The world continues to need investment in the oil and gas sector, according to most forecasts, but this is an increasingly difficult pitch for investors given concerns over carbon emissions.
Analysis from McKinsey attributes 42% of global emissions to the oil and gas industry, of which 9% is directly produced as Scope 1 and 2, while 33% comes from consumption of oil and gas, known as Scope 3 in the reporting jargon.
Environmental pressure has tended to tar the entire industry with the same dirty brush. A lack of investment runs the risk of reducing future production, which may drive prices higher.
It is not just a question of the public’s concerns, regulatory bodies are also taking note. “If we don’t do it as cleanly as possible, then we will lose the right to operate,” the Oil and Gas Authority (OGA) UK’s chairman Tim Eggar, said in comments in mid-January. “Increasingly, as we talk about area plans and final development approvals with companies, we will be asking all these questions and expecting solutions.
Cash calling
“Operating well equates to operating responsibly,” a McKinsey & Company partner Jayanti Kar told Energy Voice, following recent papers from the consultancy on the carbon challenge facing the upstream industry. Increasing production, while holding carbon emissions steady, equates to a reduction in carbon intensity.
How companies respond to the challenge will determine how the industry can navigate the changing tides of public sentiment, which is increasingly critical of those seen tarnished with the broad brush of carbon emissions. “Changes in the external environment are is having an impact on how investors think, which [in turn] has an impact on how the industry can attract capital and talent,” Kar told Energy Voice.
Changing demands from the investment community must be recognised by the industry. It is these demands that are driving the collection of data on emissions, although some geographies are better at this than others. “Shareholders just want to know about risks, which is driving community reporting and transparency,” Kar said.
Investors will shift to prioritising fields with lower emissions over higher, Thunder Said Energy’s Rob West told Energy Voice. The cost of capital is around 2-3% for those producing less carbon, West continued, and 7% higher for those emitting more. “It really does matter that much to investors.”
Differences
There is a need for the industry to highlight the differences within the oil and gas universe. Not all fields produce carbon emissions equally and there is scope for improving existing production and taking better decisions on new projects.
There is not a single amount of carbon emitted per barrel of crude. A McKinsey paper from December defined least carbon-intensive projects as large producers with high APIs and low reservoir complexity. A world leader is the Johan Sverdrup field, offshore Norway, where Equinor puts CO2 emissions at “well below” 1 kg per barrel, versus an operated portfolio average of 9 kg per barrel for the Norwegian company.
Canadian oil sands projects are often seen as on the more polluting end of the carbon range, but there is no single number that captures the entire debate. A 2018 study from IHS Markit said these may range from 39 kg per barrel to as high as 127 kg. Equinor bought into the Canadian oil sands in 2007 and sold out in 2017.
Should a major hold a particularly carbon intensive asset the sale of this to another company helps the seller, but does nothing for total emissions. When BP sold off its Alaskan assets in late 2019 it saw benefits from both the cash and from a reduced carbon footprint.
Choices made by companies will play a part in how high emissions are from a field. “For example, in terms of the steel usage, tiebacks can screen as a particularly efficient decision for companies, at around 0.2 kg per barrel, rising to 0.6-0.9 kg per barrel for a new platform,” West said.
Assets that will score less well for investors will be heavier oil, the Thunder Said Energy analyst continued, in addition to areas lacking outlets for gas, such as Gabon and Iraq. “Laggards are laggards because of a lack of a gas market.”
One place scoring highly for West in terms of carbon intensity, and therefore appeal to investors, is Guyana, while he described Norway as the “shining example” for the industry. The Norwegian use of shore-based electricity to power platforms keeps emissions under control, while piping gas to consumers is “the lowest carbon way of moving gas, while the regulators and operators are religious about avoiding venting or flaring”.
Picking fruit
Tackling fugitive emissions and flaring is one of the best ways to bring about near-term change to the sector’s emissions. Reducing these problems will provide benefits to producers beyond simply reducing the environmental strain. Patching up leaky pipes means more hydrocarbons are captured for sale, providing improved revenues, while tackling flaring also provides another potential revenue stream.
Tackling gas flaring is particularly wasteful in parts of the world where access to electricity is limited, such as Nigeria. Installing new equipment can pose challenges but a number of small-scale technologies are being developed to tackle such problems.
Other options include improving the efficiency of power generation on site, where electricity is needed to operate a platform, for instance. “Brownfield facilities will need retrofitting and some changes to equipment, which does require capital investment. We don’t think it’s terribly expensive, but it still needs and active choice,” McKinsey’s Kar said.
Carbon capture and storage (CCS) is the next step and one that has a higher price tag. There are a number of pilot projects on CCS but it remains a process of trial and error, as yet. A number of major energy companies came together in 2016 to back CCS plans, while Microsoft recently set out plans to go “carbon negative” by 2030.
While CCS may seem to be commercially challenging for now, this is likely to change as more investment goes into it. Other technological advances, such as advanced analytics and artificial intelligence are gaining ground and are available to virtually all producers.
Such tools provide information on “emissions and providing real time data and offering optimisation choices. This can help prevent process upsets”, Kar said. “The use of these tools makes day to day operations so much easier.” There are also opportunities to be found in the supply chain, for instance reducing the amounts of trips a vessel needs to take.
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