How climate change policies are impacting oil giants: opportunity vs risk

Summary

• The oil & gas sector needs to address the global calls for lowering carbon emissions.
• The sector’s operations and the products produced create considerable global emissions.
• The introduction of climate change policies can help the companies to optimise and refine their delivery chain, thereby reducing carbon footprints.
• Implementation of advanced technology, high-end equipment and business diversification can help them to cope with the risks of energy transition.

The oil & gas sector is facing a major challenge as the whole world is marching ahead with the clean energy transition amid growing pressure to act on climate change.

Without a doubt, oil & gas production results in greenhouse gas emissions. For almost all the major oil & gas players across the world, fossil fuel extraction is the primary business and the ultimate source of earning.

As the existing portfolio of many companies is focused on near-term returns rather than longer-term priorities, such as decarbonisation and positioning for the energy transition, their earnings are expected to be impacted in the future. 

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Extraction and transportation of oil & gas accounts for nearly 15% of the total greenhouse emissions, according to Dr Fatih Birol, Executive Director of the International Energy Agency.

Based on rough estimates, the oil & gas sector is required to reduce its annual emissions by around 3.4 gigatons of carbon dioxide equivalent by 2050 to achieve the target of becoming carbon neutral.

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How oil & gas business contributes to carbon emissions  

The oil & gas sector is majorly classified into three main categories– upstream, midstream and downstream.

The upstream segment incorporates all the activities that are related to the extraction of petroleum products from the ground. Midstream deals with the transportation of extracted products through pipelines, cargos, and trucks to refineries. The downstream segment is focused on the processing and refining of petroleum crude oil, along with the distribution and marketing of final products.

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Each of the three sectors is responsible for greenhouse emissions. Fugitive emissions from methane during the upstream process and heat from power and refinery systems account for almost 60% of the total greenhouse emissions. Other steps like drilling, flaring, transportation, and hydrogen production during a downstream operation account for the remaining carbon emissions.

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A powerful greenhouse gas, methane, absorbs much higher heat, thus it is one of the leading contributors to global warming and climate change. Several studies suggest that methane emissions from oil & gas production account for around 25% to 40%.

What are the risks of climate change policies on the oil & gas sector?

As the world is shifting towards a low-carbon economy, investors are interested in how oil & gas companies are planning to address the related risks. Most of the oil & gas players recognise that their business is exposed to climate regulations and challenges, lower demand for petroleum products, and an extra cost that needs to be incorporated for implementing emission reduction technologies.

Stringent carbon emission regulations will increase the risk of losing business for oil & gas companies in the near future. Thus, new carbon regulations are expected to have an impact on the profitability of these companies.

The Paris Agreement has bound the whole world to join hands for curbing carbon emissions to achieve the target of carbon neutrality by 2050.

The companies with higher average production costs are struggling the most with the implementation of new emission-reduction technologies.

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Are there any opportunities for these businesses amid energy transition?

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While most of the oil & gas players are looking at the risks, there could be opportunities for them with proper planning and execution. The ongoing transition has created multiple opportunities for businesses to increase their efficiency and incorporate innovative technologies into their delivery chain, consequently resulting in growth prospects.

The companies can save material and energy costs by optimising their processes in line with low-carbon emission standards. For this, they need to adopt techniques that can substantially decarbonise operations.

The ongoing green buzz also provides an opportunity for oil & gas companies to diversify their business. With the rising popularity of electric vehicles, the sector is experiencing exponential growth. However, to keep the momentum on, continued investment and innovation is required. This is one area where the companies can identify their interests and try their hands in order to diversify their business, depending on the capital investment they want to make.

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Investment in green technology and renewables can also offer opportunities to be in line with the current transition.

How oil and gas companies can contribute to decarbonisation

Around two-third of carbon emissions attributed to the oil & gas sector come from the upstream sector.

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Here are some of the ways that can be considered to limit carbon emissions from the upstream sector.

• The introduction of renewable power sources at the site to power various tools and machinery could be a significant step in reducing the company's dependency on diesel-powered generators, which releases significant carbon amount into the atmosphere.
• Reduction of fugitive emissions can significantly lower the carbon footprint of an oil & gas company. The introduction of vapour-recovery units (VRU), leak detection and repair (LDAR) can help the firm reduce methane emissions.
• Electrification of equipment like replacement of gas boilers with electric boilers, high-pressure storage systems and highly efficient separator units can also help to reduce energy consumption and carbon footprints.

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The downstream sector can also introduce certain changes in its process to reduce greenhouse emissions. Let us have a look at few important changes that could significantly reduce carbon footprints.

• The use of highly efficient waste heat-recovery technology and the introduction of medium-temperature heat pumps in refineries can help companies reduce carbon footprints significantly.
• Installation of green hydrogen electrolysis plants can reduce the use of methane to power the electrolysis process.
• The use of greener feedstock in place of conventional oil feedstock in refineries would also reduce emissions.