Creating Sustainable Oil & Gas Supply Chain

Position of Oil & Gas in the energy mix

"Natural gas is poised to play a key role in energy transition and will remain the most resilient fossil fuel.."

Oil & Gas continue to remain dominant in the energy mix for this decade. Investments in this sector are also a key to achieving diversification in the energy mix and transition to cleaner sources. Mckinsey energy insights global energy perspective 2022 report shows the oil demand to peak in the next two years with natural gas projected to grow by 10% by 2030. Natural gas is poised to play a key role in energy transition and will remain the most resilient fossil fuel with demand dropping by 7% by 2050 as other sources of energy gain momentum and increase their share in the energy mix. While electrification is perceived as a key factor in the shift from fossil fuels for utilization in heating and passenger cars sector, it is still not clear if the magnitude of the shift of electricity generation from fossil fuels powered plants to cleaner energy sources will influence the demand from Oil & Gas industry.?

McKinsey Energy Insights: Global Energy Perspective 2022

What does the Oil & Gas supply chain consist of?

Adopting sustainability practices is potentially required for local, regional and global Oil & Gas players to establish long-term business competitiveness. National Oil Companies (NOCs), International Oil Companies (IOCs), Oilfield Equipment Manufacturing (OEM), Oil-Field Service companies (OFS), distribution, and logistics all have a crucial part to play to make supply chain (nodes in the supply chain) transparent leading to sustainable business practices. Historically, adherence to health, safety and environment policies while supporting local societies has been dubbed as sustainable practice. The new sustainability agenda also involves a transition to decarbonization of the entire supply chain with emission measurement and control along with controlling the long-term environmental risks such as biodiversity loss.?

Oil & Gas Supply Chain Nodes (Source: API)

Adoption of sustainability reporting across Oil & Gas sector

Eventually, this will be a two-way street. Adoption will have to come from each node in the supply chain. Any node’s hesitancy towards such adoption breaks the sustainability pathway. As shareholders mature their thought towards climate change along with government policies and regulations in business’ sustainability practices, we will see the entire supply chain’s need to comply with sustainability objectives. Essentially, this would provide a license to operate a business. We are already seeing a shift in organizations’ thoughts with 81% of N100 & 100% of G250 companies working in Oil & Gas sector now publishing annual sustainability reports (KPMG, 2020).?

This evidence supports the maturing nature of sustainability practices in the Oil & Gas supply chain. While it is also important to note that such adoption is starting with international players; regional and local players will eventually need to play catch up. In order to avoid any shock in supply chain, a tiered approach by organizations can lead to a smooth transfer from current supply chain practices to a more sustainable supply chain management.?

Carbon footprint, decarbonization, emissions: What are we missing?

Due to the nature of the Oil & Gas business, a general perception of sustainability revolves around the fundamentals of emission and carbon footprint. This phenomenon called “Carbon Tunnel Vision” coined by Jan Konietzko exists in many industries today. It points out at all the opportunities we miss while focusing on carbon emissions only. Across the board, the industries are doing an excellent job of tracking and reporting the scope 1 & 2 emissions. This continues to remain a dominant metric for the international Oil & Gas organizations. The struggle with tracking scope 3 emissions remains a pain point that industries today focus on. Majority of the reporting guidelines suggest scope 3 as optional metric at this stage. The debate over inclusion of scope 3 as a mandate is beyond the scope of this article and its something I will discuss in the future. While it is tempting to jump to environmental impacts such as emissions, waste, energy, water usage, carbon foot print, etc.; sustainability risks within Oil & Gas supply chain may be more fundamental.?

A non-exhaustive list for such risks is as follows:

• Non-discrimination of workforce
• Working conditions
• Child labour
• Diversity and inclusion
• Human trafficking
• Standard of workforce rights
• Human Rights (freedom of association)
• Impact on communities (local and foreign)
• Environmental impacts
• Conflict Materials

United Nations Sustainable Development Goals

"SDG reporting must be connected to the business goals. There must be a balance between the positive and negative impact of the business on SDG."

? United Nations Sustainable Development Goals

As one may identify, the above risks relate to human capital, clean source of affordable energy, climate action and responsible consumption. UN SDGs (7, 8, 12, 13) are an excellent benchmark for implementation. While the above list is an excellent starting point, Oil & Gas?sector also requires emphasis in impact to biodiversity due to the nature of the activity in the sector. In addition, SDG reporting must be connected to the business goals. There must be a balance between the positive and negative impact of the business on SDG.

Only 31% of Oil & Gas?companies disclose the biodiversity risks (KPMG 2020).?

If an organization can implement a policy at regional or international level, then such policy must not conflict with the local or regional laws and regulations. Implementation across the supply chain can be done with due diligence in the form of a questionnaire asking objective questions followed by evidence that supports the response. Further, to establish consistency, a list of actions should be supplied to the supplier to confirm alignment. If each node in the Oil & Gas?supply chain adopts such an approach, we will see a ripple effect in forward and backward direction at each node of the supply chain; thus making the entire supply chain sustainable. In order to accelerate such practice, each node in the chain must start tracking their respective customers and suppliers for their adherence to such policies.?

Is the Oil & Gas industry consistent in sustainability reporting?

A 2021 sustainability reporting survey by IPIECA showed 92% of Oil & Gas?companies using IPIECA, API, IOGP sustainability reporting guidance. A deeper dive into the IPIECA statistics shows that the survey consisted of only 25 organizations with only 1 belonging to the OFS category. The other 24 are IOCs. This evidently shows the statistics that maybe misleading to the readers. GRI remains to be a dominant global standard followed closely by SASB. Some organizations follow two standards/frameworks or a hybrid model. The international OFS organizations use focus areas broader than IPIECA guidelines and focus on different GRIs. While going beyond requirements in reporting maybe thought of as a good practice, such a practice creates inconsistencies in reporting from a single industry. Hence, using professional societies or alliances as a platform, organizations in the Oil & Gas?sector must come together and agree on a framework that is transparent and measurable. This will further enhance collaboration and knowledge sharing in sustainability practices.

Where do we go from here?

"We need to remember that reporting is not a proxy for impact."

Overall, we see efforts from large organizations in the Oil & Gas?supply chain to be transparent and consistent (in terms of time) with sustainability reporting. The next step is for these organizations to include suppliers (local and regional) in order to adhere to these standards (create a ripple effect) to bring sustainability in the entire Oil & Gas?supply chain. Consistent evidence based reporting followed with actions is the key to sustainable supply chain. We need to remember that reporting is not a proxy for impact. As complex as the supply chain is within the Oil & Gas?industry, it will require persistence and commitment from all the nodes in order to bring a positive impact on business, people and the planet.?

I would like to thank my family, friends and my professional network who contributed positively by giving feedback and providing constant encouragement during the course of writing this article.