Wood Mackenzie expects progress to be made in decarbonising metals production at mining sites, while downstream developments will remain in the pilot phase

BHP profits

James Whiteside, Wood Mackenzie’s global head of multi-commodity research, says mine site emissions reduction will be “driven by accelerating renewables installations (Credit: BHP Group)

Climate commitments are set to top the energy and mining industry agendas in 2021, says an analyst.

This builds on the progress made in 2020, a year in which climate change became a dominant force for commodities, with a number of companies and governments pledging ambitious net-zero commitments.

According to Wood Mackenzie, renewables “grew in importance” across the year in some oil and gas companies’ portfolios and as a power source for mining.

The energy researcher points out that carbon pricing also accelerated, with prices for emissions allowances under the EU Emissions Trading Scheme and Western Climate Initiative reaching record highs. It claims this momentum is “likely to increase” in 2021 as emitters “act on plans to meet their climate targets”.

Here, Wood Mackenzie analysts highlight five of the top themes that are likely to top energy and mining agendas in 2021.

 

Five themes set to top energy and mining agendas in 2021

1. Government climate commitments will increase ahead of COP26

The 2015 Paris Agreement, which is an international climate pact that aims to cap the rise in global temperatures at “well below” 2C by 2100, required signatories to commit to strengthened national climate targets every five years.

From the first round of targets submitted last year, significant emitters such as the UK, EU and Canada made pledges to hit net-zero emissions by the mid-century. Amy Bowe, Wood Mackenzie’s head of carbon research, says these jurisdictions will “rollout policy to achieve these objectives in 2021”.

“The world will be watching to see which other countries pick up the mantle,” she adds. “China, India, South Africa, Saudi Arabia and India are amongst those yet to make submissions, though both China and India have indicated they intend to largely renew existing 2030 commitments.”

Bowe claims all eyes will be on new coal power capacity targets for China – the world’s highest polluter – after the country announced its ambition to be carbon neutral by 2060.

“In addition, President Joe Biden’s pledge to re-join the Paris Agreement and enshrine a 2050 net-zero goal will be another step forward in climate ambitions in 2021,” she adds.

 

2. Technology developments will help reduce emissions from metals extraction and oil and gas production

Wood Mackenzie expects progress to be made in decarbonising metals production at mining sites, while downstream developments will remain in the pilot phase.

James Whiteside, Wood Mackenzie’s global head of multi-commodity research, says mine site emissions reduction will be “driven by accelerating renewables installations”.

“Chile, a notable trailblazer in this area, will see 3.5 GW of renewables projects contracted to mining companies completed in 2021,” he adds.

“Additionally, gradual progress will be made in replacing typically diesel-powered mining truck fleets with electric alternatives. For instance, Anglo American will begin operating the first full-power hydrogen fuel cell electric vehicle (FCEV) mining truck.”

In contrast, he claims technology developments to reduce emissions from downstream processes in industries such as steel and aluminium will remain in the pilot phase.

“Downstream metals producers will rely on operational efficiencies and increased scrap utilisation to reduce emissions in the short-term,” says Whiteside.

He adds that similarly, oil and gas producers will continue to reduce operational emissions, with a focus on “immediate wins such as methane leakage and reducing venting and flaring”.

What is Woodhouse Colliery
Wood Mackenzie expects technology developments to reduce emissions from downstream processes in industries such as steel and aluminium will remain in the pilot phase in 2021 (Credit: geograph.org.uk/Frank Alfred Wright)

As part of the Oil and Gas Methane Partnership, many of the world’s biggest NOCs, IOCs and Major companies agreed to new methane reduction targets in late 2020 – reducing methane emissions by 45% by 2025 and by 60% by 2030 (relative to 2015 levels) – alongside more stringent reporting measures.

Wood Mackenzie projects that meeting these targets could reduce methane emissions from 13% of total upstream emissions to less than 5% by 2030.

Bowe says: “We expect more oil and gas producers to set their own methane reduction targets, expand methane reporting in their sustainability reports, and roll out methane monitoring and reduction technologies. We also expect routine flaring to decrease across the world, particularly in the US.”

She believes the Biden administration is “likely to strengthen regulations” regarding emissions management from the oil and gas sector.

“If all producing US fields were to completely stop flaring by 2022, this would reduce American upstream emissions by 13% and result in an absolute emissions reduction roughly equivalent to Norway’s total upstream emissions,” adds Bowe.

“However, considerable structural barriers remain, including infrastructure constraints, weak gas prices and a lack of domestic or export markets in many countries.”

 

3. TCFD reporting will become a requirement for a broader range of companies

Since the Task Force for Climate-Related Financial Disclosures (TCFD) guidelines were released in 2017, nearly 1,500 organisations have signed up to support them, with natural resources companies among the vanguards.

Of the eight sectors reviewed by the TCFD in its 2020 status report, the energy industry had the highest level of disclosure aligned with TCFD guidelines, averaging 40% across all categories.

While still voluntary in most jurisdictions, there is a growing movement to mandate TCFD disclosure for listed companies.

Wood Mackenzie expects the number of regulatory authorities mandating climate-related disclosures to increase, with many of those specifically endorsing TCFD guidelines.

 

4. Commodities will increasingly be marketed on their green credentials

In 2020, emissions intensity emerged as a competitive differentiator for both LNG and metals products. For example, the London Metals Exchange already plans to introduce a spot trading platform this year for low-carbon aluminium.

Wood Mackenzie says this trend of a “green premium” is likely to accelerate in 2021 and cover even more commodities.

Energy mining agendas 2021
As commodities increasingly compete based on emissions intensity, Wood Mackenzie expects producers will “begin to realise a price premium for green commodities” (Credit: Shutterstock/Alexey Rezvykh)

Bowe believes details of the EU’s expected carbon border tax, which is set to be announced in June, will “likely favour imports of lower emissions-intensity products for covered sectors”, and “contribute to the green credentials revolution”.

“Additionally, all climate bills before the US Congress currently include some form of carbon border adjustment mechanism,” she adds. “If these measures were to pass, other economies will undoubtedly look to implement similar mechanisms in response.”

As commodities increasingly compete based on emissions intensity, Wood Mackenzie expects producers will “begin to realise a price premium for green commodities”.

The energy researcher’s emissions data suggests there is a wide range of emissions intensities associated with liquefied natural gas (LNG) and aluminium, as well as other oil and gas and metals and mining products. It adds that ensuring these differences are accurately captured will “spur demand for emissions verification and certification”.

 

5. Energy companies will continue to lead the way in divestment and diversification to manage emissions risk

Wood Mackenzie expects to see more portfolio adjustments to meet climate targets, especially amongst major energy companies.

“To date, moves have been motivated by reducing absolute Scope 1 emissions, but Scope 3 intensity is likely to grow in focus as more companies set carbon neutrality targets,” says Whiteside.

“Oil and gas majors and diversified miners alike will continue to divest the most emissions-intensive assets to bring down Scope 1 emissions.

“In particular, the diversified miners’ exodus from thermal coal will continue with Anglo and BHP looking for buyers of their coal assets and BP could divest its Australian portfolio including high-intensity LNG assets,” added Whiteside.

While many countries have incorporated green growth strategies in coronavirus recovery packages, the pursuit of economic growth has come at the expense of emissions for some.

Wood Mackenzie notes that Chinese stimulus has focused on investments in infrastructure, boosting demand for steel, aluminium and other metals.

“If government stimulus packages need to be sustained in 2021, this could again be focused on carbon-intensive infrastructure investment,” says Whiteside.

“Many nations will be desperate to kick-start their economies regardless of the impact on emissions or Paris Agreement goals. That said, investor pressure will not allow the largest metals and energy producers to stray from the path they have now committed to.”

But, even if some nations prioritise near-term economic growth over sustainable growth, he believes there is enough momentum behind the initiatives and commitments made by other public and private stakeholders alike to “drive the green agenda forward in 2021”.