The unique role that oil and gas companies have in the energy transition

Even under the most aggressive energy transition scenario, the world will need oil and gas until 2050. That said, we all realise the need to lower our carbon footprint to slow and limit the effects of climate change. This is particularly true for the high-emitting oil and gas industry, not least when it comes to Scope 3 emissions.

Oil and gas companies have a unique opportunity – and responsibility – to facilitate the energy transition. It’s becoming increasingly clear that they must rise to the challenge if they are to maintain their social licence to operate. Companies that capitalise on their competitive advantages while maintaining sufficient flexibility to change as the energy transition progresses will be the most successful.

But what does a good energy transition strategy look like? What competitive advantages do oil and gas companies have to reduce global emissions? What game-changing strategies are emerging in the oil and gas industry to this end?

This article is based on Rachel Schelble’s keynote speech at the recent ONS Conference 2022 in Stavanger. Missed ONS? Read on for a recap.

Get a grip on your emissions (especially Scope 3)

For starters, oil and gas companies must be able to manage and minimise their emissions. A good emissions reduction strategy will always start with measuring and setting emission targets.

Around 65% of the companies we cover under our Corporate Service have net zero targets for Scope 1 (direct) and Scope 2 (indirect from energy supply to operations) emissions. Scope 1 and Scope 2 net zero in 2050 is now the industry standard; the challenge for most companies will be to accelerate the decarbonisation drive.

The largest source of oil industry emissions are Scope 3 – indirect emissions in the supply or services chains that include the combustion of oil and gas products. Such emissions are often outside the oil and gas companies’ control. Only 10 companies globally have net zero targets that encompass Scope 3: these include the European Majors and a small group of independent oil and gas companies.

Initial decarbonisation steps have focused on those Scope 1 emission reductions that the oil and gas industry can control, such as reducing flaring and incorporating operational efficiencies. For example, in the US Lower 48, most Scope 1 emissions come from fugitive methane. Companies have made significant progress replacing high-bleed pneumatic devices, the largest source of methane emissions, and are on track to reduce such emissions to negligible levels by mid-decade. Eliminating Scope 1 emissions is a must for the sector to maintain its credibility and social licence to operate.

Electrification from green power sources will play a big role in driving down Scope 2 emissions. Norway is leading the world in electrification from green power, with offshore wind gaining traction as an alternative to onshore power.

Scope 3 emissions make up 80% to 95% of total emissions for oil and gas companies. When we consider emission reductions, this is really the elephant in the room. Who should take responsibility for these emissions? 

We now cover scope 1, 2 and 3 emissions in our Emissions Benchmarking Tool

The simplest Scope 3 abatement strategy is to cut demand for oil and gas, which is not within the control of the oil and gas sector. Reducing Scope 3 emissions will require large structural changes for the industry, because there are few levers that oil and gas companies can pull. They can reduce their production, refining or product sales, use carbon offsets, which are likely to have a cap under evolving standards, or pursue low-carbon projects.