Inconvenient (climate) truths: an oil and gas perspective

On 9 August 2021, the Intergovernmental Panel on Climate Change (IPCC) issued its sixth and most detailed report on climate change since 1990. United Nations Secretary-General, Antonio Guterres, warned that the report should be a clear sign about our consumption of fossil fuels before they destroy our planet.

However, a low carbon economy will need strong performance from a prominent fossil fuel sector, namely oil and gas. That is the inconvenient truth that must be accepted by society, policy makers and the oil and gas sector itself.

PARIS MANDATE

The Paris Agreement is a landmark international accord on climate change that was adopted by virtually every country in 2015 to address human-induced global warming. Its key goal is to limit global warming to under 2°C, and preferably to 1.5°C, compared to pre-industrial levels (1850-1900).

IPCC MITIGATION PATHWAYS

The IPCC is the United Nations body responsible for assessing climate change science. In 2018 the IPCC published a special report on the impacts of global warming and assessed mitigation pathways to limit global warming with implications for transitions in the energy sector. A number of energy supply implications are revealed in this 2018 IPCC assessment.

In a 1.5°C low overshoot scenario (temperatures going slightly over the recommended temperature thresholds), the primary energy supplied by oil from 2020 to 2050 decreases by a median average of 66% and gas supply reduces by 40%. In the higher overshoot scenario (i.e., less success in reducing oil/gas consumption in society), oil supply reduces by 34% and gas supply reduces by 31%.

These emissions reduction requirements for the oil and gas sector are incredibly challenging. Reducing the consumption of oil and gas commodities by even 31% by 2050 would imply an economic contraction on an unparalleled scale, while exacerbating global socio-economic inequalities. For example, what would happen to transport operators in, say Kathmandu or Timbuktu (yes, I know!)? Or operations of industrial manufacturers in historical Old Dhaka? Pathways to 2050 net zero emissions need to be more carefully considered within the context of global energy security, energy equity, environmental sustainability, and economic development.

THE OIL AND GAS PROBLEM

Over 30% of global greenhouse gas (GHG) emissions are directly and indirectly attributable to the oil and gas sector. The requirements for the oil and gas sector to contribute towards emissions reductions as part of the IPCC pathways are incredibly challenging due to the prevalence of oil and gas throughout modern economies (consumer fuels, commercial and industrial fuels, infrastructure, and others). It is almost impossible to find replacements for these commodities within the requirements of the Paris Agreement. Additionally, these rapid transition requirements will hit developing economies particularly hard as they have limited institutional or financial means to manage the transition.

Despite growing climate scrutiny of the oil and gas sector, the economic returns and consumer demand are still attractive enough for oil and gas companies to continue prospecting. The consistently high demand for oils and gases, their continuing availability, plus increasing calls for sweeping changes in socio-economic activities have left oil and gas companies with some difficult decisions.??

WHAT IS THE PUBLIC POLICY IMPLICATION?

Public policy of energy demand and supply has historically concerned itself with the security and pricing of energy resources. Climate change is now the “third wheel” which policy makers must increasingly consider in this relationship.

The diversity in the GHG intensity of oils and gases means that there are short-term policy solutions which can be proposed to phase out the dirtier oils and gases and sustain economic activity with cleaner ones, while initiating an equitable energy transformation to a low carbon world. In order to make policy decisions which are socially acceptable, economically viable and environmentally responsible, policy makers need to consider the implications of the diversity and abundance of oil and gas resources.

CARRY ON AT YOUR INCONVENIENCE

It is extremely difficult to apportion accountability for oil and gas GHG emissions between the sector and the end users; this is ultimately a political question. Societies, oil and gas companies and policy makers need to consider various factors as they ponder such accountability and seek solutions:

• The sheer universality of oil and gas in our lives means that simply using less (demand-side solutions) will not yield desirable GHG emissions reduction results within the Paris timeframe. We therefore need to more actively consider cleaner supply-side solutions.
• The impact of climate change on economic growth has been established and we know that it has exacerbated global inequalities. Essentially, hotter, poorer countries have become less economically productive while wealthier countries with more temperate climates have become more economically productive relative to human-induced global warming. Ironically, a rapid shift away from oils and gases would exacerbate the inequalities and leave blocks of developing countries stranded in uncertain energy circumstances.
• Economic tools have often been proposed to stimulate climate change mitigation initiatives. But economic tools can only work effectively if externalities are fully factored into the pricing mechanisms. For example, a proposed EU Carbon Border Adjustment Mechanism (CBAM) would effectively be a carbon tax that would recognise the carbon emissions of goods imported into the EU, thereby acknowledging the value of externalities. The EU currently imports nearly 30% of its crude oil from Russia and nearly 10% from Saudi Arabia. The proposed CBAM would make Saudi Arabian oils a more economically viable option for the EU’s imports than Russian crudes because of the less carbon intensive nature of the former. Externalities have not been fully factored in virtually all pricing models for a variety of reasons but ultimately it boils down to one key fact: social costs increase with the level of pollution. Leaders (both political and commercial) have been reluctant to properly acknowledge such costs, let alone factor them into pricing. In traditional politics, such costs would not win votes in marginal electorate seats; in the corporate market, these social costs would offer no economic returns to shareholders. So ultimately, you and I have been accomplices (often unwitting) to the problems we now face!

WHAT CAN OIL AND GAS COMPANIES DO?

Oil and gas companies are currently responding to investor pressures, regulatory pressures and competition from renewables. The long-term sectoral responses range from inactivity from those companies that do not consider global warming a strategic concern to long-term leadership positions from those companies that have implemented global warming strategies, invested in technology solutions and engaged actively with regulators and policy makers.

But even the efforts of the leadership companies which are generally aimed at improving organisational processes and efficiencies have yielded non-transformational results. To achieve transformational climate change results, oil and gas companies will need to apply a multi-point strategy which includes the following elements:

1. Develop communication and engagement acumen: The most difficult task for the oil and gas industry has little to do with technological innovation and everything to do with communication and engagement acumen. Oil and gas companies are already undertaking innovative process improvements in their direct operations. As they continue to invest in even more innovative technologies, they need to develop their stakeholder engagement capabilities to more competently advocate the case for clean oil and gas commodities in a low carbon economy to communities, financial bodies, labour markets, and industry organisations.
2. Advocate appropriate carbon pricing mechanisms to phase out dirtier commodities: Once producers and operators recognize a genuinely feasible carbon price signal, they will respond and quickly abandon dirtier fuels. Carbon prices have traditionally struggled to provide the market with an optimal price signal but if done properly they can work. In my experience with oil and gas clients, a great majority actually want to see a carbon price in place; it would impose a smaller impost on “cleaner” oil companies (easily accessible oils/gases and best practices in their midstream and downstream activities) while penalising “dirtier” companies (accessing unconventional resources and using more carbon-intensive processes).
3. Continue investing in innovating process improvements: Oil and gas companies need to continue cutting emissions by implementing process improvements, such as:

• producing green hydrogen within refining operations instead of steam-reforming methane
• electrifying the upstream and midstream operations where possible
• installing carbon capture, utilisation and storage (CCUS) facilities at larger emissions points sources
• increasing internal organisational awareness on linkages between operations and specific GHG emissions

1. Increase advocacy on uniqueness of oil and gas Scope 3 emissions: Oil and gas companies should increase the value chain awareness of end users. Awareness of the composition and contribution of Scope 3 emissions (embedded emissions in various products and the use of sold products along the supply chain) is poorly understood. The characteristics of Scope 3 emissions pose a particularly unique challenge for the oil and gas sector. For most other sectors, the Scope 3 emissions are related to the manufacture, product use, transportation, and end-of-life of goods that are associated with the use of their products. However, for oil and gas companies, the majority of Scope 3 emissions come from the consumption of the actual products themselves. A reduction of these emissions therefore necessarily involves a change in behavioural patterns of the consumers. This means greater efforts are needed to engage communities, civic bodies and policy makers in raising the awareness of this unique characteristic of the oil and gas sector.
2. Initiate carbon budget planning: When I talk to friends or clients, I describe the carbon budget as the “emissions trading scheme of nature” by visualising a limit to the amount of remaining greenhouse gases that can be safely emitted to ensure the safety of the world as we know it. Within this carbon budget, there is an existing order of emitters and oil and gas companies need to understand their contribution to the carbon budget so that ultimately a solution can be implemented across all responsible emitters. While this idea is not yet mainstream thinking, it is possibly only a matter of time before it gains mainstream acceptance. Strategic oil and gas companies will investigate this strategy to coordinate their strategic planning processes, resource use and end-use activities to understand their contribution to the carbon budget.?

FINAL WORDS

United Nations Secretary-General Antonio Guterres has described the 6th report on climate change as a “code red for humanity” with a warning that we are already speeding towards the 1.5°C threshold.

Although current proposals for climate change solutions advocate drastically reduced consumption of oil and gas commodities, they do not practically account for the more vulnerable economies. Indeed, the plight of the most exposed sectors of these economies would suffer even greater damage in the brave new world of a low carbon economy.

The oil and gas sector finds itself in a most unusual situation where it will have to play a significant role in a low carbon economy while potentially addressing global energy equity issues. Oil and gas leaders can present a roadmap for phasing out dirtier, more carbon-intense commodities, while engaging with the wider global community to demonstrate the value of cleaner commodities in a low carbon economy.

There are uncomfortable realities that will have to be faced, including:

• The oil and gas companies need to make greater strides in offering supply side solutions.
• Wealthier and poorer economies have to engage with each other on practical terms rather than rhetorical aspirations.
• Leaders (political and business) must face up the realities of fully pricing social costs which they have avoided for decades (indeed, centuries).
• You and I need to radically change our lifestyles to transmit the “social signal” to catalyse the transition to a low carbon economy.

Finally, who else can match the oil and gas resources, reach and the technologies to implement a rapid energy transformation on the scale required? That may be an inconvenient truth, but it is a truth nonetheless.