Key changes and results
The climate change issue has dominated the social agenda for many years now, and in 2019 very close attention was paid to the problem. Climate change and environmental threats led the list in global risks for our planetSource: Global Risk Report, 2019.. The climate change problem is of an obviously complex nature with a wide coverage and requires that efficient solutions be found to challenging tasks carrying long-term consequences.
Given the global nature of LUKOIL Group’s business, we are analyzing potential trajectories of the global climate agenda’s development to be able to make a sizable contribution to solving the climate change problem while ensuring our economic growth. We see not only risks resulting from global warming but also new business opportunities arising for LUKOIL Group.
Rising public activity
Despite efforts of the international community and growing investment in a low-carbon economySources (examples): Scaling Up Action: Aiming for Net Zero Emissions; Oil and Gas Climate Initiative, 2019; Top Sustainable Business Trends of 2020; Joel Makower, Sustainable Brands, 2019., extreme weather events and ever more evident climate changes continue to affect people’s lives and our planet’s
The need to act immediately
EstimatesSources: Emissions Gap Report 2019. UN Environmental Program, 2019; Report of the Secretary General on the 2019 Climate Action Summit and the Way Forward in 2020. UN, 2019. show that nationally determined contributions will not be sufficient to reach the Paris Agreement’s primary temperature goal of limiting warming to well below 2°C pre-industrial levels.
Having achieved 55.3 Gt of СО2E in 2018, GHG emissions continue to grow and there are no indications that peak values have been reached. Both the academic and expert communities demand that governments and countries take additional urgent climate protection measures and set more ambitious goals. Not only measures to reduce emissions are required but also technologies providing for a higher GHG absorption capacity.
Following the UN Climate Summit (COP 25), 121 countries set more ambitions national goals to reduce GHG emissions, and this may have an impact on the Company’s operations in those countries.
Role of the oil and gas sector
Slow rates of structural changes in the transport, power and utilities, agriculture, and manufacturing sectors that directly depend on oil and gas supply, as well as an extensive use of energy resourcesSource: CO2 emissions data from fuel combustion, contribute to the acuteness of the climate issue.
After 2015, the rate of energy intensity reduction in national economies slowed downSource: Energy Efficiency 2018: in 2018, only a 1% improvement was seen, while the energy efficiency growth rate is required to be 3% per year to reach the Paris Agreement’s goals. A more rational use of resources opens promising opportunities for both governments and companies.
Being the most affordable energy resources at the moment for the majority of countries, oil and gas are still in high demand. Until new technologies come to the required maturity, ‘old’ and ‘new’ power industry will develop on a parallel track, and this period may be used to fundamentally transform the oil and gas sector.
A progressive development of digital systems and technologies may become a source of new opportunities for the oil and gas sector, including in terms of reducing climate and environmental impacts. An essential transformation of the sector may ensure its climate neutrality in the long term.
Still, there has been progress after the signing of the Paris AgreementSource: Emissions Gap Report 2019. UN Environmental Program, 2019.. This shows that efficient solutions may be found and the situation may change for the better. LUKOIL expresses its support for the Paris Agreement’s goals and is now assessing its abilities to intensify efforts to achieve them.
However, successful efforts of individual countries, companies and projects cannot succeed aloneSource: Resilience to Climate Change? A new Index Shows Why Developing Countries will be Most Effected by 2050. The Economist Intelligent Unit, 2019.. The risk that collective actions prove to be insufficient increases the likelihood of a worse case scenario. To close the gap, significant investment is required, because a lot of new technologies are still at the early development stage and have not been adequately piloted yet. Therefore, it is highly likely that participation in joint projects will continue, thus opening new cost efficiency opportunities for the participating companies.
One of the major uncertainties of the climate agenda is what global mechanism will be created to govern the sharing of emission reduction obligations.
Although no consensus on setting up a global market for allowances on GHG emissionsSources: COP25: Key outcomes agreed at the UN climate talks in Madrid; Cop25: What was achieved and where to next was reached at COP25, measures for state regulation of climate change are being enhanced at the national levelSource: State and Trends of Carbon Pricing 2019. World Bank, 2019.. Projections by price trajectories suggest their growth within various rangesSources: State and Trends of Carbon Pricing 2019. World Bank, 2019; Fiscal Monitor: How to Mitigate Climate Change. International Monetary Fund, 2019.
The requirements of the EU climate policy are expected to become even more stringent. In December 2019, as the European Commission has approved the European Green Deal, which aims for carbon neutrality by 2050.
The EU member states have announced the most ambitious plans to achieve net zero pollution by 2050. A reduction prospect in carbon emissions by 50–55% as early as by 2030 (instead of the current goal of 40%) is also being discussed. Measures required to achieve the stated goals are currently being analyzed, including the introduction of a cross-border import taxBorder carbon adjustment.. However, experts anticipate difficulties in assuring that the new rules comply with WTO principles and free trade agreementsSources: Center for European Reform; The World Economic Forum.
In addition, «a fundamental reshaping of finance» is predicted to occur «sooner than most
A package of “Sustainable Finance” laws is now being passed in the EU. These laws are expected to significantly influence the finance sector as they will establish the criteria for environmentally and socially responsible economic activity. This will have a particular impact on investments in the fuel and energy complex.
In 2019, Russia acceded to the Paris Agreement, becoming one of the parties establishing the global climate agenda and officially acknowledging the significance of collective efforts to tackle climate change challenges.
Russia is among the world’s five largest emitters of greenhouse gases, along with China, the United States, the EU and IndiaSources: Carbon Tracker Initiative, The Moscow Times. At the same time, Russia has substantial potential to mitigate a negative impact on the climate by enhancing its energy efficiency, taking measures to promote reduction of CO2 emissions and forest restoration, and taking steps in other areasSources: СО2 absorption by the forests in Russia in the context of the Paris Agreement, WWF Russia, 2018.
A National Action Plan for the First Stage of Adaptation to Climate Change for the Period up to 2022 was approved by the Government of the Russian Federation. Among other steps to be taken, strategic measures and plans for the fuel and energy complex and the Arctic Zone of the Russian Federation will be developed at the national level.
The 2019 debates of the draft Federal Law “On the State Regulation of Greenhouse Gas Emissions and on Amendments to Certain Legislative Acts of the Russian Federation” demonstrated that the legal framework in furtherance of restricting emissions and implementing economic mechanisms may be established only over a longer time frame. In March 2020, the Ministry of Economic Development of the Russian Federation elaborated a draft of Russia’s long-term low-carbon development strategy up to 2050Source: Draft of strategy, which presents the baseline scenario of low-carbon development. Three other scenarios – an intense scenario, an inertial scenario and a scenario of development without state support – are also considered.