The world is heading towards a sustainability revolution, and ESG commitments are one of the central methods to achieve this. But how can an environmental, social, and governance oriented approach bring about tangible change in the world of massive oil and gas enterprises? The answer lies in a process known as decarbonization. Simply put, the term refers to the reduction of carbon, but in this context it refers to the conversion to an economic system that sustainably reduces and compensates the emissions of carbon dioxide (CO₂). The long-term goal is to create a CO₂-free global economy.
It is important to note that oil and gas companies account for 45% of the anthropogenic greenhouse gas (GHG) emissions. This is paramount information that creates an understanding for why a greater pressure is directed towards them to decarbonize. In the GCC, several national oil companies (NOCs) such as the Abu Dhabi National Oil Company, Qatar Petroleum, and Saudi Aramco have set goals to reduce their GHG emissions. These companies can serve as national catalysts for decarbonization and also help their respective countries achieve their goals to combat climate change. Furthermore, the ESG policies and commitments that these companies create can serve as great outlines for other companies that would wish to follow in their footsteps, even if it is on a smaller scale. NOCs can work with government authorities and research institutes to codify carbon reporting and tracking based on globally accepted standards. Additionally, internal carbon pricing mechanisms can also be adopted.
ESG commitments refer to the environmental, social, and governance requirements that companies must meet in order to practice their operations sustainably and maintain their standing publicly. These are especially important now, given the fact that climate change is a real problem that is upon us that calls for our immediate attention. In fact, according to a paper by Deloitte, it is crucial to provide these details in order to attract investments. Some banks are even divesting their holdings or halting further investment in companies that do not fulfill their ESG commitments. However, in order to decarbonize successfully, it is crucial to identify all the parts of the process that contribute to pollution – the upstream and downstream operations. Depending on this, specific action can be directed towards the area with the greatest problem. Hence, countless companies are beginning to make strides towards decarbonization by adopting the following tactics in their ESG reports:
- Adopting renewable energy, which is becoming increasingly affordable.
- Improving maintenance routines to reduce intermittent flaring and vapor-recovery units to reduce methane leaks
- Changing power sources
- Reducing fugitive emissions
- Increasing carbon capture, use, and storage (CCUS)
- Increasing energy efficiency
- Producing ‘green’ hydrogen
Points 3 to 5 are strategies that can aid upstream operators of oil and gas companies to reduce carbon emissions, of which they are responsible for at least two-thirds of. The implementation of these strategies largely depends on the local conditions. Electrifying equipment, reducing methane emissions, as well as storing and capturing carbon could significantly reduce carbon emissions. Downstream operators could benefit from points 6 & 7, which encourage anticipating energy usage and making changes to replace equipment, for example. Additionally, by producing hydrogen through electrolysis that is powered by renewable energy, we can obtain ‘green hydrogen’. This would even lead to the price of the element dropping almost two-thirds by 2050.
Many companies are even considering revisiting nature as a solution. Oceans, plants, forests, and soil are all natural carbon sinks that can help in removing GHGs from the atmosphere, therefore reducing their concentration in the air. According to McKinsey & Company’s report on oil and gas companies and decarbonization, we learn that plants and trees can absorb approximately 2.4 billion tons of carbon dioxide a year. ENI, an Italian oil and gas multinational, has announced an initiative to plant around 20 million acres of forest in Africa to create a natural carbon sink. This would be a greatly positive environmental and social policy to enact, but it is important to take into consideration that it is not possible for all companies to do so, which is why, we can consider one of the main takeaways from the ESG strategies to support decarbonization – renewable energy. According to sources such as Our World in Data and Statista, we can see how renewable energy generation is being taken more seriously (figure 1) over the years, and how its accessibility has improved due to lower costs (figure 2).
Figure 1 – Renewable Energy Generation
Figure 2 – The Falling Cost of Renewable Energy
Moreover, many companies are working towards the 2030 Decarbonization challenge, an interim challenge that can aid accelerate the process of decarbonization over the decade. According to Deloitte’s report on the same, instead of pondering how to dispose of CO2 and other waste, many companies hope to adopt a perspective where everything they produce, including emissions, by-products and end-product can be utilized as a tradeable resource to create economic value by 2030. Consequently, new partnerships and markets could be formed, substances long emitted or discarded as costly nuisances can become products that companies want to buy, and a new, cleaner, more circular economy can emerge.
While planning for decarbonization in their ESGs, it is important to take into consideration the position that the company has, along with the resources that are available to it. Some may be able to act as soon as possible, while some may still be identifying where to begin from. By considering the following points, a company in any stage of development can create an outline it would follow to achieve its GHG-emission reduction targets:
- Start by setting goals over a specific period of time. Is your company working towards the 2030 Decarbonization Challenge and eventually towards a climate-neutral 2050?
- What initiatives would aid in achieving your goals? How cost-effective can they be and what would the opportunity cost be? How sustainable can they be?
- What sort of management system would work the best to achieve these initiatives? What organization setup would help achieve decarbonization across a range of portfolios? How would progress be tracked? What level of collaboration would be required?
- How would stakeholders such as investors, employees, customers, and governments be affected? What level of investment would be required and what funds can be used?
- How does one policy of decarbonization lead to an overall energy transition? Where does the company lie in terms of overall transition?
f strategies such as these are adopted and followed through, decarbonization can be a greater reality than what it is today. Our ESG services here at The One Percent can help your company grow sustainably and support the 2030 Decarbonization Challenge.