How and why the Oil and Gas sector should improve energy efficiency
The Oil and Gas (O&G) industry continues to face scrutiny over the consequences its operations and business activities have on the environment. These companies are being asked to prove how they are helping to reduce carbon emissions. O&G companies should no longer be seen as just a part of the problem but rather a significant part of the solution.
O&G companies have come under pressure from portfolio managers in the trillion-dollar club (AUM) such as BlackRock and State Street, as well as large financial institutions – e.g. Mitsubishi UFG (Japan’s second largest brokerage after Nomura) and government entities – e.g. Norway’s sovereign wealth fund (which ironically is almost wholly constructed from historical oil and gas revenues).
The types of institutions above are either blacklisting or stopping funding to companies that do not adhere to sustainability measures outlined in Environmental, Social, and Governance (ESG) policies. Because the institutions are prepared to take direct action, they are also credible enough to influence views more widely.
In a third party report from a trillion dollar club member, that ACF assessed for clients, the author estimates that there are USD 30 trillion of filtered ESG investing assets available globally in 2020, which is USD 5 trillion above our own forecasts for YE20. These assets are controlled by institutional fund managers and allocated to companies with verifiable ESG policies.
The metrics of an appropriate ESG policy could, with some admittedly reasonable effort and expense, be tracked throughout the whole O&G value chain, from discovery to distribution, to analyse its efficiency. As of today, 15% of greenhouse gas emissions (GHG) come directly from the O&G sector, and arguably it all comes from the sector indirectly.
Fossil fuels account for two thirds of the global primary energy mix and are expected to dominate the energy market for at least another 20 years. The O&G production process is very energy intensive and contributes significantly to GHG emissions; all of which lead to its lack of efficiency in producing the levels of energy required to meet consumer demand.
For O&G, we think the solution lies in carbon emission offset combined with a renewed focus on energy efficiency. The concepts go hand in hand and are good for all parties in the ecosystem whether opposed to, or supportive of, fossil fuels. There are several actions that the O&G industry can take to improve energy efficiency:
- Reduce the ‘flare’ of gas (gas that is burned/flared because it cannot be captured and re-used due to a lack of infrastructure – e.g. nearby gas pipelines, factories, businesses, homes);
- Invest in renewable energy technology;
- Use renewable sources throughout the O&G value chain.
In a recent research publication, ACF explains (https://acfequityresearch.com/acf-explains/)
why the combination of renewable energy and energy efficiency is critical and can potentially reduce GHG by 70% over the next 30 years. Incorporating O&G initiatives with the existing synergies between renewables and energy efficiency, could make the Paris Agreement goal a more achievable target.