Decarbonisation is front of mind across the oil industry.

If COP21 two years ago was the call to action for the longer term, escalating pressure from capital markets is rather more pressing.

Activist shareholders are pushing for change; banks are beginning to withdraw financing from carbon-intensive new projects. A problem for companies and investors alike is the variable quality of carbon emissions reporting. What's needed is consistent, independent metrics to be able to benchmark peers, see what assets are challenged and understand how much of a company's value is at risk.

We provide many of the answers in our Upstream Carbon Emissions Performance and Risk Benchmarking Study. We have built comprehensive CO2 emissions profiles for 25 of the top IOCs and NOCs, using the 31,000+ upstream asset analyses in our database. Here are a few high-level snippets from the study.

The sector’s carbon emissions are increasing. Emissions intensity (CO2 per unit of energy produced) is set to rise by around 20% through the mid-2020s.

Just as the world finally woke up and smelled the coffee on the dangers carbon emissions pose to our climate, the upstream industry was investing heavily in more carbon-intensive assets. LNG, oil sands and heavy oil have the highest carbon intensities, and have been among the five biggest upstream growth themes over the last few years along with tight oil and shale gas.

Gas’ status as the cleanest of the fossil fuels is severely dented by the high carbon intensity of LNG, venting, flaring and fugitives.

LNG's high rating reflects the energy-intensive liquefaction process and venting. CO2 has to be removed prior to entering the liquefaction plant and is often vented into the atmosphere. Gas flaring is allowed in some jurisdictions where there is no ready market for the gas. Fugitives are methane volumes leaked into the atmosphere all along the value chain. Methane has a carbon intensity 37 times that of CO2, and in some cases fugitives may double a company's CO2 intensity.

As carbon pricing is rolled out, there will be a cost to companies.

We estimate that the sector's value at risk runs into several tens of billions of US dollars directly from the cost of carbon at US$40/t, and excluding the impact on commodity prices of a lower carbon future.

So what can E&Ps do to reduce CO2 intensity?

Firstly, fix the roof, or at least fix the big holes. This is in the immediate gift of the industry, and the 80:20 rule would go a long way. The financial cost and any reduction in NPV need to be weighed against both the environmental cost and potential reputational damage from a lack of mitigation. Some LNG producers are already sequestrating CO2 rather than venting, and similar creative solutions are needed across the industry. Regulators have an important role to play in LNG processing, flaring, venting and fugitives. 

Second, portfolio high grading. Reduction of carbon intensity can be achieved, over time, by disciplined portfolio management and judicious organic investment. In some portfolios, a single asset may be the rotten apple. Divestment is an option and already happening. Almost US$20 billion of oil sands assets in Canada were sold by IOCs over the last year and cutting carbon exposure was a factor in some transactions.

For every sale, there’s a buyer — the Canadian assets were acquired by domestic oil sands operators. We expect more deals like this where carbon-intensive resource themes and the attendant risks are taken on by specialists. As they say, where there’s muck, there’s brass.

Third, invest in zero carbon production. Some Majors are sowing seeds in wind and solar capacity, though so far it's more about signalling intent than committing much capital. The value proposition in renewables is still a challenge for oil companies.

And this is the nub of the dilemma. E&P is what the industry knows best and where it can make the best returns. Upstream will likely continue to dominate capital allocation for the foreseeable future. But the winners — those that continue to attract investor capital — will have a clear strategy for tackling carbon intensity.