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By Geoffrey Cann
It has never been more important for fuel companies to track the provenance of their products, and the excuses why it can’t be done look increasingly hollow.
A Kitchen Love Story
I spend a great deal of time in my kitchen as our household’s primary meal preparer. My interest in cooking is a gift bestowed on me by my Mom who had a part time job when I was growing up. She found it impossible to organize a nightly sit-down dinner for eight (Mom, Dad, six kids) at 6 pm prompt (in hindsight an outrageous target imposed by my Dad) when she barely got home by 5:30. The answer? Teach the kids the kitchen basics (peeling potatoes, mostly) and let them have at it.
In hindsight, all she really wanted was the mise en place completed to save her a bit of time, but it instilled in all of us a curiousity about cooking. One of my brothers even went on to become a professional baker.
One of the things you learn quickly in a kitchen is that it’s relatively easy to repair a dish that consists of solid ingredients. Many is the cook who misreads a recipe and dumps a tablespoon of cayenne pepper into a dry mixture when the recipe calls for a teaspoon. Simply scoop out the excess from the ingredient pile and carry on.
Try this with liquids, such as a beaten egg in a cup of milk. There’s no way to separate the two.
This problem, the tendency of liquids of similar viscosity to blend together, is at the heart of the fossil fuel industry’s historical stance about fuel tracing. But pressures are building to make urgent changes to this industrial norm.
A Hard Nut to Crack
There are a variety of factors that make tracing of fuels so challenging.
CONSTANT BLENDING
Fossil fuels are almost always blended to create new commodities that are more desirable. Heavy sour crudes are blended with light sweet to dilute the sulphur concentration and lighten the crude so that more refineries can buy it. Canada’s oil sands industry sells products with such esoteric names as synbit, dilbit, and syndilbit. Brent is no longer solely from the now depleted Brent field, but is a mixture of crudes that recreate the Brent crude. Biofuels such as ethanol are blended with gasoline to create ethanol fuels at the pump. A gasoline station might have products from a few suppliers in its tanks.
Blending also concentrates the products into economic volumes that are lower cost to handle. Imagine if every barrel needed its own ‘clean chain’ to keep products from multiple shipments from contaminating each other.
LONG FRAGMENTED SUPPLY CHAINS
Many countries produce fossil fuels like crude oil and natural gas for global markets. Tracing these commodities is fraught because of the number of touch points, transit pathways, storage facilities, shipping options, refining destinations, bulk movements, and wholesale and retail points of sale. Thousands of companies are involved. As fungible products, diesel, jet fuel and gasoline from different refineries are virtually indistinguishable. Many countries resort to adding dyes to the products to help distinguish products that are taxed or for safety.
ACTIVE TRADING
At any point in the supply chain, literally down to the truck that delivers petroleum to a gasoline station, the product on board can be traded and sold to another party. A cargo of crude oil can change hands a half dozen times between the original point of production (the well head) and the refinery that converts it to petroleum products. An entire industry of financiers and traders operate behind the scenes to optimize the global industry.
HUGE VOLUMES
The transactional volumes involved are staggering. The world consumes 100m barrels per day in volume or about 14m tonnes, through thousands of ships and planes, millions of trucks, and a billion cars, which account for 50% of the volume (the other 50% is in materials, plastics, lubricants, building products, road surfacing, and hundreds of other uses). Lot sizes range from a 5 gallon purchase at the gas station, the 2m barrel shipment on a crude carrier, and the 1m barrel per day pipeline.
A Hot Stove
Much like a kitchen that gets hot when it gets overworked, the oil and gas industry is feeling the heat to improve the tracing of fossil fuels through the supply chain.
ACHIEVING DECARBONIZATION
The EU has declared its intent to be carbon neutral by 2050. Looked at another way, companies and consumers in the EU will be transitioning to neutrality over time, rather than all at once, and progress will be measured regularly. By 2035, perhaps, the continent will be aiming to reduce its net carbon footprint by 50%. On a simple straight line basis, that means achieving an annual reduction from today by 4% every year for the next 13 years. Every year of delay makes the target that much harder to achieve. After 3 years of no action, the slope steepens to 5% per year.
Unsurprisingly, companies are now starting to measure where they stand on their carbon intensity, and setting plans to achieve reductions. One easy solution is to substitute bio fuels for traditional fuels, either completely, or in some kind of blend.
While it’s easy to declare that a given fuel is based partly on a more sustainable process, it’s hard to prove. That requires information about the source of the original fuels and a trace of the fuel through the complete supply chain, through changes in title, blending, transportation, storage, financing, and all the other variations in the chain. As challenging as this is to achieve, it must be done or the goal to become carbon neutrality is a mockery.
VALUING CARBON CREDITS AND OFFSETS
A second way to manage to carbon neutrality is to invest in ventures that create a carbon reduction. For an oil company, this could mean investing in a tree plantation that would not otherwise be funded. The trees lock up carbon from the atmosphere and qualify for a credit.
Carbon credit markets are a high risk gamble when you can’t trust the underlying data behind the credit. Does the tree you claim you planted even exist? Is it traceable? Has your tree been turned into furniture, or returned to the atmosphere in a fire?
MAKING INFORMED ENERGY DECISIONS
Given the choice, some consumers select fuel options that meet their needs. For example consumers will purchase provably green energy, ethically-produced energy, terror-free energy, sustainable energy, mission-driven energy, and energy with offsets. These are all plausible consumer choice options that we can’t deliver today because we can’t trace energy.
It’s the same with companies. The ability to make informed decisions is imperiled in energy because the norm in the supply of energy is that energy cannot be traced.
ENFORCING SANCTIONS
And now for the newest flash point. Russia’s war on Ukraine has provoked calls to ban or sanction the purchase of Russia’s energy commodities. How this is to be done is the question. Oil and gas traders are paid to optimize global supply chains, not enforce policing actions via commercial trading. Even Shell, who quickly denounced the Russian invasion and abandoned the country, was still purchasing distressed Russian crude cargos.
I can hear the howls of protest already. Even if the EU or the US tries to ban purchases of Russian crude, what’s to stop India or China from taking the cargos. It’s a kind of prisoner’s dilemma problem.
Regardless, countries, banks, companies and consumers everywhere will be seeking assurances that they individually through their various decisions are not inadvertently financing Russia’s war on a neighboring democracy.
Interestingly, efforts to trace the provenance of bio fuels to prove their origins can also be put to work to trace the provenance of crude oil. Commodity tracing is a one-size-fits-all solution.
Tracing Energy is Now Real
Fortunately, the wave of digital innovations that have transformed many other markets (financial services, telecoms, entertainment), is about to have the same positive impacts on energy. The building blocks that enable democratic choice for energy products are falling into place. These components—industrial internet of things, cloud computing, machine learning, blockchain, application integration, low code—allow for the end-to-end tracing of energy products completely throughout their independent and increasingly interconnected value chains.
The essential ingredient to transforming energy is data. Historically, the energy industry has relied on its instrumentation and controlling systems (SCADA) to produce the data needed to manage energy supply and demand. The internet of things will provide for vast new data sources about energy, to be stored and processed in the cloud, and for consumers, immutably and confidentially recorded on blockchain structures. Emerging artificial intelligence engines will be able to process that data to make meaningful business and consumer decisions.
Many commodity companies are trialing their way through the various hurdles that our legacy norms impose, including blending, vessel transport, pipeline movement, storage, and product quality. Conferences about carbon tracing are popping up.
Conclusions
The pressures to answer the question about where fuels originate are intensifying. The leaders are already on the move because a delayed response only contributes to an ever-steepening curve. Meanwhile, the price of low quality carbon credits rises, the competition for quality assets such as sustainable fuels inflate, and capital and social markets are poised to punish the laggards.
Check out my latest book, ‘Carbon, Capital, and the Cloud: A Playbook for Digital Oil and Gas’, available on Amazon and other on-line bookshops.
You might also like my first book, Bits, Bytes, and Barrels: The Digital Transformation of Oil and Gas’, also available on Amazon.
Take Digital Oil and Gas, the one-day on-line digital oil and gas awareness course on Udemy.
Mobile: +1(587)830-6900
email: [email protected]
website: geoffreycann.com
LinkedIn: www.linkedin.com/in/training-digital-oil-gas
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