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In recent years, we’ve seen more evidence of oil and gas companies extending their sustainability commitments, as they comply to the new realities of the global environment landscape. With the world’s toughest economies setting goals for lower carbon emissions and increased share of renewables in their national energy plans, oil and gas industry is trying to follow up with clean exploitation innovations. In addition to many OPEC countries looking to diversify their economic strategies, we can hope to see more cases of sustainability measures being adopted across the industry.
Definition of compliance
A frequent question asked by investors, whether a company is “Paris compliant” actually breeds a number of complexities, and viewpoints on the evolving role of the oil and gas industry. In order to assess if a company is compliant, they need to rely only on a forward-looking basis and a reasonable timescale. By no means can a company be called compliant based on its current or historic production, as this doesn’t tell anything about the company’s plans for the future. In the same way, reserve estimates give no indication if, and when they will be exploited, so they can’t provide indication of alignment. The Paris Agreement’s limitation of future temperature rises to well below 2°C automatically entails the use of less fossil fuels than are consumed presently. As concerning oil and gas, the actual scenarios assume slower declines in demand than natural production declines from existing fields.
Natural climate solutions
Currently, the only two companies that have put natural climate solutions (NCS) into their long-term transition strategies are BP and Shell. In this sense, they’ve recognized that landscape-scale initiatives are more effective than smaller, one-off projects. Natural climate solutions include reduced deforestation, reforestation of cleared lands, improved soil management, and agricultural nutrient management. In the long term, NCS reduce the release of greenhouse gases from land management practices, and eliminate carbon dioxide from the atmosphere. A paper by TNC scientists concludes that one-third of the reduction, that is necessary to stay on the “well below 2°C” course between now and 2030 can be achieved by natural climate solutions at the cost of $100/ton CO2.
Cheaper than other strategies
By estimates, NCS can isolate as much as 3.5 billion tons of carbon dioxide each year at a cost of merely $10 per ton, which makes them cheaper than other mitigation strategies. BP has pledged to freeze its own emissions at 2016 levels while its business grows. A portion of this will be achieved through increased energy efficiency, and the rest by investing in natural climate solutions. However, that is still not enough, as with the current production, if every company froze their emissions at the today’s level, the Paris goal would still be out of reach. In order to stay on the Paris path, we need reduction in emissions by one-half every decade between now and 2050.
Improving production processes
On the other hand, even innovations that don’t technically make oil and gas production greener and cleaner, still have the potential to improve the industry’s sustainability by allowing the processes to become more cost-effective. For example, the latest ultrasound technology enables surveyors to create 3D images of the inside of oil wells, allowing them to make more informed decisions. At the same time, the use of Industrial Internet of Things (IIOT), automation, and quality oilfield equipment enhances the capabilities of existing fields, eliminating operational inefficiencies and allowing the same amount to be produced with reduced costs and energy expenditure.
Common goal, different plans
Although the companies’ reports describing the measures to address climate change bear a considerable variation on the level of commitment to the Paris Agreement, it now becomes clear that they have received the message from their investors and stakeholders about the alarming need to address the climate threat directly. The Shell’s “Sky” scenario, for example, aims for “net zero” CO2 emissions by 2070, which would inevitably require an early cut on the fossil fuel use. Interestingly, all the reports expect sales of electric vehicles to increase exponentially. However, batteries can’t replace the entire transportation industry, so there will still be a need for low-carbon fuels for air, marine, and long-haul transport.
How can businesses ensure Paris compliance?
This question always raises the question of production cost. If demand is in decline, the most competitive supply will fill in. In this way, a compliant company would adhere to only authorizing projects that are low-cost enough to fit the projected low carbon budget, express their intention to do so, and prove this in action. Any excess funds can be returned to shareholders, or reintroduced onto other sectors as the company sees appropriate. For example, Shell has previously declared that it will only invest in projects that are climate-competitive, referencing the compatibility with the below 2°C course. This approach, however, allows for a healthy dose of criticism, as companies may have false beliefs that their projects fall into climate constraint, when that isn’t true.
As we are striving to adapt to the energy transition, the dialogue between investors and oil and gas industry continues to underline the principle of compliance to climate change goals. Companies that want to prove their dedication to reducing carbon emissions within the international community need to prevent investing in projects that deviate from their carbon budgets.