Maintaining Energy Compliance Through Carbon Resilience

After the U.S. Securities and Exchange Commission (SEC) published an update on climate disclosures in March, giving clearer definitions of Scope 1, 2 and 3 emissions, it became critical for oil and gas companies to put a greater emphasis on their emissions reporting.

A recent report from EY Americas – “How oil and gas can leverage past lessons for future resilience” – surveyed 50 major oil and gas companies on their ESG practices and emissions disclosures.

In addition, the report outlined the beginning steps for energy companies looking to appease investors through emissions reporting while maintaining energy security and shared the next steps toward reducing global greenhouse-gas emissions.

“There is a critical need to translate more substantive reporting into meaningful impact on climate change,” the EY leaders wrote in the report.

The report, published Aug. 17, was co-authored by: Herb Listen, EY Americas energy assurance leader; Dr. Paul Bogenrieder, EY U.S. energy analyst; David Johnston, EY U.S.-west region strategy and transactions energy leader; and Ryan Bogner, EY Americas digital sustainability leader.

Of the 50 major oil producers surveyed, 82% reported publishing an ESG or sustainability report, according to EY data. 

Additionally, 86% of companies surveyed report greenhouse gas emissions, with 62% having a specified greenhouse-gas reduction goal.

Only 26% companies included third-party assurance over ESG metrics in their reporting.

“Oil and gas companies should be deliberate and transparent about what they are and what they want to be to manage the complex political landscape – including the contradictory goals of boosting capital expenditures to increase supply while also reducing fossil fuel consumption,” the report stated. “To this end, many companies are refreshing their sustainability materiality assessments to appropriately align with their ESG strategy.”

According to EY, some integrated oil companies are attempting to rebrand as energy companies by selling core oil and gas assets along with acquiring proved and unproved properties. However, while this rebalancing might earn short-term gratification from investors, it ultimately doesn’t help reduce the amount of emissions created across the industry.

“While these moves may positively impact individual companies’ emissions reporting, the net effect of this realignment may be higher industry-wide emissions, as less carbon-intensive operators sell their worst-performing assets to operators with less scrutiny over their carbon emissions,” EY said.

EY’s proposed solutions

Instead of shuffling assets around, the report suggested a better long-term solution to the emissions reporting problem – and securing more environmentally positive operations – is threefold: decarbonization, collaboration and digitalization.

The first step in this process, EY Americas oil and gas leader and Ernst & Young principal Patrick Jelinek told Hart Energy, is laying a common foundation to establish where to begin and what operators can feasibly do to report and manage their emissions.

“What are your options to decarbonize? What assets, what alternatives do you have?” he said.

From there, EY offers solutions as to “how we actually help deliver those in more efficient ways, such that we're both solving energy poverty, but also making improvements on an everyday basis around emissions,” Jelinek continued.

Entry-level decarbonization efforts include carbon offsetting, electrifying operations, installing carbon capture, utilization and storage technology or any combination of the three. After identifying which methods will be the most effective and cost-efficient, companies can work with suppliers and policymakers to help create collaborative standards for sustainability.

“Many of these larger companies, not just oil and gas companies, but all companies are realizing that they have different standards to report against either at a jurisdictional level, local municipal, or in different geographies,” Jelinek said, continuing on to point out the importance of the SEC’s attempt to standardize the reporting process.

Beyond decarbonization and collaboration, digitalized technologies, such as carbon monitoring solutions, carbon-enabled digital twins and other carbon management platforms, will allow companies to intervene faster, cutting off emissions problems at the source.

“Some oil and gas companies are using the traceability of these systems in conjunction with high-quality offsets to offer differentiated products at a significant margin premium in specific markets (such as California and Asia),” the report continued.

Scope 3 potential

While the practices mainly focus on Scopes 1 and 2, there is potential for Scope 3 emissions to become more important among investors. Since Scope 3 emissions are harder to quantify, and they look different to different parts of the sector, it has been harder for organizations to define standardized guidelines across the energy industry.

“It will be for different sectors potentially,” Listen told Hart Energy. “I do think Scope 3 is going to continue to get a lot of focus. And certainly depending on the sector that you're in, that the more important Scope 3 might be viewed by those investors and those stakeholders.”

At least for the time being, though, Listen and Jelinek believe investors will focus more on Scopes 1 and 2.

“Those are the types of things that the companies as operators can control and that they can focus on and that they can make meaningful improvements on,” Listen added. “Scope 3 is going to be a natural outcome as a result of the products that are either produced at an oil and gas company and sold to customers, or that are manufactured through a refining process."