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The Oil and Gas Industry Needs New Tools to Manage its Exposure and Capture its Opportunities From Carbon
Part 1 of a 3-Part Sponsored Article Series brought to you by Hewlett Packard Enterprise and Powerland – by Geoffrey Cann
A changing climate
An Uber driver in Calgary recently confided that he didn’t believe in climate change. His view was that humanity has only been relevant on the planet for a tiny fraction of the earth’s long geologic history, and the planet has experienced multiple waves of climate change long before human relevance. Extreme weather events were odd, but nothing to worry about and certainly no reason to change anything.
He was unaware that the Great Barrier Reef on Australia’s eastern shore has lost 50% of its coral since 1995 because the temperature in the oceans has risen, subjecting the reef to back-to-back bleaching events, and triggering more intense cyclone damage. The reef is worth billions in value to Australia, not to mention home to a very diverse collection of marine creatures not found anywhere else and is in some peril. Once gone, it won’t return for centuries, if it rejuvenates naturally at all.
Thankfully, Uber drivers are not responsible for setting climate policy.
Western societies now generally accept that excessive green house gas emissions are contributing to the slowly rising temperature of the planet, triggering frequent and more extreme weather events. Cherry blossoms in Japan are blooming weeks ahead of schedule. A heat dome in the Pacific North West kills dozens and incinerates a mountain village. Out of control fires rage in Greece, Australia and California. Floods hammer Germany and Australia. Rain falls on an ice field in Greenland for the first time in recorded history. Polar bears wander further south in search of food because Arctic ice has receded. Climate refugee is now a recognized term as humanity flees to escape.
Far-reaching actions
In response, numerous governments, both authoritarian and democratic, have announced plans to phase out fossil fuels to one degree or another within the next 10 to 30 years. Fossil fuels are used principally for heat and transportation, and of these uses, transportation is most amenable to meaningful regulatory action because transportation capital (cars, light vehicles, buses, trucks) has both alternative technology (like electric vehicles) or sustainable fuel (like jet biofuel) and turns over quickly in comparison to heating systems for buildings. Transportation will change dramatically over the next 15 to 20 years. As much as 50% of a barrel of oil is refined for the transportation sector as gasoline, diesel, aviation, and marine fuel, putting refining infrastructure on a survival footing.
Industrial energy uses like cement plants, food processing, and power generation, require large capital infusions, and are better timed by management and capital markets than regulation.
The oil and gas industry is doubly hit because it both produces and consumes fossil fuel, whereas other industries are merely consumers of petroleum. Establishing a carbon game-plan is challenging because oil and gas assets are highly distributed across large land masses, or over oceans, and are costly to access. The assets vary widely by age and technology. Along with routine wear and tear, environmental exposure causes continuous degradation, erosion and contamination to equipment. The actual emissions can be hard to detect and measure at a large site because the gases are invisible, vanish quickly in windy conditions, and can emanate from many points.
Capital markets now demand more transparency on green house gas emissions but also on company tactics to manage and mitigate exposure to climate effects, the potential for stranded assets, and the requirements for new climate-based investment. Norway’s sovereign wealth fund no longer invests in fossil fuel projects. Major investors like Blackrock require clear statements on exposure to climate risk and regulatory change. Boards want frequent briefings on the latest in climate risk analysis.
Markets are stepping up to create the financial incentives for change. Innovations such as carbon prices, carbon credits, cap and trade schemes, carbon offsets, carbon trading, and preferential pricing for alternatives are swiftly moving into place. These mechanisms encourage businesses to measure their carbon emissions and invest to manage their exposure (installing efficient burner tips, or high efficiency incinerators) or capture new value streams (carbon capture and storage, stranded gas bitcoin mining, and hydrogen fuel).
The carbon opportunity
In that sense, carbon has emerged as an intriguing new commodity, but with some curious aspects. Emissions from a flue stack can be highly concentrated, but those from an oil field can be hugely dispersed. As a relatively new commodity type, and only recently with a financial incentive, emissions have not to date attracted the kinds of investments in measurement methodology, measurement tools, and analytics, leading to an inadequate understanding of the scale of the problem (or the opportunity). Even standards for reporting are still a work in progress.
As carbon pricing is fraught with this uncertainty risk, balance sheets that feature a carbon component are likely to be misstated. Consumers are at risk of paying a premium for green energy products that actually don’t exist. Companies cannot prove that their energy products are sustainable or terror-free because they cannot trace the molecules through the value chain.
But as with all commodities, there is money to be made. But where exactly? Every flue stack, weld, piece of rotating equipment, storage tank, production well, engine, and burner tip, are potential sources of a measurable and actionable GHG emission. As the price of carbon rises, these emissions become both more costly to ignore, and more lucrative to capture and convert to tradable credits. The executive in oil and gas can no longer afford to overlook this valuable new commodity.
The next article in this series will look at the challenges that must be overcome for better carbon management to take flight.
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