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Is the Louisiana oil and gas industry jeopardized by climate change concerns?
Last year’s UN’s COP21 agreements in Paris were a milestone, putting in evidence a global shift towards political and social awareness on climate change. In this context, policies aiming to price carbon in order to incorporate the cost of pollution into the energy market have gained great support. However in regions like Louisiana, there is still a great deal of skepticism and different points of view on how this issue should be addressed.
On one side, climate change poses an imminent treat to the coastal communities in Louisiana, as projections estimates increasing global water level for up to 3 feet. In fact, Terrebonne and Montegut are already facing the danger of the land intrusion of the Gulf of Mexico. On the other side however, Louisiana is the second largest producer of oil and natural gas in the United States. Furthermore this industry is a cornerstone of the local economy, generating thousand of jobs and substantial revenues to the State.
This dichotomy helps creating extreme positions. While environment concerns are self explanatory, it exists a high degree of uncertainty in the public opinion over if jobs and economic growth could be at risk. It is important to tackle this problem objectively; perception should give place to the use of available facts to understand the future outcome of the oil and gas industry in this context.
Is the Louisiana oil and gas industry jeopardized by climate change concerns? Are pricing carbon policies detrimental to the industry? These questions have been in my mind since I moved to Baton Rouge a couple months ago. If a market-based solution is found then my short answer is no, and in this note I explain why.
On March 15 2016, the LSU Center for Energy Studies and the Grow Louisiana Coalition hosted an open presentation from BP’s General Manager, Global Energy Markets & US Economics. In his keynote, Mark Finley explained the outline for the “most likely” path towards 2035 world energy demand by type of fuel, taking into account future changes in policy, technology and the economy. He concludes that world GDP growth would require the energy sector to grow by a third of its current size. In this scenario fossil fuels remain the dominant form of energy with almost 80% of the total energy supplies market share, predicting gas as the fastest growing with increasing supply by the US shale and share of LNG. Renewables are estimated to quadruplicate its supply.
When asked about climate change and carbon emissions mitigation solutions, he clearly supported a market-based solution, such as pricing carbon, as the preferable path. He explained that it would allow setting a common ground for suppliers to compete in terms of productivity and efficiency to gain market share, while targeting a decrease in both energy and carbon intensity (I would like to add that revenue-neutral policies are even more appealing from the demand side, as those aim to return all the generated revenue to taxpayers to offset rising energy costs). After further enquiring, he clarified that the above mentioned results of the “most likely” scenario takes into account carbon prices on fuels for up to 40 $per ton of CO2 taking place in most OECD countries.
In other words, this shows that fossil fuels and particularly gas will continue to grow under a scheme of carbon price policies. For an oil- and gas-producing region like Louisiana this means increasing production and economic activity. I believe that these results could also be understood as a necessity to shift paradigms in the local political and business scene. Discussions over detrimental impacts of such policies towards the local industry should be better assessed across the value chain and in an international scale. More importantly, discussion should focus on understanding that the real challenge remains in technological innovation and efficient practices to gain competitive advantage. More interestingly, this not only involves oil and gas producers, but a general shift of local suppliers and Louisiana industrial cluster as a whole to engage in more productive activities.