ComplianceOctober 07, 2021

How the Oil and Gas Industry Can Get to Decarbonization

Decarbonization is all the rage. Companies are promoting their carbon-reduction policies to vie for attention from consumers and financing from investors.

Oil and gas companies, obviously, have a harder path to decarbonize. But none the less, their contribution to mitigating climate change is just as critical. And investors as well as consumers are holding them accountable.

The “Net Zero Strategies for Oil and Gas” standard, published by the Institutional Investors Group on Climate Change (IIGCC) in September, highlights 10 essential benchmarks on which a company’s performance towards a net zero goal will be based. Authors also offer specific actions companies can take, as well as related disclosure expectations. 

This post examines one of those benchmarks, Indicator 5: Decarbonization, in depth. Indicators 1 through 4 were examined in a previous blog post “A Net Zero Standard for the Oil and Gas Industry.” Indicators 6 through 10 will be discussed in a future post.

Decarbonization

The CA100+ Net-Zero Company Benchmark evaluates a company based on whether it has “a decarbonization strategy to meet its long-, medium- and short-term GHG reduction targets.” But it doesn’t stop there. In addition, a company must include a commitment to “‘green revenues’ from low-carbon products and services.”

What strategy is best for a company to reach this benchmark will vary. The Standard does not suggest a one-size fits all approach.

Also, it acknowledges that technologies and subsequent costs are still evolving, so that a company may not be able to say exactly how it will decarbonize at this time. The report gives companies a little flexibility on specifics.

The Standard does expect a company to:

  • Disclose the major actions it intends to take to reach its medium-term and 2050 targets; and 
  • Disclose the expected contribution of those actions to reaching both these targets.

To help make these targets a reality, the report identifies a range of actions a company can take, though none are surprising or new:

  1. Reduce operational emissions to net zero;
  2. Reduce Scope 3 (cat. 11) emissions/fossil fuel sales;
  3. Netting off (“neutralizing”) residual gross emissions;
  4. Increasing sales of lower carbon energy.

Let’s take a closer look at each. 

Operational Emissions to Net Zero

At the bare minimum, the Standard expects every oil and gas company to reduce its operational emissions (scope 1 and 2) to net zero.

It suggests this is possible through a combination of: better energy efficiency, a switch to green energy sources, a focus on less energy intensive oil extraction, and Carbon Capture, Utilization, and Storage (CCUS).

Also, because a large portion of operational emissions are associated with the release of methane through venting or incomplete flaring, the Standard suggests the use of drones and satellites to directly measure the amount of methane emissions.

“The IEA sees reducing methane emissions as ‘among the most cost-effective and impactful actions’ the sector can take to reduce climate change,” write the authors. 

As flaring is also a major contributor to greenhouse gases, investors would like to see a commitment to zero flaring by 2030.

As for the gas industry, the use of CCUS to offset operational emissions is acceptable and relatively cost effective at present. If a company uses CCUS, they should disclose the expected contribution of CCUS to meeting its net zero operational emissions target.

Reducing Emissions/Fossil Fuel Sales

The Standard expects companies to acknowledge that oil and gas firms must reduce their production of fossil fuels. For oil companies, in particular, the Standard stresses that this has to begin before 2030.

The report also suggests that oil and gas companies will need to decrease sales of fossil fuel energy products purchased from third parties by 2050.

There is an exception to this. The Standard states that “If a company’s planned cuts to oil or gas production in its medium- and long-term targets are not as large as that required by the adopted 1.5-degree Celsius scenario, it should state why by highlighting that its production costs are substantially lower than the industry average and/or peers.”

If this is the case, a company must disclose:

  • Why it believes its production plans do not need to be consistent with the declines indicated in the adopted 1.5-degree Celsius scenario, and 
  • Its global average (mean) production cost by fuel.

Crude oil refineries have another potential action: increasing the proportion of refinery output destined for non-energy uses (i.e. petrochemicals and plastics). Although these non-energy products are associated with other environmental issues, this diversification strategy is a potentially legitimate decarbonization strategy.

Neutralizing Residual Gross Emissions

The Standard suggests companies primarily focus on reducing gross emissions. This comes with a few caveats, however. 

For example, while the Standard does not propose direct limits on the use of neutralizing procedures such as CCUS, BECCS, DACS or offsets, “total neutralizing measures should not account for the majority of the medium- and long-term emission reduction targets.”

Investors deem plans that rely on a company’s own actions more reliable than those that rely on third-party customers/suppliers. This is especially true at this time, because there is no credible way to account for supply chain actions in the “external assessment frameworks.” 

Companies should also minimize their use of offsets as these have not proven to be effective.

Disclosures include:

  • If a company intends to use the following approaches in meeting its net zero ambition: a) CCUS, BECCS and DACS, b) offsets, c) actions by third-party suppliers or customers, and
  • The total expected contribution of these measures towards both the medium-term and long-term targets.

It should be noted that actions taken to net off residual emissions require greater disclosure to convince investors that they are credible.

Increasing Sales of Lower Carbon Energy

Investors want to see what actions a company is taking to help society reach net zero. 

While an oil and gas company does not need to invest in green energy to have a net zero strategy, it should disclose the extent to which it intends to rely on sales of green energy to meet its targets.

To this end, a company should:

  • Disclose the total annual “green” energy (in terajoule (TJ)) it expects to generate in both its medium- and long-term targets from investing in generation capacity, either by directly building its own generation infrastructure or as a result of signing long-term “off-takes” or power purchase agreements (PPAs) with third parties where it is the buyer of the majority of the power produced, and
  • Disclose the split of energy in TJ from capital investment in building self-owned new green energy capacity and from long-term PPAs.

Combining Indicators 1 Through 5

The Net Zero Standard suggests that disclosure information from Indicators 1 through 5 (1: Ambition, 2-4: Long-, medium- and short-term targets, and 5: Decarbonization) should be examined together. 

To this end, data from each indicator will be combined into a single graph where intensity and absolute emission pathways are plotted on a net and a gross basis. 

This pathway can then be used to assess a company against its peers and against a sectoral emissions benchmark.

The next blog post will look at the remaining Standard Indicators: 6 through 10. 

Click here for a copy of the report.

 
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