Opinion

How are oil and gas companies using carbon offsets to decarbonise?

Offsetting can be both a decarbonisation tool and a financial instrument – but cannot replace carbon mitigation solutions

Elena Belletti

Head of Carbon - Energy Transition Practice

Elena works to provide clients with intelligence on recent developments in the carbon landscape.

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Rachel Schelble

Head of Corporate Carbon Management and Infrastructure, Corporate Service

Rachel leads the development of our corporate midstream research service.

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The energy transition represents a crossroads for the oil and gas industry. More than 130 countries have now made net zero pledges, covering around 88% of global emissions – the need for action is clear and unequivocal.

For oil and gas companies, good strategic positioning starts with an ambitious but realistic carbon management plan that clearly maps their path to decarbonisation. What role do carbon offsets play in such plans? And what extra value can offsetting deliver in the process?

This is part two of our series on the role of carbon offsets in the net zero journeys of energy-intensive companies. Read part one here – and fill in the form to sign up for the Inside Track to ensure you don’t miss out on the next instalment.

Carbon offsets are just one piece of the emissions-reduction puzzle

Carbon offsets aren’t a decarbonisation silver bullet. Corporate carbon management plans must adhere to an order of emission-reducing operations, with the first step focused on avoiding emissions through operational improvements.

Next steps include improving the efficiency of current processes, leveraging new lower-carbon technologies – and then finally compensating residual emissions using carbon offsets.

Given the quantity of emissions that are hard to abate in oil and gas industry operations (Scope 1 and 2) and along the whole value chain (Scope 3), carbon offsetting is an important part of net zero targets. However, how companies source and use carbon offsets is critical.

Evaluating the need for carbon offsets

The value chain for carbon offsets includes three main nodes: evaluating need, sourcing and using offsets. Evaluating need calls for scrutiny of Scope 1 and 2 emissions and, ideally, Scope 3. Emissions must be categorised by source and accurately quantified.

Full consideration must then be given as to whether earlier steps in the carbon management plan can be deployed. Measures that avoid emissions, improve efficiency or leverage new lower-carbon tech should come before offsetting. It’s a useful tool but should not be used in place of carbon mitigation.

Sourcing carbon offsets: the ‘hands-off’ way

When it comes to sourcing carbon offsets, one core question is: how ‘hands-on’ do you want to be? The options vary considerably.

‘Hands-off’ options at one end of the spectrum include purchasing offsets from exchange platforms, aggregators, brokers or directly from developers. This is an easily accessible route but gives the buyer little control over project quality.

The energy sector is currently the largest buyer of carbon offsets. While individual companies don’t necessarily disclose the type and quantity of offsets they buy, we’ve seen an overall shift in preferred sectors. Credits generated from renewables once dominated, but are considered lower quality as they avoid, rather than remove, emissions. In the last year we’ve seen a switch towards nature-based solutions (NBS) that focus on conservation, restoration and improved land practices to provide permanent carbon sequestration.

We expect carbon sequestration projects, including NBS and CCS, to dominate the market going forward.

A more hands-on approach to sourcing carbon offsets

Hands-on carbon offset sourcing options offer a higher degree of quality control. The three main routes are:

  1. partnering with project developers
  2. developing new projects
  3. acquiring third-party companies that produce high-quality offsets. 

Several Majors have already made clear moves in this space. Both BP and Shell acquired NBS companies in 2020, for example. And Shell, BP, Eni, TotalEnergies and Chevron have all partnered with project developers to generate carbon offsets through forestry projects.

Hands-on strategies help to ensure a consistent stream of high-quality offsets is available as needed. These offsets can be used to address the company’s own decarbonisation needs or as financial instruments.

Carbon offset strategies leveraging the value chain

Clearly, carbon offsets can be used as a mechanism to offset a company’s emissions footprint and reach Scope 1 and 2 net zero targets. But there are other use cases. Offsets can also be used to compensate emissions along the value chain, for specific purposes like crude and LNG cargoes, or to help customers reach their own net zero goals.

Finally, offsets can also be used as a financial instrument to generate value. A carbon offset can be used in the same as any asset in a company’s portfolio. It can be held, traded, used as collateral, or retired when needed to offset emissions or products. Companies that can optimise the use of carbon offsets as a financial instrument can capture market differentials and create flexibility in their carbon management plans, potentially establishing a competitive advantage.

Oil and gas companies are seeing the potential opportunity – BP and Shell’s activities hint at how business models could develop.

Both companies have positioned themselves along the entire carbon offsets value chain and have committed not to use carbon offsets to meet their own net zero targets until after 2030. They’re producing geographically diverse, high-quality offsets through partnerships with developers and through dedicated NBS companies. They’re providing opportunities for their customers to offset emissions, have dedicated carbon-neutral product lines and have leveraged offsets for carbon-neutral LNG. And, lastly, they have carbon trading organisations that are ramped up and ready to maximise the use of offsets in their carbon management portfolios.

This article is an extract from Carbon offsets II. The strategies driving the net zero of tomorrow. For a more detailed look at how oil and gas companies are sourcing and using carbon offsets visit the store to read it in full.

Coming soon: part three of our series will focus on the strategic decision-making process. Subscribe to the Inside Track via the form at the top of the page to ensure you don’t miss out.