renewables, Nuclear and
Carbon Capture and Storage.
Carbon Tracker is a non-profit organisation working to align the capital
markets with the climate change policy agenda.
Carbon work is now used by banks such as HSBC and Citigroup
and the rating agency Standard & to help focus their thinking on
what a carbon budget might mean for valuation scenarios of public
companies.
Lets reiterate: We have five times as much oil and coal and gas on the
books as climate scientists think is safe to burn...however, capital is
being spent to develop more reserves.

In order to find and develop reserve more capital will have to be deployed.
Analysis shows that the Capital Expenditure [CAPEX] spend over the last 12
months by the 200 leading fossil fuel companies totalled US$674billion.
The higher capital costs existed within the oil and gas sector, at $593billion.
If CAPEX continues at the same level over the next decade it would see up
to $6.74trillion in wasted capital developing reserves that is likely to
become unburnable.

But what happens if a global consensus is reached regarding the control of

CO2 emissions, what affect will this have on fossil fuel companies and their
profits?
This has profound implications for asset owners with significant holdings in
fossil fuel stocks.
 Financial Consequence
• The 200 fossil fuel companies analysed here have a market value of
$4trn and debt of $1.5trn.
• Asset owners and investment analysts have begun to investigate the
implications of unburnable carbon. Analysis from HSBC suggests that
equity valuations could be reduced by 40 - 60% in a low emissions
scenario.
• In parallel, the bonds of fossil fuel companies could also be vulnerable
to ratings downgrades, as recently illustrated by Standard & .
• Such downgrades would result in companies paying higher rates to
borrow capital, or if the rating drops below investment grade they
could struggle to refinance their debt.