November 15, 2021
By: Lyat Avidor Peleg
Where is Sustainability on the Oil and Gas Agenda?
Meeting the energy needs of society in a reliable and economical way has been the mission of the oil and gas industry since its inception. However, decades of high-profile disasters like oil spills, serious pollution, and incessant stories about the need to cut carbon emissions have placed oil and gas sustainability firmly in the spotlight. Oil and gas companies are under high pressure to address their impact on the planet, prevent future air, land, and water pollution from spills, leaks, waste, and emissions; and cut accidents, flare events, and fires at oil and gas sites.
The good news is that oil & gas leaders are aware of the need for sustainability, and are acting to address it. According to David Branson, Senior Executive Advisor at PwC Strategy, “Sustainability has been elevated from an important element in oil and gas companies being good corporate citizens, to a critical pillar for future long-term business competitiveness.”
A recent survey by SAP and Oxford Economics reveals that energy and utilities executives have made more sustainability-related changes to their operations than those in other industries, with 79% saying that sustainability is a major concern or top-of-mind at all stages of the manufacturing process, and 47% having committed to a net-zero carbon goal. Separate research by KPMG found that 97% of oil & gas executives agree that their ability to manage climate-related risk is important for keeping their jobs over the next five years
That said, these important advances in oil and gas sustainability are often overlooked when considering its otherwise massive negative impact. Research has found that the oil and gas industry is the second largest single contributor to greenhouse gas (GHG) emissions, emitting more than 13 million metric tons of methane each year, which has a global warming potential that’s 28-36 times greater than CO₂. Air pollution from fossil fuels can lead to respiratory, cardiovascular and other diseases, causing more than 13% of deaths among Americans aged 14+, and fossil fuel processing can leak toxic substances into the soil and drinking water, causing cancer, birth defects, and liver damage.
Oil and gas companies are also under attack for using and destroying precious resources, with fracking operations, in particular, requiring enormous amounts of water at a time when drought is increasing globally, and oil extraction damaging valuable land.
In addition to the impetus of climate change, the COVID-19 pandemic exposed significant cracks across the industry, emphasizing the need to build resilience.
Let’s explore the key drivers of sustainability in oil and gas, what are their priorities, and how they are taking steps to achieve a more sustainable business.
Which Sustainability Issues Are Oil and Gas Companies Prioritizing?
It’s worth remembering that sustainability is a very broad concern that goes way beyond reducing environmental footprint. For oil and gas companies, sustainability issues include:
- Reducing waste
- Cutting pollution, emissions, and hazardous leaks
- Minimizing their impact on the environment
- Ensuring employee safety and health
- Lowering energy and water consumption
- Advancing diversity in hiring
- Decreasing use of rare natural resources like rare earths
- Resolving human rights abuses within the supply chain
In September 2020, the private equity firm Kimmeridge called for oil and gas companies to improve their ESG (environmental, social, and governance) profile in specific ways:
- Environment: Work towards a zero flaring goal, use 100% recycled water for fracking, and create a plan towards net zero emissions.
- Social: Increase diversity in hiring, advance community engagement, and improve the safety record.
- Governance: Align interests between shareholders, boards, and investors, and connect compensation to performance.
But with so many concerns, oil and gas companies have to narrow down their focus. Many are using the UN’s 17 sustainability goals (SDGs), or a selection of them, to drive their sustainability policies. For most companies, the primary priority is to reduce emissions, advance decarbonization and renewables, and cut pollution of all sorts.
What Is Driving Sustainability in the Oil and Gas Industry?
Oil and gas companies are under fire from all sides to improve their sustainability profile.
1. Consumer pressure
There’s widespread anger at oil and gas companies for large and small pollution incidents, as people react to images of dying wildlife, and communities near oil and gas sites experience direct harm to their health.
In the US, for example, more than 12 million people live within 1/2 mile of oil and gas sites and are exposed to pollutants on a daily basis. The recent oil spill in Huntington Beach, CA, is just one example of the damage that oil spills do to ecosystems, and to oil and gas companies’ reputations.
2. Climate change
The recent COP26 climate summit in Scotland saw governments make new commitments to reducing carbon emissions, even as scientists warn that the world is likely to warm by 2.7℃ by 2100.
Oil and gas companies have themselves started to experience the effects of climate change, with floods affecting oil refineries in the Gulf of Mexico, and over a third of California’s oil fields burning in wildfires. In addition, pressure from stakeholders prevents them from ignoring their contribution to the unfolding disaster.
Oil spills destroy wildlife and ecosystems; BP’s Deepwater Horizon spill in the Gulf of Mexico spread oil across 68,000 square miles of sea, killing well over a million seabirds and marine creatures. Smaller spills, leaks, and regular emissions from hazardous waste and toxic liquids are no less harmful. A report by the Center for Western Priorities counted 2,179 spills in Colorado, New Mexico and Wyoming in 2020 alone, while the lubricating fluids used for drilling — known as mud — are often splashed around drilling sites. Toxic wastewater is frequently released into rivers and waterways, especially after fracking.
At the same time, processing oil and gas for general use requires massive amounts of both water and energy, further depleting water tables and adding to carbon emissions.
3. Pressure from government and international bodies
The last few years have seen a proliferation of sustainability regulations and requirements from both national governments and international organizations, such as the EU’s European Green Deal and the 2015 Paris Climate Agreement.
Various governments have introduced carbon taxes and incentives to reduce fossil fuel use and increase the development of sustainable alternatives. For example, California voted to ban gas-powered vehicles by 2035, and Denmark has canceled all upcoming North Sea licensing rounds with a view to ending North Sea oil and gas production by 2050.
4. Access to capital
As ESG adoption grows, oil and gas companies that don’t meet ESG requirements risk losing access to capital funding. Larry Fink, CEO of BlackRock investment management firm, warned in a recent letter “We will be increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them.” BlackRock has $10 trillion of assets under management, with oil and gas accounting for close to $255 billion and $36 billion respectively, which is a lot to lose.
ESG (environmental, social, and governance) investment funds have doubled in size and number over the past three years, and Harvard University announced plans to end all investments in fossil fuels and stop funding activities that drive global warming.
5. Financial incentives
On top of maintaining access to capital funds, there are also other financial reasons for advancing sustainability. Cutting waste has the effect of also cutting costs; recycling water for fracking use can reduce operating costs, for example, and more and more companies are introducing pollution pricing schemes that could result in high fines.
Oil and gas companies are finding it hard to attract and retain the next generation of top talent, which is increasingly concerned with sustainability. In the US, 70% of employees say their company’s sustainability plan affects their long-term career choices.
Additionally, ESG compliance is becoming key for economic success as leading customers turn to more eco-friendly options. Oil and gas companies that aren’t compliant risk being shut out of markets and losing customers. 93% of oil and gas executives, more than in any other sector, say that decarbonization is key to succeeding in a net-zero global economy.
Interestingly, carbon trading is also predicted to become a significant market, with oil and gas companies standing to add a revenue stream through carbon capture and storage (CCS). Voluntary carbon markets are estimated to grow 15x by 2030, reaching a value of $15 billion-$40 billion a year.
The results of sustainability are speaking for themselves. The best-performing low-carbon companies are seeing comparable returns for lower capital costs than traditional oil and gas organizations. The spread over the cost of capital for low-carbon energies such as renewables can be 200 to 250 basis points higher relative to oil and gas players.
6. The need for resilience
In 2020, when the pandemic slashed travel and consumer spending, global oil consumption fell by approximately 9%. “The recent crisis has proved just how vulnerable the global economy remains to systemic risks, one of the most important of which is climate change,” say McKinsey analysts. “The events of the past year, as a recent report by the International Renewable Energy Agency shows, have “sharpened investors’ interest in sustainable and resilient assets, including renewables.””
Recent events have merely accelerated an ongoing shift from fossil fuels to renewable energy, underlining the need for oil and gas to become more resilient, versatile, and agile. Across the past 15 years, the annual total returns to shareholders (TRS) for an average oil and gas company has lagged the S&P 500 by seven percentage points, which suggests that the pandemic is not the only factor in play.
What Steps Have Oil and Gas Plants Taken to Improve Sustainability?
1. Diversification and decarbonization
We’re increasingly seeing enterprises moving on from viewing themselves as oil and gas companies, and instead diversifying as energy providers, including as retailers for energy-related products. In this new role, they are increasing investment in alternative low-carbon fuels, like renewables, hydrogen, and green hydrogen, and in natural gas, which is less damaging to the environment.
Remi Eriksen, the group president and CEO of risk management firm DNV GL, said: “The financial markets – through the effects of the Covid-19 pandemic – have seen what peak oil demand could look like, and are increasingly factoring in changing sentiment in society towards a decarbonised future. Decarbonisation has moved from something on the horizon to an immediate priority, and there are signs that our sector may invest to transform rather than cut its way out of the present crisis.”
A survey by DNV GL found that 57% of oil and gas producers plan to increase investment in renewables, a jump from 44% in 2020; 48% expect to increase investment in green or decarbonized gas; and only 21% will invest more in oil projects. 66% of senior oil and gas professionals reported their organisation is actively adapting to a less carbon-intensive energy mix in 2021, up from just 44% in 2018.
Europe-based companies focusing their decarbonization efforts on increasing renewable energy production, with leading European energy companies producing 3.87 GW of renewable energy and planning projects to generate another 5.76 GW, while American companies have zero current output, and future plans amount to less than 1GW.
BP, for example, is investing $1 billion in offshore wind production with Equinor; Danish energy company Ørsted ,aims to become the “first offshore wind major;” and Neste, a Finnish energy company, has shifted its asset base from oil refining and marketing toward processing biofuels. Shell is investing $2-3 billion in wind and solar power generation alongside more investment in hydrogen, biofuels, and EV charging, while Total has set a target of 25GW of renewable energy by 2025.
In contrast, North America-based companies are mostly focusing on CCS and CCUS (carbon capture, utilization, and storage) strategies to collect and safely dispose of carbon emissions. American oil company Occidental Petroleum has placed CCS at the center of its efforts to hit a target of net-zero emissions by 2050, and Exxon has promised to invest $3 billion in carbon capture technology over the next five years.
2. Increased transparency
Transparency is a crucial pillar for sustainability, and most oil and gas companies have made strides to deliver regular, standardized, and transparent sustainability reports that use targets and goals set by external bodies, like the UN’s SDGs. Total and Chevron, for example, both use the entire spectrum of SDGs to guide and monitor their global sustainability. Sustainability has widely become a board-level position, showing commitment to the issue.
New reporting guidelines are helping standardize monitoring and benchmarking. The Sustainability Accounting Standard Board (SASB), the American Petroleum Institute (API), the Carbon Disclosure Project (CDP), the Task Force on Climate-related Financial Disclosures (TCFD), and the Open Footprint Forum have all produced guidelines to help improve reporting quality.
Establishing transparent targets is another step forward. BP set the goal of becoming net-zero by 2050; ExxonMobil aims to reduce operated upstream greenhouse gas emissions by 15 to 20% over the next five years, and Occidental Petroleum set a net-zero emissions target associated with their own emissions by 2040, and a commitment to reduce GHG associated with their products by 2050. A total of 6 multinational oil and gas companies have committed to cut net GHG emissions by 80%-100% by 2050.
3. Improved regulations
As in many industries, the rise of independent regulations is also having an effect. Oil and gas companies are responding to new industry regulations around ESG targets. SASB standards were developed through input from the industry and stakeholders and includes specific metrics to track GHG emissions, air quality, and water usage.
Other regulations relate to wastewater reuse. New Mexico is trying to require oil and gas companies to use wastewater instead of freshwater for processing needs. “Clarifying the state and federal regulatory frameworks associated with its recycling and reuse is of the utmost importance.” New Mexico State Engineer Tom Blaine said, adding “Reuse of this water in appropriate applications has the potential to relieve the growing demand on our ground and surface water sources.” Under President Trump, the Environmental Protection Agency (EPA) in the US had rolled back regulations around oil and gas, but there is pressure to reinstate them.
Companies are also instituting internal ESG policies and self-regulating.
4. R&D for new technologies
Oil and gas companies are hoping that increased investment in R&D will produce more sustainable technologies. These include CCS, as mentioned above, and R&D in low-carbon and low-emission ways of producing energy. Kinder Morgan formed a new unit to explore green energy opportunities, including the storage and handling of liquid renewable transportation fuels, and Shell is investing in innovative energy solutions including mini-grids and home solar systems.
Increasing digitalization forms the bedrock for these initiatives. Energy and utilities companies are more advanced than other verticals, with 49% using cloud technology versus just 36% for other industries, for example. Moving to the cloud enables better integration and streamlining of processes across the organization, which in turn allows for diversification, innovation, and process optimization.
Technology like real-time data analytics, Internet of Things (IoT) devices, automation, artificial intelligence (AI) and machine learning (ML), and agile methodologies all contribute to improved industrial efficiency and energy performance. New low-cost sensors inside pipes can detect and alert about leaks before damage spreads, and IoT and AI enable smart machine-to-machine (M2M) systems which can spot anomalies and bottlenecks and tackle inefficiencies.
With edge computing and AI-powered predictive analytics, oil and gas personnel can receive and respond faster to alerts, refine maintenance scheduling to ensure infrastructure remains in good condition, and prevent small issues from snowballing into headline-grabbing disasters. Improving the efficiency of digital infrastructure contributes to its safety and sustainability.
5. Better data and analysis
As the saying goes, you can’t improve what you don’t measure. Certainly, as long as oil and gas didn’t measure emissions and pollution, they couldn’t improve them. Now companies are mapping energy flows and emissions to identify areas that need work and determine how best to improve them, at the same time as independent organizations are monitoring environmental impact and setting benchmarks for sustainability.
For example, the Environmental Defense Fund has carried out research to quantify how much methane is emitted by oil and gas companies. Energy companies are using their own data and analysis to see where the problems are, enabling a joined-up perspective on how, when, where, and why emissions are happening.
6. More efficient processes
Oil and gas companies are increasingly adopting predictive analytics solutions to identify inefficiencies and instituting IoT systems to spot processes that could be streamlined. Even simple, low-cost steps like replacing valves with newer technology or replacing older equipment can help improve plant efficiency, reduce waste, and cut energy and water consumption.
Plants are introducing more equipment for heat exchange to lower energy needs and water reuse systems that recycle wastewater for fracking. At the same time, oil and gas companies are beginning to look for ways to source more local raw materials whenever relevant.
7. New partnerships
It’s encouraging to see more oil and gas stakeholders working together to come up with joint solutions. Organizations like the International Petroleum Industry Environmental Conservation Association (IPIECA), the International Finance Corporation (IFC), and the United Nations Development Program (UNDP) joined together to map oil and gas impacts and potential contributions to the UN Sustainable Development Goals. Eight major energy companies have also united to agree to 6 Energy Transition Principles which focus on reducing emissions and increasing transparency.
What Are the Obstacles Handicapping Oil and Gas Companies from Achieving Sustainability?
Despite their good intentions and the significant pressure to achieve sustainability, oil and gas companies are still struggling to meet their own goals. Much of this is attributed to a lack of resources since it requires a lot of money and time to create an ESG strategy, implement it across a large organization, and track and measure progress, although critics say that there is also a lack of will to make those investments.
Oil and gas companies also face the hurdle of a lack of standardization in reporting. With few independent benchmarks, contradictory advice, and a shortage of clear governance policies, many are effectively feeling their way in the dark.
On top of that, oil and gas companies preside over highly complex organizations with processes that have been set in place for decades and are difficult to alter. 50% of energy and utilities executives say that the increased complexity of the system is an obstacle to meeting their sustainability goals. Legacy equipment doesn’t help, but the process of updating crucial energy infrastructure with more efficient, digital-ready parts can’t be achieved overnight.
Oil and Gas Companies Are Struggling to Achieve their Goals
In the face of pressures from multiple directions, oil and gas companies realize the need to advance sustainability, and are working hard to digitize operations and develop new technologies so they can decarbonize and diversify into more environmentally-friendly energy products.
Complex processes, aging equipment, disparate policies, and insufficient resources are adding to the struggle, but with investment in new technologies, improved analytics, new partnerships, and enhanced regulations and transparency, oil and gas companies can shed their eco-unfriendly reputations and become more sustainable.