A seismic shift is occurring in the wake of the global pandemic bringing the energy industry to a tipping point. Although addressing global emissions and reducing carbon footprint received attention in the oil and gas industry pre-COVID, increased focus on attaining a lower carbon future is spurring a higher rate of change.

Oil and gas companies are now expected to participate in the move to greener energy, with increased scrutiny from investors, NGOs, the public and policy makers. Pressure is now aimed at a company’s pocketbook with investors paying close attention to capital spent to reduce carbon output and greener technologies implemented to decarbonize existing infrastructure and daily operations.

Investors examine projects and strategies through an ESG lens and make investment decisions based on transition to decarbonization and green energy solutions.

The transition to a low carbon future will come in many shapes and sizes, with no ‘one size fits all’ solution. Although company size can be a good predictor of the decarbonization strategy employed it will be up to each entity to determine their financial status, employee resource availability, and the benefit of achieving lower carbon output.

Companies utilize an established Greenhouse Gas (GHG) emissions protocol to direct measurement and emissions tracking to demonstrate decarbonization achievement. The GHG identifies three categories oil and gas production companies of any size can track and work to reduce—denoted as Scope 1, Scope 2 and Scope 3 emissions. 

Scope 1 emissions include direct emissions from operations. Most companies have already begun directly addressing Scope 1 emissions because these efforts tend to require shorter-term efforts, less complex project opportunities, and a lower overall cost structure. Reduced natural gas flaring, replacing leaking valves, lowering volatile organic compound (VOC) emissions, upgrading equipment and increasing the efficiency of operations not only addresses emissions and carbon reduction goals but also makes good business sense.

Producers must continue to explore ways to address Scope 1 emissions, as these are well within their operational control and the best way to make contributions to decarbonization. Companies that have embraced and are implementing digital operations and maintenance solution find additional Scope 1 savings as well as operational efficiency benefits. Immediate identification of production upsets and provide real-time opportunities to manage potential emissions events. Operational changes including installing pipelines to capture and flow gas to sales rather that flaring and installing vapor recovery units to capture tank emissions preventing potential venting to the atmosphere present additional decarbonization opportunities.

Scope 2 emissions are indirect emissions from sources used to power operations. Most electric plants supplying power utilize natural gas or coal as a fuel source creating carbon emissions directly related to production operations.

Scope 2 reductions require a commitment to purchase power and other energy from sources focused on a low carbon outcome. Producers are likely to find the availability of low carbon options in remote production, both on shore and offshore, to be limited or non-existent. Rotating equipment such as gas compressors and fluid pumps, process heaters, and other wellsite and processing facility equipment operate in areas where grid electricity from green energy sources is not available. Some companies have accepted Scope 1 savings in lieu of Scope 2 reductions by utilizing wind power or solar energy to power smaller electrical equipment in the absence of large-scale alternative energy sources.

Scope 3 emissions are indirect emissions generated by suppliers and customers as well as those generated by using the company’s produced commodities. Emission reductions in these areas will have the greatest impact on lowering carbon footprint as these efforts address the issue at a supplier and consumer level where most of the emissions occur.

It is estimated that 80% of all greenhouse gas emissions occur in this category. Larger oil and gas companies recognized the need to address Scope 3 emissions years ago. These companies developed strategic business plans prioritizing decarbonization efforts allocating significant capital and personnel specifically to address decarbonization.

Billions of research dollars support advances in alternative fuels development with green hydrogen leading the way, new energy sources such as wind and solar, and methods to capture and store carbon long term in reservoirs or salt dome structures.

The industry also looks to years of oil and gas E&P experience to support projects aimed at decarbonization. Offshore wind farms can utilize existing production platforms as the base using their extensive offshore platform construction experience.

The creation and use of green hydrogen, specifically using natural gas as feedstock and methods to transport and process the gas, can potentially utilize existing petroleum infrastructure to create and move the fuel. Utilizing reservoir and facilities technologies companies can develop ways to capture, utilize and store carbon from multiple emitters. Implementation of these technologies is unlikely to be an option for all but the largest companies primarily because large amounts of capital and personnel will be required to make these options reality.

With the need for investment dollars to continue to operate and grow, oil and gas companies of all sizes are increasingly aware that demonstrating robust policies, practices, and performance on key ESG topics can play a direct role in securing equity and debt financing. ESG enters into corporate thinking as public expectations focus on corporate sustainability, accountability and effectively managed financial systems. A company must demonstrate that they value the environment, embrace and behave in a socially consciousness way, and hold company leadership accountable for affecting positive change.

Sentiment toward the oil and gas sector has been trending negative as a function of wider market perspectives as well as concern around climate change. The pace of energy transition and the consequent potential for stranded assets on companies’ books may never be monetized.  

Clearly how oil and gas companies demonstrate their climate risk management is the most significant ESG issue that investment firms, ESG ratings providers and other interested parties take into account and which can impact recommendations, inclusion in funds, indexes and voting decisions on resolutions.

Traditionally mainstream investors have been primarily interested in the return on capital invested. Major growth is occurring in the sums invested with specifically ESG funding. ESG performance is now increasingly factored into investment strategies from what have historically been viewed as mainstream investment entities. This is partly a function of pressure on investment firms from activists and partly a change in the assessment of the extent to which good ESG performance will create competitive advantage and avoidance of and reduction in value destroying activities.

Regarding climate change, companies across sectors are expected to set out how they are addressing climate risk in their strategies, operations investments and decision-making and extent to which carbon footprint and decarbonization strategies are implemented.

The oil and gas industry has reached and slipped beyond a historic tipping point, which is permanently changing the energy landscape. Companies have recognized the need to pursue activities to reach lower carbon footprint levels and are committing ever increasing resources to reach self-imposed and mandated decarbonization levels. There is no one-size-fits-all solution in the transition to a low carbon future.

Corporate ESG strategies and goals supporting decarbonization must consider company size, resource availability, and relative carbon footprint. Incorporating the GHG scopes as part of ESG strategy provides a consistent and accepted way to communicate achieved carbon emission reductions. Change is needed to reach global decarbonization goals and companies that embrace the change and take the appropriate actions will certainly gain a strategic advantage over those that lag behind.