What does the carbon dioxide shortage tell us about the energy transition?

Much has been made in the UK media over the last week or so regarding the shortage of carbon dioxide as an industrial gas. The supply issues are now so acute that some retailers are restricting sales of beer and soft drinks, abattoirs are closing, frozen food shipments that rely on dry ice are being disrupted and food manufacturers are struggling with storage of short shelf-life goods. The shortage is not restricted to the UK, but has also appeared in some parts of Europe.

The problem has arisen from the coincidental shutdown of several sites that produce carbon dioxide as a by-product. These are typically hydrogen manufacturing units, where the hydrogen is then used to produce ammonia for industrial and agricultural use. Ammonia is an important material in the food chain due to its use as a fertilizer in the form of urea. The latter is made by reacting ammonia with carbon dioxide (yet another use). The reason for the shutdowns is that summer is the low period for fertilizer demand, but this year there has been some unfortunate timing as the shutdowns have coincided with technical difficulties at facilities that have remained running.

The hydrogen required for the ammonia plants is made by steam reforming of natural gas (or coal) to produce synthesis gas, a combination of carbon monoxide and hydrogen. A further step, known as the water-gas shift reaction, increases the yield of hydrogen at the expense of carbon monoxide, with carbon dioxide also being produced.

The link from natural gas (or coal) through to beer and even pig slaughter (where carbon dioxide is used to stun the animals first), illustrates the complexity of the energy system and the way in which fossil fuels end up in the supply chain of all goods and services. A transition away from fossil fuels must also find alternatives for all of these uses. In my book, ‘Putting the Genie Back: Solving the Climate and Energy Dilemma’, I discussed the pervasive nature of fossil fuels in the global economy, not from the perspective of products we know well, such as gasoline, but rather products like ammonia.

While our immediate contact with fossil fuels is the gasoline we put in our cars or the natural gas we burn in our homes, there is more, much more.  This includes the unappealing, somewhat messy but nevertheless essential chemical plants where products such as sulphuric acid, ammonia, caustic soda and chlorine are made (to name but a few).  Combined, about half a billion tonnes of these four products are produced annually. Manufactured by energy-intensive processes operating on an industrial scale, but concealed from daily life, these four products play a part in the manufacture of almost everything. Even the ubiquitous can of soft drink relies on sulphuric acid; the chemical is used to give the aluminium can the shiny look that is expected before opening it and consuming the contents. These core base chemicals rely in turn on various feedstocks, many of which come from the fossil fuel industry. Sulphuric acid, for example, is made from the sulphur found in oil and gas and removed during refining and treatment processes. Although there are other viable sources of sulphur, they have long been abandoned for economic reasons. And of course there is ammonia!

In thinking through the energy transition required to fully address the climate issue, the end game is zero emissions, which means that there is no further accumulation of carbon dioxide in the atmosphere. The Paris Agreement achieves this by calling for a balance between sources of emissions and sinks during the second half of the century, or what is referred to for the energy system as net-zero emissions. In the Shell Sky scenario, which meets the goals of the Paris Agreement, this is achieved in 2070. In Sky, there isn’t an alternative pathway developed, commercialized and scaled for every use of fossil fuels in just 50 years, far from it. Rather, carbon capture and storage (CCS) is deployed as the mechanism to allow the multitude of uses to continue until alternatives are fully in place. When Sky reaches net-zero in 2070, emissions from the continuing use of fossil fuels are countered by direct application of CCS or indirect removal of carbon dioxide from the atmosphere. But the story doesn’t end in 2070, for example by 2100 in Sky industrial CCS has declined compared to 2070 as hydrogen has grown as an alternative.

The process of commercialising and scaling alternatives for all the uses of fossil fuels will likely take us well into the 22^nd century. Some alternatives are emerging today, such as the use of solar PV to generate electricity, but as clearly demonstrated in recent days, the dependency on fossil fuels remains pervasive and entrenched in our society.

Note: Scenarios are not intended to be predictions of likely future events or outcomes and investors should not rely on them when making an investment decision with regard to Royal Dutch Shell plc securities. Please read the full cautionary note in http://www.shell.com/skyscenario.