One of the most significant trends of 2022 will be how the oil and gas industry acts against climate change. Already, international and national oil companies (IOCs and NOCs) around the world have ambitious plans to reduce the greenhouse-gas (GHG) emissions from their operations—part of national agendas against climate change. The challenge is now to translate these ambitions into actions, while managing perceptional and commercial risks. That will be difficult, requiring that companies understand the inherent complexities of decarbonisation in the industry and take action through five strategic imperatives.
Worldwide, the oil and gas industry accounts for 45 percent of anthropogenic GHG emissions, according to the International Energy Agency. That significant contribution has led to increased pressure to decarbonise from a growing range of stakeholders. Indeed, governments, investors, customers, and other stakeholders have declared their intent to reduce GHG emissions. The UAE has said it will reach net-zero emissions by 2050. Bahrain and Saudi Arabia will do so by 2060. Several countries are establishing or expanding national emissions trading schemes, taking advantage of market forces to determine a fair cost of emissions. Investors are turning their attention to decarbonisation as well. Public activism has focused pressure on certain types of oil and gas operations, particularly assets that have a larger environmental impact such as oil sands and shale.
In response, many oil and gas companies have set targets for decarbonizing their operations. Twenty-one of the top 25 publicly listed oil and gas operators globally by market cap have announced decarbonisation targets, of which 17 are aiming for net zero emissions from their operations. Further, several unlisted NOCs have also announced tangible decarbonisation (including net-zero) targets. However, turning ambitions into action is complex, for several reasons.
Today, emissions across operations are mostly estimated using benchmarks and proxies. Accordingly, one of the top agenda items for 2022 will be for companies to establish urgently a clear and reliable baseline of their actual emissions footprint across the entire value chain—upstream, midstream, and downstream.
Similarly, emissions intensity can vary widely across different types of assets in the portfolio due to technical and operational characteristics. Companies require a comprehensive approach to identify the largest opportunities for emissions reductions and those that are fastest to implement across their portfolio.
A further issue is that a wide and intricate range of mitigation solutions is available, with technologies developing all the time. Oil and gas leadership teams should be fully informed of the options and evaluate them by considering their abatement potential, technological maturity, and business case for implementation.
Given these complexities, IOCs and NOCs should follow five imperatives to achieve tangible progress toward net-zero emissions.
First, oil and gas companies should focus on long-term shareholder value. Companies should ensure that they provide their investors with positive returns and tangible progress toward emissions-reduction targets. Management teams must balance capital expenditures with the return on investment—financial and environmental—for any initiative, and consider the timeline for those returns. When laying out capital expenditure priorities, management teams must incorporate factors such as changes in carbon and product pricing frameworks, and also consider implications for future access to capital markets and maintaining their social licence to operate in consumer markets.
Second, oil and gas companies should identify portfolio decarbonisation priorities and make clear choices. Companies need to identify the largest opportunities to ensure that decarbonisation efforts are effective. These are the small number of assets in the portfolio that contribute a disproportionate share of emissions. Some are candidates for investment and intervention. Others that are not strategically important may require divestment or retirement.
Third, oil and gas companies should take a systems approach to decarbonisation technologies. Rather than limiting their approach to discrete solutions for specific assets, companies should develop or acquire integrated systems for the most urgent decarbonisation priorities. For broader systems solutions, companies should determine their technological maturity, required investment, the time to realise benefits, and the cost per unit of emissions avoided. Implementing these broader solutions through cross-functional teams ensures that companies consider potential synergies, take advantage of a range of capabilities, and gain early knowledge of operational barriers.
Fourth, oil and gas companies should capitalise on new partnership models. The scale of emissions, and the urgent need for action, demand a wider approach to partnerships. To become contenders in the race for the “greenest barrel” produced with the least emissions, companies should expand their partner base to collaborate with traditional oil and gas competitors, companies in other heavy industries, technology licensors, and digital firms.
Fifth, oil and gas companies should build integrated pathways for implementation. Companies can begin implementation by building decarbonisation approaches that include technology roadmaps, business cases, a blueprint for governance, and a means to track results over time.
The oil and gas industry’s recently announced decarbonisation agendas and initiatives are significant, but will not succeed unless there are tangible results soon. The challenge for leadership teams in 2022 is to think beyond their traditional focus on the cost and quality of their oil and gas. Although this will not be easy, the future of individual companies and the environment will be decided by how they meet this challenge.