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How To Reduce The Oil Industry's Carbon Intensity

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Simon Flowers Simon Flowers , Contributor
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Offshore oil and natural gas platform in fog, located in the Gulf of Mexico

Decarbonisation is front of mind across the oil industry. If COP21 two years ago was the call to action for the longer term, escalating pressure from capital markets is rather more pressing. Activist shareholders are pushing for change; banks are beginning to withdraw financing from carbon intensive new projects. A problem for companies and investors alike is the variable quality of carbon emissions reporting. What’s needed is consistent, independent metrics to be able to benchmark peers, see what assets are challenged and how much of a company's value is at risk.

We provide many of the answers in our Upstream Carbon Emissions Performance and Risk Benchmarking Study. We have built comprehensive CO2 emissions profiles for twenty five of the top IOCs and NOCs, using the 31,000+ upstream asset analyses in WoodMac’s database. Here are a few high level snippets from the study.

The sector’s carbon emissions are increasing. Emissions intensity (CO2 per unit of energy produced) is set to rise by around 20% through the mid-2020s. Just as the world finally woke up and smelled the coffee on the dangers carbon emissions pose to our climate, the upstream industry was investing heavily in more carbon intensive assets. LNG, oil sands and heavy oil have the highest carbon intensities, and have been among the five biggest upstream growth themes over the last few years along with tight oil and shale gas.

Gas’ status as the cleanest of the fossil fuels is severely dented by the high carbon intensity of LNG, venting, flaring and fugitives. LNG’s high rating reflects the energy-intensive liquefaction process and venting. CO2 has to be removed prior to entering the liquefaction plant and is often vented into the atmosphere. Gas flaring is allowed in some jurisdictions where there is no ready market for the gas. Fugitives are methane volumes leaked into the atmosphere all along the value chain. Methane has a carbon intensity 37 times that of CO2, and in some cases fugitives may double a company’s CO2 intensity.

As carbon pricing is rolled out, there will be a cost to companies. We estimate that the sector’s value at risk runs into several tens of billions of US dollars directly from the cost of carbon at US$40/t, and excluding the impact on commodity prices of a lower carbon future.

So what can E&Ps do to reduce CO2 intensity? Firstly, fix the roof, or at least fix the big holes. This is in the immediate gift of the industry, and the 80:20 rule would go a long way. The financial cost and any reduction in NPV need to be weighed against both the environmental cost and potential reputational damage from a lack of mitigation. Some LNG producers are already sequestrating CO2 rather than venting, and similar creative solutions are needed across the industry. Regulators have an important role to play in LNG processing, flaring, venting and fugitives.