The future of fossil fuels

Podcast transcript: scroll to the areas that interest you

• IR: Iman Rappetti, journalist and host
• MJV: Melanie Janse van Vuuren, Global Sustainability Lead at Investec
• CM: Callum Macpherson, head of Commodities, Investec UK
• FT: Fani Tshifularo, Executive Director of the South African Petroleum Industry Association (SAPIA)
• CP: Campbell Parry, Global Resources Analyst, Investec Investment Management

• 00:00: Intro

  IR: In the late 18th century, while the French Revolution was blazing its bloody trail, and an emerging United States was fighting for its independence, a movement was starting in Britian.

  Technological innovations in manufacturing, mining, and transportation were beginning to shape what would become known as the Industrial Revolution - the impetus for our modern world.

  And while we manufacture faster, mine deeper and travel further than arguably anyone at that time may have believed possible, the coal, oil and gas that powers our world is humanity's ultimate mixed blessing. These ingredients are so intricately interwoven in the fabric of our material existence that it's almost impossible to imagine a world without them. And yet, there is a very real need to build a future that requires less fossil fuels, as the realities of climate change and the move to sustainability become more urgent.

  So how do we manage to decrease our reliability on coal, oil and gas when so much depends on them? And what does it mean for the fuels themselves, as well as the countries and industries that rely on them?

  Welcome to The Current - an Investec Focus Radio series that delves into South Africa’s energy transition. Over 10 episodes we explore the country’s energy crisis, and how we can collectively shape a resilient and sustainable energy future. I’m your host, Iman Rappetti, and in this series, I’ll be talking to industry experts, from inside Investec and beyond, about how South Africa can keep the lights on while moving towards more equitable and sustainable energy solutions.

  At the halfway mark in our series, we're taking a look at fossil fuels - just how the world depends on them, why we need to move away from them, and how we can mitigate their environmental impact in both local and global contexts as the world moves to Net Zero. Let’s welcome my guests… 

• 02:22: Meet the guests

  MJV: Melanie Janse van Vuuren and I'm the Global Sustainability Lead at Investec.  

  CP: My name is Callum Macpherson. I run the commodity business for Investec in London. 

  FT: Fani Tshifularo, I'm the Executive Director of the South African Petroleum Industry Association, SAPIA in short.

  CP: Campbell Parry, and I'm the Global Resources Analyst at Investec Investment Management. 

• 02:42: What was agreed at COP28?

  IR: To provide a context for this episode, we'll start by going back to COP28 in 2023, when over a hundred countries issued a joint statement calling for a global phase out of what they called "unabated fossil fuels". But, as we’ll find out in this episode, nothing to do with fossil fuels is straightforward.

  MJV: There was a first draft saying it's a phase out of fossil fuels. And what a phase out means is basically it's a deliberate and complete cessation and elimination of fossil fuels. So, it's a radical reduction towards zero and a specific timeline. Obviously, most of the oil producing countries were not happy with that.

  So, they came out with the next draft suggesting a reduction in consumption and production of fossil fuels. But then again, this was considered too weak. And then the parties came to a standstill. They couldn't get to an agreement. So actually, then they agreed, let's do a phase down of fossil fuel. Now this means there's a decline, but it's a structural reduction towards zero.

  They don't specify how much and by when, there's no target set for the date to reach net zero. So that's what a phase down is as opposed to a phase out. But then they also put in this "just an equitable transition" in the script. So what does this mean?

  Basically, you need to take into account all the social justice and fairness. And as different countries and communities have different needs and dependencies on these fossil fuels. So just, it needs to be fair. You need to look at the workers in these communities, their livelihoods. Remember a lot of these workers in these industries are single income earners, so they support a whole family. And you don't want to make that inequality gap even bigger. The equitable side on the other hand says the burden and the benefits needs to be distributed fairly across countries and communities.

  In the past developed countries were the largest contributors to greenhouse gas emissions. So they should take greater responsibility and provide support to the developing countries in this transition. 

• 04:50: Fossil fuels account for 75% of global GHG emissions

  IR: Melanie, according to the United Nations, 75 percent of global greenhouse gas emissions are caused by fossil fuels like coal, gas and oil. Why is it difficult to phase out fossil fuels? How important are these non renewable energy sources in the process of transitioning to a new energy system?

  MJV: For one reason, you've got economic dependence. Fossil fuels, such as coal, oil and natural gas have been the primary energy source for so long, for so many countries. And they've got a crucial role to play in a lot of industries like transportation and electricity generation.

  So, there's a lot of economies that still depend heavily on these fossil fuels, which make the transition difficult. Then you also sit with infrastructure and investment. Distribution of fossil fuels is extensive and requires significant investment and shifting to new energy systems can also have substantial investments in renewable energy.

  So you need to take that into consideration as well. And then there's things like energy storage unlike fossil fuels which can be stored and you use it as you need it, many renewable energy sources such as solar and wind are intermittent and it depends on the weather, if the sun is shining, if it's not shining, if there's wind, if there's not wind. So that also is challenging. And then you also have some political and economic interest in these industries as well.

  Non-renewable energy sources, coal and natural gas can provide baseload power. So that's a big one. But a big thing as well is the workforce. And that's again, the social aspects of these people that's working in these industries. You need to reskill them and you need to make sure that this a smooth transition and it's a just transition. So it comes with a lot of complexity.

• 06:38: Our everyday dependence on fossil fuel products: from clothes to fertilizer

  IR: And that complexity runs deep, because of the sheer number of products and processes that currently rely on fossil fuels. Some of them are obvious, but many of them aren't spoken about nearly as widely as things like internal combustion engines and coal fired power stations - even though a few of them, as Campbell explains, are even more fundamental to human life.

  CP: We use fossil fuels to produce more than just clothes and heating oil for industry and aviation gas, we use fossil fuels to produce the clothes we wear, if you think about a polyester fiber. The detergents we use, the shaving creams, the lubricants and fuels, the inks and the paints, the plastics, preservatives, pharmaceuticals, cleaning agents. These are just some of these everyday items that we use fossil fuels for, and it'd be really difficult to produce them in an alternative way.

  People don't appreciate the link between fossil fuels and food. And just to use two examples here. Firstly, 80 percent of the world's sulfur is produced by refining crude oil. So crude oil generally contains sulfur as an impurity and it's removed in what's called hydrodesulfurization in a normal crude oil refinery. That sulfur is used to produce sulfuric acid and sulfuric acid is one of the world's most actively traded chemicals.

  One of the things that it gets used for is to produce phosphate fertilizer for our crops. Without the sulfur produced by crude oil refining there’s going to be less sulfuric acid and much less phosphate to fertilize our crops with.

  The second thing is natural gas methane or CH4. Hydrogen in methane is reacted with nitrogen from the air in a process called the Haber process to produce ammonia. And ammonia, as we all know, is a precursor for all nitrogen-based fertilizers. So without natural gas, there's not enough nitrogen to replenish the soil with. So unless we all agree to stop eating, it's almost unthinkable to stop using fossil fuels right now. 

• 08:34: Electric vehicle adoption in SA versus the rest of the world

  IR: There's one very obvious candidate who stands out as the proverbial poster child for the evils of fossil fuels: the motor vehicle. Research suggests that passenger and freight vehicles contribute far more to global greenhouse gas emissions than aviation and rail combined. Although this cornerstone of modern life has taken its first steps aways from petrol and diesel, there's still a very long way to go - even more so in South Africa. 

  FT: If we were to give an example of South Africa, where we probably have got something like, 12 million cars. And on average, each car probably it's lasting for not less than 18 years. By the time it gets scrapped off, it's been around for almost two decades. And if you look at how can we really quickly phase out, it means we need to change the technology that is used for road transport, itself. It means going into electric vehicles going into hydrogen powered vehicles.

   But you always going to have the issue of cost in South Africa. A typical electric vehicle, I don't know what is the cheapest, but it won't be less than 700, 000. The government is mindful that there is no money really to assist the motorists in terms of subsidizing moving from the internal combustion engine (ICE) to electric vehicle (EV) technology. I think it's a question of affordability. 

   

• 09:56: When will the demand for oil fall?

  IR: Here in South Africa, electricity consumption in transport is only 1.4%. compared to 98. 6 percent of oil products, an indication that the electric vehicle market is in its infancy. So does it mean that oil demand will be longer than predicted in SA?

  FT: It is critical that if you are looking at this, you must look at the entire value chain to say, the total reduction in emissions from the production side all the way until use we the vehicle itself.

  But if you just look at the continent as a whole, if you look at various studies, whether it's the International Energy Agency or the U S Department of Energy statistics, or even some of the oil companies or energy companies like BP, Total, Shell, you look at how do they see their role of oil products going into the future, you still see that as much as you're going to see the decline in the developed world, in Africa you still see that there will still be some growth in terms of the demand of oil products, to some extent in the Middle East as well, or Asia. The transition will be much slower compared to the rest of the world.

   

• 11:06: Road transport drives 50% of oil demand

  IR: The issue with the humble motor vehicle isn't just about fuel - in just about every phase of its production, and all of its life, there is a reliance on oil. But it's also a big opportunity for decarbonizing.

  Callum, during COP26, it was revealed that about 50 percent of global oil consumption comes from road transport. What does the energy transition in the transport sector look like?

  CM: Road transport is the biggest, it's 50%. And that compares to say aviation, which tends to get a lot of attention, but is less than 10 percent of oil demand. But fortunately, as well as being the biggest, road transport is probably one of the easiest to decarbonize.

  I'm not saying it's easy, but it's easier than the others. And I think the key enablers of that transition are going to be, or are, the very high efficiency of electric motors and the availability of electricity. Where you have renewable-heavy grids, where you've got lots of solar and wind connected to the grid, then electric vehicles become a way of absorbing that energy to be used later because of course they have batteries. And so electric vehicles become really an integrated part of the energy system with the renewable energy production, the electric vehicles themselves, and then the grid and all sorts of other associated infrastructure.

  But there is a long way to go. If you consider International Energy Agency figures, the global electric vehicle fleet at the end of 2022 was 25 million. And if you compare that with the total global vehicle fleet, it's over a billion.

  So clearly there is quite a long way to go, but I do think that these drivers of efficiency, combined with regulatory needs in line with carbon emission reduction commitments are going to ultimately speed this process up.

• 13:02: The role of transition fuels in moving away from oil and coal

  IR: The idea that the world will be able to simply swap fossil fuels for renewable energy in the motoring space - albeit over a significant span of time - won't be, practically speaking, a straightforward process. This brings us to transition fuels, and their place in the phasing-out process. I started by asking Melanie to explain what a transition fuel is.

  MJV: A transition fuel means it's a bridge fuel or interim fuel. It's a temporary solution to help reduce emissions and to help us with that shift from this fossil fuel dependent economy to more renewable economy. The important thing is there's an end date.

  So a common example that I'll give is natural gas. We all know natural gas, it's lower in carbon emissions, and it can be used as a substitute. However, it's important again to note that the long-term goal should be to phase out these transition fuels as well. There's an end date and we should move to renewable energy technologies.

  IR: Ok, we'll come to gas shortly, but Fanie - are there transitional fuels available for road vehicles and are there plans for their use in South Africa?

  FT: Transition fuels must be defined by its limited usage. It will be very difficult in a geography like ourselves, because if you think about it, the next phase, which is the 10 ppm fuels that are going to be rolled out in 2027, those are geared to be transitional fuels in terms of road transport. So it means the cutoff point will be the point at which the EV technology is reaching the equilibrium with the ICE technology.

  But as long as we are not seeing a faster penetration of the EVs, it will be very difficult to say how long will transitional fuels last in the country. So the transitional fuels or the 10 ppm fuels, they're geared also to enable hybrid vehicles. So what we see is that in the interim in the next let's say 5 to 10 years, we're going to see more hybrid vehicles because there will be enabling fuels which will be easily available because it would be really the same concept of refueling the normal ICE vehicles. That's how we see transitional fuels unfolding in South Africa. 

• 15:16: Does the demand for gas as a transition fuel hold promise for SA?

  IR: Campbell, coming back to gas and its potential as a transition fuel. The global gas market is expected to expand in the next decade. Are there any gas opportunities in South Africa?

  CP: When it comes to natural gas, I think there are significant opportunities in South Africa because we believe we are blessed with a rather rich endowment of the resource.

  So, if you look north of our borders, they've been sizable oil and natural gas discoveries offshore in Namibia by Total and Shell and others; and the location of these discoveries are right in the southern part of Namibian waters bordering South Africa and remember, it's all the same source rocks and some of our work on the geologies shows that those source rocks extend south all the way down the West Coast and around the South Coast as well.

  The West Coast tends to be shallower water. So monetizing the oil and gas asset, there might be more easily done than the more difficult South Coast. But that said, Total has discovered significant gas resource in the deep water of Mossel Bay, two wells in particular, Brulpadda and Luiperd.

  Problem is that the conditions are so difficult in getting to that gas that total has plugged and abandoned those wells for now and has taken its efforts to Namibian waters instead. Honestly, I think monetizing that will be expensive, we just don't have the expertise and inevitably it's going to encounter activist pressure.

  IR: Are there any downsides of using gas?

  CP: It's about 50 percent better from a carbon footprint than coal. But natural gas is more difficult to store than coal. It's also a nonrenewable resource and I think most importantly, remember that coal in its natural state doesn't give off emissions, whereas you take natural gas in its natural state, it is a greenhouse gas anyway.

  So you get these fugitive emissions from pipelines, which contribute to global warming. Coal stores the carbon until it's burned, whereas natural gas can escape and create a greenhouse gas effect.

  IR: Our conversation with Melanie, Campbell, Callum and Fani continues after this.

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• 17:58: Can one predict when oil demand will peak?

  IR: While there is a lot of urgency and a lot of effort being expended in the energy transition, it's important to temper expectations with the reality that fossil fuels are here to stay for the foreseeable future.

  Bearing in mind that the Paris Agreement's global deadline for the achievement of Net Zero is 2050, I asked Callum if he could foresee a time of peak oil demand.

  CM: It's a very difficult one to predict. Oil demand is increasing. So the IAE is estimating that consumption next year will reach 104 million barrels per day, which is well above the pre-COVID level of consumption.

  And I would expect sort of some sort of rate of increase will continue for some years to come. But I do think that nevertheless, this process of electrification will continue. It is being pursued very heavily in Europe and indeed in China where there's an incredibly aggressive rollout of solar, particularly, and electric vehicles.

  And as we all know, Chinese electric vehicle producers are becoming very good and that they're exporting vehicles. Also Europe and China are the two biggest oil importing regions in the world. So, that is a very serious challenge to oil producers over the coming decade and beyond.

• 19:14: Geopolitics and fluctuating prices of fossil fuels

  IR: Fossil fuels are not just about manufacturing goods or making sure we can get to work; they go beyond mining and are a very real part of geopolitics.

  This factor impacts global stability, most recently seen with Russia's invasion of Ukraine - the result of which meant sanctions on Russia and higher gas prices for Europe. I asked Callum how he thought that having renewables as a greater part of the world's energy mix might make a difference.
  

  CM: I think they already are providing a greater degree of energy security. The gas prices went particularly high in Europe in 2022 because of the Russian invasion of Ukraine; they would have gone a lot higher and we'd have had even more problems if we didn't have as much renewable generation as we did have.

  IR: So, that's a plus for renewables, but what about the concern that they can't yet provide baseload power, which is an undoubted strength of fossil fuels?

  CM: Clearly there is a challenge for renewables with intermittency and so on. But the fact is over the course of a year it's pretty predictable how much solar energy, how much wind energy you're going to get.

  And that is going to displace serious amounts of gas or other fossil fuels from your grid and so if you can learn to work around that intermittency, then definitely renewables are going to help with and do help with, energy security.

  And you can see that, using Britain as an example, if you look at the role of gas in the power generation mix, whereas some years ago it was mostly baseload, these days, it is increasingly being the counter to volatility in renewable output. If we have a very windy and, or sunny day, then there's very little gas generation in the mix.

  Whereas if there is very little sun or wind then gas plays a much bigger role. Consequently, you need much less gas overall than if you didn't have those renewables.

• 20:56: What are local government and industries doing to transition from fossil fuels?

  IR: The move away from fossil fuels is gaining momentum globally, and while South Africa has to deal with its many other problems, it simply can't afford to not be a part of this monumental shift.

  I asked my guests what they believed local government and industries can and are doing in their efforts to decarbonize.

  FT: A lot of people don't realize that the whole issue of reducing emissions is so central in energy companies' decision-making. They need to do something in order to reduce emissions. They also need to contribute to our ambition as a country to net zero.

  Some of the decisions in terms of what energy companies are doing to say, whatever investment decisions that we take, we need to consider what is our own ambition as a company to reach a net zero by 2050. And what are we doing in terms of complying with the Air Quality Act in South Africa, which deals with the minimum emissions.

  However, we have not dealt with the issue of emissions from road transport because the demand for petroleum products will still remain the same. We need to pay special attention to say, what do we do with the road transport emissions going into the future. This is where the issue for clean fuels in 2027 comes into the picture. 

• 22:17: How to make the dirty industry more efficient

  IR: Callum, what should oil and gas companies do to reduce their emissions and play their part in mitigating climate change?
  

  CM: If we accept that oil and gas production is going to continue for some while, we need to concentrate on how that can be made more efficient from an emissions point of view. Certainly there are a lot of emissions in the production of oil and gas, probably the worst one is actually leakage of gas. Campbell was alluding to this earlier.

  If you leak only a small proportion of the gas out of your gas production and transmission system, then the power, the electricity, you generate with it at the end can actually become more emission intensive than coal. So keeping leaks down is absolutely essential.

  The other thing is what you do on platforms which are mainly producing oil, but also produce some gas and you don't happen to have any route to market for that gas? You certainly don't want to just release it into the atmosphere for the reasons I've just mentioned as well as health and safety ones.

  So you burn it, and this is called flaring, and okay, that's not as bad as just releasing it into the atmosphere, but it is still bad, it's wasteful and it's environmentally damaging. So, trying to do something with that: piping it away or using it to generate electricity, really helps.

  The other thing is trying to electrify the pumping and other sorts of mechanical things that go on oil rigs and in production of electricity. If you take in the North Sea, for example, there's clearly a lot of renewable energy production.

  If that can be used to supply energy to the offshore oil and gas industry, that would help enormously. Because at the moment, the consumption of electricity by North Sea oil and gas production is probably equivalent to five to ten percent of the generation on the grid.

  It's not connected to the grid, but that gives you some idea of the scale of it, so that’s another big opportunity to decarbonize oil production and hence make emissions a little bit lower for the oil that ultimately gets into the tank of a car or whatever.

• 24:21: How do you bring oil-rich countries onto the transition journey?

  IR: There are a number of countries globally, which have invested in renewable energy. Rich oil countries like Qatar and Saudi Arabia, however, still focus a hundred percent on fossil fuels for energy. How can countries smoothly transition to renewables while still ensuring that there are enough fossil fuels to cater for the current demand?

  CP: In all honesty, I think they should follow the example that China has set. They're spending billions on quickly ramping up renewables of all forms. And last year if my memory serves me correctly, they commissioned around half of the 510 gigawatts of new renewable capacity worldwide.

  They're doing about 100 to 120 gigawatts just on solar every year. While all that's happening, of course, on the renewable side, the country is looking after the fossil fuels that power its baseload supply, they are commissioning that new coal capacity.

  CP: What that tells us, of course, is that it's a country that's looking after its coal and oil and natural gas that supports economic growth for now, but at some point they'll have enough renewable capacity for baseload requirements, and they can slowly start to turn down or phase out those fossil fuels.

  And I think that's a great example to set. And I hope that one day the rest of the world follows.

• 25:43: Investec’s approach to oil and gas: commitments and targets

  IR: Melanie let's turn this to you then. What are Investec's commitments and targets regarding oil and gas and what did you need to consider to arrive at them?

  MJV: There's an interplay between so many factors. So you need to look at -each country’s own challenges. You need to look at what are the specific needs of the country.

  What are they dealing with? How does the energy landscape look? What is the socio-economic challenges of these countries? And also what the environmental priorities are. Then you need to look at the economic implications. I'm coming back to the fact of employment. South Africa's got one of the largest unemployment rates.

  So we need to consider that. And how would you reskill these workers? How would it impact the communities? I always feel that the social aspect is getting lost in this, and it's so important to look at that as well. How are you facilitating new skills? And then also the South Africans know that  we're dealing with load shedding.

  You need to look at energy security and reliability as well. So there's different nuances in different countries, and that's the approach that we took as Investec. Because we've got operations across the world. We've got operations in South Africa, a developing country, we've got operations in the UK, a developed country.

  So there are country nuances that you need to look at. It took a while to get to our ambition as to where we want to be, because we have to take all of this into consideration. But our ambition remains that we don't want to finance new oil and gas exploration, extraction, or production directly regardless of jurisdictions from the 1st of January, 2035.

• 27: 21: A pragmatic approach to transitioning away from fossil fuels

  IR: Fossil fuels have a strange legacy. We all know how damaging they are for the environment, but they're also responsible for helping create the technologies, infrastructure and the lifestyles which we so often take for granted. Their exit from the global energy mix will almost certainly be complete, but it won't be quick.

  MJV: I think fossil fuels are still going to be here for a while. We need to deal with the reality that we're sitting with. But ultimately we have to go to renewables. We have to make that switch to a cleaner environment and a cleaner planet.

  CP: We spent more than a hundred years integrating fossil fuels into society, and we can't just turn our backs on that. It's still a very important part of the energy mix.

  We need to be pragmatic and accept the fact that they will remain an important part for some time, given the need for those in our everyday lives. But at the same time, we really need to be doing a more responsible job about using energy. And that brings to the fore things like renewables.

• 28:21: Electrification the key to speeding up phase-out of fossil fuels

  IR: For Fanie and Callum, the technology most likely to help speed up the transition away from fossil fuels in the immediate future is electrification.

  FT: I think the clearest indicator of how quickly can we transition as a country as far as road transport is concerned is the rate at which the new energy vehicles being sold in South Africa. I think if you look at it now, probably we are selling less than 2, 000 vehicles per annum. So if we move quickly in terms of this new energy vehicles, we'll quickly transition the vehicle car park in South Africa.

  CM: I think that electrification is really the key feature of the energy transition and to really appreciate the significance of it you have to look at the overall system: transport, energy production, renewables, storage, the grid, all of these things become an integrated whole and have to work together. And we've made some progress on this in Europe. And so you can see it's starting to work. And I think that this is a model that can be used elsewhere, such as in South Africa.

  IR: Thanks for listening to this episode of The Current, brought to you by Investec Focus Radio. Our next episode is a future-focused one that will evaluate the feasibility of exciting new technologies and innovations in the global energy transition.

  You can find all episodes of this series at investec.com/thecurrent, or wherever you get your podcasts. If you enjoyed this episode, please rate it, leave a comment and forward it to your friends and colleagues.

   

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