The oil and gas industry has played a key role in the Australian economy for about half a century, but it is coming under increasing pressure to alter its business model amid the energy transition. JOSH LEWIS explains.

Resources Minister Keith Pitt revealed last month that Australia’s resources and energy export earnings are forecast to surge to a record high $425 billion by the end of the current financial year.

With the International Energy Agency (IEA) forecasting oil and gas demand to remain strong in the years ahead, it is clear Australia’s oil and gas industry will remain a key part of the nation’s economy into the future, but it is likely to continue to face increased scrutiny over its green credentials.

The industry is at a crossroad as it looks to meet rising demand while balancing its environmental, social and corporate governance commitments amid the energy transition.

The transition is seeing a number of oil and gas companies declare net zero emissions targets by 2050, or sooner, even before Australian Prime Minister Scott Morrison set a 2050 net zero emissions target for the nation.

The net zero emission plans of most oil and gas companies currently relate to Scope 1 and Scope 2 emissions. Scope 1 emissions are generated from sources that are owned or controlled by the company, such as an offshore production facility, while Scope 2 emissions are related to emissions from the generation of purchased electricity consumed by the company.

There is also increasing pressure for energy companies to be responsible for reducing Scope 3 emissions, which are generated by the end user of the product, such as when combusting gas to generate electricity.

Carbon capture and storage (CCS) — which involves capturing carbon dioxide before it is emitted into the atmosphere, transporting it to a storage site and injecting it deep into an underground rock formation for permanent storage — is being pursued by a number of major oil and gas players, including Santos and Woodside.

While this can help offset Scope 1 and Scope 2 emissions, CCS has no impact on Scope 3 emissions.

With Scope 3 emissions generally larger than Scope 1 and 2 emissions, there is increased pressure on companies to develop fuels that will burn cleaner and reduce end user emissions.

Hydrogen is one fuel that is gaining popularity among traditional oil and gas producers. Once produced, hydrogen generates power in a fuel cell, emitting only water vapor and warm air.

Traditionally, hydrogen production has high associated emissions, with 1kg of grey hydrogen typically having 10kg of associated CO2 emissions.

However, cleaner forms of hydrogen are being pioneered, with the oil and gas industry placing a particular focus on what is known as blue and green hydrogen.

Green hydrogen is produced from electrolysis powered by renewable energy to split water molecules into oxygen and hydrogen, creating an emissions-free fuel.

Blue hydrogen is produced from natural gas feedstocks but utilises CCS to capture and store the CO2 by-product from the hydrogen production, presenting a way for existing gas producers to lower their emissions profiles. However, the process to create blue hydrogen is not completely emissions free.

There are also still question marks over future hydrogen demand, especially as the debate over hydrogen versus electric vehicles rages on.

The UN’s Intergovernmental Panel on Climate Change (IPCC) warned last month that rapid and deep cuts to greenhouse gas emissions are needed by 2025 to avoid catastrophic climate effects.

With urgency increasing to reduce emissions, some companies – such as ASX-listed Carnarvon Energy – are pursuing alternative low-emission fuels that can be used today.

The IPCC report found that, with the right level of capital investment in production infrastructure, and substantial policy support, alternative fuels such as renewable diesel and sustainable aviation fuel (SAF) could play a significant role in helping mitigate the impacts of climate change.

“Renewable diesel offers a drop-in replacement to conventional diesel produced from hydrocarbons, meaning potential customers can use it immediately without the need to look at switching their fleets over as they would with battery or hydrogen powered vehicles,” explains Carnarvon CEO Adrian Cook.

Carnarvon’s FutureEnergy Australia (FEA) joint venture with Frontier Impact Group is looking to build a renewable fuels production facility near Narrogin, in Western Australia’s Wheatbelt region, that will initially have the capacity to produce about 18 million litres of renewable diesel per year.

The facility will convert sustainably sourced woody biomass, such as cuttings from ecological thinning, oil mallees and plant-based agricultural residues, into renewable diesel using high temperature pyrolysis.

There is already an existing market for the fuel as well, with heavy machinery such as trucks, tractors and mining equipment already running on diesel.

“We are already received strong interest, particularly from the mining sector, with our renewable diesel offering a direct replacement to fossil fuel diesel, while also providing a substantial reduction in carbon emissions,” Adrian says.

The produced renewable diesel also has the potential to be further refined into SAF, while the high-temperature pyrolysis process also produces high-quality biochar and wood vinegar, supporting the agriculture industries and providing further employment opportunities.

FEA states that for each tonne of biomass processed at its renewable fuels facility, about three tonnes of CO2 emissions will be avoided.

Adrian notes that the economics of switching to renewable diesel are also improving as tightening oil supply is sending prices at the pump skywards.

“Based on the work we’ve undertaken, which is reasonably advanced, it appears our renewable diesel will be able to compete fairly strongly with fossil fuel diesel,” he adds.

“Further adding to the economics of renewable diesel is that unlike with hydrogen or battery electric vehicles, there is already significant infrastructure in place, with renewable diesel able to be distributed at existing fuel stations, removing a significant cost.”