Oil and gas overall consumption accounts for roughly 50% of the human-generated emissions driving climate change[i]. Industrial uses generate about 20% of total emissions, of which an unidentified portion includes the extraction, transport, and refinement of petroleum products. So, in addition to producing the fuels that contribute greenhouse gas emissions into the atmosphere, the industry consumes a significant portion during routine operations.
This industry is more nuanced than it appears, and emerging sustainability solutions are presenting what could be a better story.
From the power of increasing transparency and reporting to new ways of engaging with regulators, oil and gas companies are responding to global science and political realities. The nexus of economic development and the social license to operate gives companies the opportunity to lift up the communities where they operate while responding to local desires. And critically, the innovation inherent to the industry’s business model coupled with changing economics is providing significant potential to capitalize on efficiencies and develop new solutions.
This is not a monochromatic industry; where all operators are inherently cast in dark hues because of the work they do, aligned against the forces of brightness in the context of environmental impact. Shades of grey and flashes of green can be seen, providing reasons to think that certain actors in this industry could emerge as bearers of light. Encouraging this emergence requires a reevaluation of the relationship between those who primarily see the climate as under threat and those who primarily see their business model as under threat. Only by a combination of defining a set of accountability measures while also rewarding moves in the right direction can this industry become a partner towards a sustainable future. Using an ambitiously practical approach that works within the confines of today’s paradigm, evolving in real time, we can chart a path in that direction.
State of Play—Where we are now
While there is no denying that the climate is undergoing rapid change being characterized as a climate crisis[ii], there is also no ignoring the current state of our world. Population is growing, nations are urbanizing, and technology is spreading; in short, energy demand is growing.
The International Energy Association’s (IEA) most recent forecast includes two scenarios, one that aligns with current stated policies and another that aligns with science-based targets to reach the Intergovernmental Panel on Climate Change (IPCC) targets, known as the sustainable development scenario. Under the stated policies scenario, oil is headed towards a plateau at about 10% over current demand by 2040, at which time natural gas is trending towards an ascending 33% increase. Under the sustainable development scenario, natural gas still sees an increase by 2030 before trending down to an approximate 3% decrease from 2018 levels by 2040, while oil drops significantly to about 30% of current levels by then[iii].
The continued reliance on natural gas growth is notable; hydraulic fracturing technologies continue to enable transition from dirtier and more carbon intensive fuel sources, especially in the in the electrical generation sector. Oil continues to power our transportation network, and the derivative products of both oil and natural gas are pervasive and integral to our modern lifestyles. For consumers that truly want to divest from hydrocarbons and drive down demand, there is a much longer list of plastics and products to limit in addition to shifting to lower carbon emitting transit options. As those who can make the choice to reduce their use of these products, those who need the affordable resources to create better lives and choose these products will continue to drive demand in these scenarios.
The regulatory environment is another critical component that has a significant impact on the oil and gas industry’s ability, desire and impetus to take more sustainable actions. Environmental regulations continue to tighten as more information is known about climate, water and air quality impacts due to advances in science, technology, and compliance efforts. The boom in hydraulic fracturing and horizontal drilling technology[iv] in particular is also allowing more drilling closer to and even in the midst in the midst of population centers. Though regulations continue to differ locally and nationally, there are examples of alignment; Colorado’s industry leading rules on methane emissions put in place in 2014[v], for example, were largely used as the template for rules issued at the federal level per 2016 rules from the EPA[vi].
In addition, regulatory agencies and the oil and gas industry have a complicated relationship. There are sentiments in the oil and gas industry that are wary of sharing technological improvements with regulators for fear of being mandated to adhere to ever higher standards. Some operators do what they can to stay under the radar; meeting the minimums. On the other hand, there are numerous operators gladly taking on voluntary control measures that go above and beyond existing regulations. The aforementioned rules on methane emissions in Colorado represented a model of cooperation at the time where both regulators and companies found common ground.
Other drivers are impacting oil and gas, including some not necessarily within the sector. At the corporate level, 86%+ of Fortune 500 companies are publishing sustainability or corporate responsibility reports[vii]. All the super-majors now have annual sustainability reports, and the year over year trends are heading towards more reporting for smaller companies. The rapid advance of technology across sectors provides opportunities for options such as electrification and renewables at increasingly attractive price points, and as other energy sources emerge the potential for major disruption looms large over the industry.
This is the state of play; the question for some is how to shift that trajectory dramatically, how to re-align with natural limits, and how to shift the paradigms with urgency beyond economics. That is noble work, and needed; but so is the work within the bounds of realistic parameters, where shifting may not be as dramatic but can in many cases be more likely.
So, what are oil and gas companies doing now, and what can they do to move towards more sustainable solutions without closing shop? Voluntary reporting and cooperation with regulators are aligning with investor desires and political headwinds. The opportunity to build on and recognize the traditional sustainable positive economic impacts on communities with additional actions is becoming more clear with the rise of the United Nations’ Sustainable Development Goals (SDGs). Add in the continuous innovation inherent in the industry and efficiency potentials, and a platform for real breakthroughs is evident.
Reporting and Regulation Solutions
The continued push towards transparency and corporate reporting is impacting these industries that were already looking at performance factors to benchmark against peers and provide data for investor evaluation. Organizations like the International Petroleum Industry Environmental Conservation Association[viii] support industry best practices and provide frameworks for comparison, guidance for sustainability reporting in line with UN guidelines, and actively share resources to help companies understand how they stack up to a host of sustainability thresholds. The recent uptick in voluntary reporting has been noticeable, with all the super-majors producing annual sustainability reports compared to a select few in 2014[ix]. With reporting publicly being a significant but increasingly in demand thing for companies to do, there is substantial effort behind the scenes to gather, evaluate and act on such data internally.
Along with IPIECA, there are other industry working groups that provide a forum for oil and gas industry companies to anonymously report on their resource consumption and best practice. Groups such as American Exploration and Production Council Independent Petroleum Association of America (IPAA), the Energy Water Initiative (EWI), the Extractive Industries Transparency Initiative (EITI) all share a variety of industry metrics in this way. The anonymity of these groups provides a degree of assurance that companies won’t be singled out while providing reliable snapshots of where the industry stands. One of the somewhat understated impacts of this reporting is to provide a channel to regulators regarding what the industry can do and is doing. This is facilitating conversations from the global level to the local on which best practices and targets make sense as regulated activities versus which are specific to regions and companies. The trick is convening these conversations in ways that encourage the industry to move forward without feeling exposed to additional regulation, a balancing act that these reporting processes are enabling.
In addition to voluntarily reporting, oil and gas industry companies are increasingly taking steps to voluntary exceed regulations and share some specific best practices. In Colorado, for example, in recognition of the negative impacts of ozone, operators have been voluntarily curtailing operations[x] and taking specific steps to limit emissions when the state environmental agency, the Colorado Department of Public Health and the Environment or CDPHE issue pre-emptory notices of upcoming high ozone days. Frameworks for cooperation are in place across the country; various industry associations regularly interact with regulatory bodies to try and reach solutions that both find advantageous.
There are also recognition programs, such as the Environmental Leadership Program[xi] where oil and gas (as well as other companies) can highlight their environmentally friendly activities and are required to continually improve in order to remain in good standing. These types of programs are starting to break down the walls between the industry and the public, but the work is ongoing and continuous attention needs to be paid to demonstrate value and encouragement.
Social and Economic Sustainability
In the traditional corporate ESG (Environmental, Social and Governance) reporting world, the S is where oil and gas companies have traditionally shone. Placing safety as the number one priority provides health benefits to workers, and the above average wages provide direct benefits that help lift up the economies of local communities. While IPIECA has developed a useful website[xii] that identifies how the oil and gas industry aligns with each of the Sustainable Development Goals, some of the highest magnitude alignments are with the economic and social goals. From affordable energy access (SDG 7), decent work and economic growth (SDG 8) and Industry, Innovation and Infrastructure (SDG 9), there are significant benefits the industry offers. These allow a broader view of sustainability than one limited to the area of greatest negative impact/opportunity of climate action (SDG 13), and recognizes that a holistic view can see benefits leading to individual choices to lower negative impacts, especially in communities where industry operates.
The positive economic and social impacts of industry on local communities often have significant indirect benefits in addition to raising local wages. Generally speaking, in America at least, an average of between 4-10% of the total production value of oil and gas in a given state goes back to local governments[xiii]. In New Mexico, the governor recently announced a plan to provide free college tuition to residents largely due to taxes on oil and gas operations in the Permian Basin[xiv].
Resource Efficiency & Innovation
By using resources efficiently, companies can see cost savings, environmental wins, and can add a third benefit of avoiding additional regulation. Even where immediate cost savings aren’t as strong as alternatives, the added sustainability benefits can provide both longer term value and risk mitigation that make these types of projects attractive.
Energy is the biggest resource to conserve, and the places using the most are refineries. Refineries consume massive amounts of energy, much in the form of heat, and can often provide the fuel from the fuels that they are refining. However, this also seems like an area to introduce renewables to help offset or entirely offset some of these huge energy loads, and there are encouraging signs. Royal Dutch Shell is looking at combinations of solar, battery storage and natural gas to power a significant portion of a refinery in the Philippines[xv] and is investigating a much wider deployment of solar including at their largest refinery in Singapore[xvi].
Transportation efficiency measures have very high potential for cost and energy savings; historically trucking has been managed fairly ad hoc. Applying logic and technology to fleet operations presents a significant opportunity. Companies like Engage[xvii] are helping save energy, cost, and carbon; they specialize in real-time data and logistics management and have measured about 21,000 miles reduced and 34 tons of carbon saved annually per driver in at least one instance[xviii].
Water efficiency is another key area for improvement that is only becoming more critical. The need for large amounts of waters in hydraulic fracturing poses a challenge, especially in water-poor regions, and looking into reuse and low embodied energy water makes sense. Reports from the Energy Water Initiative have called out chemistry and technological improvements that are allowing companies to use lower quality water and reuse water more effectively[xix]. Where there is sufficient well density combined with local water availability, geologic limitations or opportunities, and local regulations, some operators are building and often sharing water treatment plants. Companies such as Southwestern Energy have taken on water treatment efforts and achieved near-zero disposal of produced water while reusing treated water for operational needs or allowable discharges[xx].
Finally, the greenhouse gas impacts of fugitive methane emissions are increasingly well documented[xxi], and many leading companies have agreed to follow the Methane Guiding Principles[xxii] to continue to reduce these emissions and joined the Oil and Gas Climate Initiative to track progress. From improved combustion efficiency to better monitoring and preventative techniques, there are numerous impactful activities operators can and are implementing to limit methane released. With support from the oil and gas majors, entire supply chains are being examined to improve efficiency. According to the EIA, 45% of the currently emitted methane could be recaptured at no net cost due to the market for methane[xxiii], so the number of factors pushing for near zero leakage are lining up and will hopefully show sharp progress in the coming years. The nexus of science showing greater potential emissions than previously thought, operators implementing stricter emissions controls, and regulators hastening to ensure emissions are regulated provides a pathway for oil and gas companies to get ahead of the curve and demonstrate leadership.
Beyond increasing the efficiency of operations and getting better at the environmental, economic, and social impacts they have on communities, the second major path forward is innovation. This is where the potential for disruption is greatest, the opportunity to shift gears is most ambitious, and where the incentive is lowest in the short term but perhaps highest in the long term. The energy industry is built on innovation, and innovations continue to power additional efficiencies, expansion, and new uses for the basic products. The fracking revolution has unlocked access to tremendous amounts of previously unrecoverable oil and natural gas, new techniques and efficiencies are remaking certain processes profitable again, and innovations in monitoring technology are enabling more complete knowledge of operations than ever before. In Houston, Petrologistics recently announced plans to build a new propane dehydrogenation (PDH) plant that will only be feasible due to remarkable increases in efficiency from a catalytic cracking process developed by Dow Chemicals[xxiv]. Enabling these innovations and rewarding them is a key area for regulators to engage that could be a major fulcrum point to help shift the industry quickly.
Innovations from other energy sectors are also in many cases complementary to traditional fuels. One interesting innovation may be combining geothermal energy generation with fossil fuel extraction[xxv]. The combination of heated water, sufficient flow, and proximate off-takers can allow for beneficial capture of the heat that would be otherwise wasted, providing a renewable heat or electricity resource. There are a number of factors that need to align for this to be practical, but there is existing technology that just needs to be integrated in innovative ways. The technical, business and PR cases need to be made, but if they add up, there are operators willing to invest resources to make it happen.
The concept of an energy transition being led by traditional energy companies will require innovation and gradual shifting of resources. The idea of harnessing the R&D capabilities and energy delivery models to deploy non-traditional fuels can be seen as Shell gas stations install electric chargers staring in the UK and the Netherlands[xxvi], ExxonMobil pushes into algae biofuel[xxvii], and Chevron’s recent establishment of a Future Energy Fund[xxviii]. On a potentially more meaningful scale, Total is making moves to diversify their energy assets to shift to cleaner sources and newer fuels, even highlighting these efforts on their “Why Invest in Total?” webpage[xxix].
Major companies investing in new technologies to bring them cost effectively to scale isn’t a new concept. From Exxon’s commercialization efforts for modern day solar panels[xxx] to Chevron’s founding on the transition from whale oil to kerosene in 1879[xxxi], there is precedent. The concept of an “all of the above” energy strategy made sense for the industry then and can continue to make sense today.
The culture of innovation is most pronounced at the top, where the majors and super-majors have the R&D budgets and vision to experiment, and fail, and fail, and sometimes succeed.
BP’s gamble to go big into renewables hasn’t panned out for the time being – they sold their interests in the solar company they had gone into and are currently in a space in between re-trenching in their core business model and continuing to test out other innovations to try and start showing the claims to move Beyond Petroleum weren’t empty. This uncomfortable space is healthy from an innovation and creative perspective. The commitments made may dissuade some other companies from making such public commitments, but the pressure to follow through from investors, the buying public, and hopefully from the corporate boards will continue to demand progress towards preparing for an energy transition.
One good source of this information is the Carbon Disclosure Project, whose analysts have framed the discussion in terms of opportunities and risks related to a low-carbon transition in their sector report on oil & gas[xxxii]. The report is worth looking at on its own, but the following chart illustrates a possible framework for analyzing major oil and gas companies in the context of climate opportunities and risk.
The basic business model of extracting fossil fuels and getting the by-products to consumers is the core of current oil and gas industry business models, without which the economics don’t add up. Energy demand is increasing, and projections show that natural gas in particular is still needed in greater volumes as a fuel source.
But, there are ways to make those profits in cleaner, more resource friendly ways while incorporating new technologies and looking to use some of the profits to increase sustainability indicators in the geographic areas where these companies operate. Some of that is being done. Some of the ships are turning course, with fits and starts but generally building the momentum to turn. Investors are battling it out, with the need for consistent profits running into the need to maintain higher ESG scores and demonstrate thoughtful risk avoidance.
The essential challenge is to bring these companies along in partnership towards a more sustainable future. To do so will be hard; it will require an evolution of the regulatory regimes to both encourage innovations and drive accountability for science-based impacts. The trend of transparency and reporting may emerge as the driving force; it will certainly help in the process. As companies get recognized for their positive actions in a holistic manner a bridge can be created that allows for more dialogue and less demonization. The potential for innovation in efficiencies and new energy sources in particular can provide a path forward for the majors to start and shape industrial pathways for smaller operators, and smaller companies can likewise introduce disruptive technologies that can shift operations for companies of various sizes and responsibilities in the oil and gas industrial ecosystem. Ultimately, this combination of innovation and cooperation will be needed to truly shift the paradigm.
- [i] Global Carbon Budget 2019, https://www.earth-syst-sci-data.net/11/1783/2019/
- [ii] Report of the UN Secretary General, December 2019, https://www.un.org/en/climatechange/assets/pdf/cas_report_11_dec.pdf
- [iii] IEA World Energy Outlook 2019, https://www.iea.org/reports/world-energy-outlook-2019
- [iv] Blackmon, David. “Horizontal Drilling: A Technological Marvel Ignored”, Forbes, 28 Jan 2013, https://www.forbes.com/sites/davidblackmon/2013/01/28/horizontal-drilling-a-technological-marvel-ignored/#64e8c0db6f11
- [v]Paige Ogburn, Stephanie. “Colorado First State to Limit Methane Pollution from Oil and Gas Wells”, ClimateWire, 25 February 2014, https://www.scientificamerican.com/article/colorado-first-state-to-limit-methane-pollution-from-oil-and-gas-wells/
- [vi]“Controlling Air Pollution from the Oil and Natural Gas Industry, New Source Performance Standards and Permitting Requirements”, Environmental Protection Agency, https://www.epa.gov/controlling-air-pollution-oil-and-natural-gas-industry/new-source-performance-standards-and
- [vii] Flash Report: 86% of S&P 500 Index® Companies Publish Sustainability / Responsibility Reports in 2018, Governance & Accountability Institute, Inc., 06 May 2019, https://www.ga-institute.com/press-releases/article/flash-report-86-of-sp-500-indexR-companies-publish-sustainability-responsibility-reports-in-20.html
- [viii] http://www.ipieca.org/
- [ix] Schneider, Jennifer; Ghettas, Salim; Merdaci, Nacer; Brown, Mervin; Martyniuk, Joseph; Alshehri, Waleed; and Trojan, Anthony (2013) “Towards Sustainability in the Oil and Gas Sector: Benchmarking of Environmental, Health, and Safety Efforts,” Journal of Environmental Sustainability: Vol. 3: Iss. 3, Article 6, http://scholarworks.rit.edu/cgi/viewcontent.cgi?article=1028&context=jes
- [xi] https://colorado.gov/pacific/cdphe/environmental-leadership-program/
- [xii] http://www.ipieca.org/our-work/sustainable-development-goals/
- [xiii] Raimi, Daniel and Newell, Richard G. “Oil and gas revenue allocation to local governments in the United States”, Duke University Energy Initiative 1, May 2016, https://energy.duke.edu/sites/default/files/attachments/4.%20Local
- [xiv] Allyn, Bobby. “New Mexico Unveils Plan To Give Students Free College Tuition Regardless Of Income”, NPR, 18 September 2019, https://www.npr.org/2019/09/18/762071931/new-mexico-unveils-plan-to-give-students-free-college-tuition-regardless-of-inco
- [xv] Willuhn, Marian. “Shell to power Philippines refinery with solar, storage and natural gas”, pv magazine, 11 October 2019, https://www.pv-magazine.com/2019/10/11/shell-to-power-philippines-refinery-with-solar-storage-and-natural-gas/
- [xvi] “Shell Explores Using Solar Panels At Singapore Refinery”, Chemical Processing, 09 August 2019, https://www.chemicalprocessing.com/industrynews/2019/shell-explores-using-solar-panels-at-singapore-refinery/
- [xvii] www.Engagemobilize.com
- [xviii] Personal communication from Caroline Charles, Engage Mobilize.
- [xix] “U.S. Onshore Unconventional Exploration and Production Water Management Case Studies”, CH2MHill, January 2015, https://www.anadarko.com/content/documents/apc/Responsibility/EWI_Case_Studies_Report.pdf
- [xx] “Water”, Southwestern Energy, https://www.swn.com/responsibility/environment/water/#responsible-produced-water-management
- [xxi] Ward, Richard and Haley, Kevin. “Cutting Methane Emissions from Oil and Gas Production: One of the Year’s Biggest Energy Challenges, Rocky Mountain Institute, 31 January 2018, https://rmi.org/2018s-pressing-energy-challenge-methane-emissions/
- [xxii] “Reducing methane emissions across the natural gas value chain – Guiding principles”, Climate and Clean Air Coalition (CCAC), November 2017, https://www.ccacoalition.org/en/resources/reducing-methane-emissions-across-natural-gas-value-chain-guiding-principles
- [xxiii] McGlade, Christopher. “Tracking Fuel Supply, Methane emissions from oil and gas”, November 2019, https://www.iea.org/reports/tracking-fuel-supply-2019/methane-emissions-from-oil-and-gas
- [xxiv] “PetroLogistics to build new PDH plant on Gulf Coast”, Business and Industry Connection, 24 July 2019, https://www.bicmagazine.com/expansions/downstream/petrologistic/
- [xxv] Sanyal, Subir K. and Butler, Steven J. “Geothermal Power Capacity from Petroleum Wells – Some Case Histories of Assessment”, proceedings from World Geothermal Congress 2010, Bali, Indonesia, 25-29 April 2010, https://www.geothermal-energy.org/pdf/IGAstandard/WGC/2010/3713.pdf
- [xxvi] Lambert, Fred. “Shell to start deploying fast-charging EV stations with Allego at its gas stations”,Electrek, 17 July 2017, https://ww.electrek.co/2017/07/17/shell-ev-fast-charging-station-allego-gas-stations/
- [xxvii] “Advanced biofuels and algae research: targeting the technical capability to produce 10,000 barrels per day by 2025”, 17 September 2018, https://corporate.exxonmobil.com/en/research-and-innovation/advanced-biofuels/advanced-biofuels-and-algae-research
- [xxviii] “Chevron Technology Ventures Launches Future Energy Fund”, Chevron press release, 20 June 2018, https://www.chevron.com/stories/chevron-technology-ventures-launches-future-energy-fund
- [xxix] https://www.total.com/en/investors/why-invest-in-total
- [xxx] Hsu, Andrea. “How Big Oil Of The Past Helped Launch The Solar Industry Of Today”, NPR, All Things Considered,
- 30 September 2019, https://www.npr.org/2019/09/30/763844598/how-big-oil-of-the-past-helped-launch-the-solar-industry-of-today
- [xxxi] “the energy transition”, Chevron, https://www.chevron.com/corporate-responsibility/the-energy-transition
- [xxxii] Luke Fletcher, Luke, Crocker, Tom, Smyth, James and Marcell, Kane. “Beyond the cycle, Which oil and gas companies are ready for the low-carbon transition?”, Carbon Disclosure Project, November 2018, https://www.cdp.net/en/reports/downloads/3858