Title : Carbon pricing: challenges in upstream oil and gas economics
Abstract:
Nations worldwide are on a mission to decarbonize. Higher carbon pricing is now certain for any upstream project, which raises serious questions for investors. Carbon charges will transform the hydrocarbon sectors, affecting asset values and project economics. Therefore, upstream oil companies have already anticipated these changes and are building carbon costs into their financial models. Mitigating the impact of carbon charges will be difficult to achieve. Businesses will need to take steps like adopting new technologies to reduce carbon cost. These costs will influence the project's economics and the ability to raise financing for the hydrocarbon producers. A high carbon price could discourage investment in upstream projects, pushing companies towards developing cleaner alternatives or more efficient extraction methods. Carbon pricing could also incentivize upstream companies to prioritize projects with lower carbon emissions, like natural gas, or even invest in carbon capture and storage technologies. This can also lead to investments in cleaner extraction technologies and a shift towards lower-emission sources. In a global market with carbon pricing, companies with lower emissions will gain a competitive advantage. Carbon pricing can drive innovation in the oil and gas sector by encouraging the development of new technologies to reduce emissions. Upstream investments may also decline due to the uncertain future of rising carbon pricing as companies become more cautious about investing in projects that could incur higher costs in the future. The carbon credits will add a cost to high-emitting operations, pushing businesses to seek ways to minimize emissions to avoid the need to purchase additional credits. To reduce emissions and lower the need for carbon credits, upstream projects may invest in new technologies like carbon capture, enhanced oil recovery methods with lower emissions, or develop cleaner energy sources. Corporations might prioritize extracting and processing lower-carbon oil and gas reserves to naturally reduce their emissions footprint. Projects with lower emissions can gain a competitive edge by selling carbon credits to higher-emitting competitors, or by commanding higher prices for their cleaner products. Carbon credit systems can stimulate research and development into new technologies and practice for reducing emissions. The upstream sector faces several challenges and opportunities related to carbon pricing. A project that can adapt to a world that involves carbon pricing will have a greater chance of succeeding in the future energy transition. As the regulatory and economic landscape changes, businesses will need to focus on reducing emissions, innovating new technologies, and reinventing their business strategies.
