How ESG and sustainability are proving to be game changers for the energy sector

Energy companies operate in dynamic and complex environments, where they face constant challenges especially in terms of supply and demand. Several market forces have pushed environmental, social, and governance (ESG) and sustainability to the top of the agenda for the energy companies. Globally Investors and financial markets are increasingly demanding a compelling ESG plan and a path to net-zero carbon emissions. As expectations rise and global regulations expand, many energy firms are grappling to decipher the solution to the current climate puzzle.

Climate Action 100+, an investors initiative that aims to ensure major companies take necessary actions on climate issues, has more than 500 signatories which, combined, account for more than US $50 trillion in assets under management. Governments across the world are championing sustainable investments as cornerstone of their economic stimulus strategies.

The need of the hour of the energy companies is to identify the key actions that will get them closer to net zero. To achieve net zero, the leaders of energy companies need to solve all the key variables in the sustainability equation: carbon emissions, financial performance, capital investment, and societal impact. The Paris Agreement and COP27 conference have all proved to be a wakeup call for C-level executives of energy companies to develop new ESG and sustainable business strategies in their future strategy road map to net zero. Sustainability and ESG strategies are set to be in the forefront of critical issues plaguing energy/oil and gas companies especially post COVID-19.

Investments in low-carbon energy

With the integration of ESG strategies, energy companies can effectively cut their emission levels either by using renewable energy and/or capturing and sequestering the emissions from fossil fuel sources. Additionally, the growth of renewable energy translates to more jobs and the overall development of the energy industry. Therefore, investments in low-carbon energy generation are highly acceptable from a socio-political perspective.

Hydrogen, carbon capture, use, and storage (CCUS), renewable energy and energy storage are some of the mechanisms through which energy companies can achieve decarbonisation and thus foster the sustainability and ESG pathways.

For oil and gas companies, there are plethora of options to decarbonise and thus increase their sustainability and raise the bar of ESG compliance. The specific initiatives a company chooses to reduce its emissions will depend on multitude of factors such as its geographical presence, asset portfolio mix (offshore versus onshore, gas versus oil, upstream versus downstream), and local government regulatory policies and practices (the availability of renewables, carbon pricing and the central grid’s reliability and proximity).

Understanding emission performance

Upstream operators and leaders aspiring to reduce emissions must first overcome the uncertainties in understanding the emission performance of their assets and portfolios: what is really driving emissions, which emission sources to tackle urgently, and by how much.

Upstream operators account for more than 66% of the sector specific emissions. Using alternative power sources such as renewable energy as an alternative to diesel fuel can help reduce emissions. Companies can cut emissions of methane, a powerful GHG, by improving leak detection and repair (LDAR) and installing vapor-recovery units (VRU). It is estimated that reducing fugitive emissions and flaring could contribute 1.3 GtCO2e in annual abatement by 2050, at a cost of less than $14/tCO2e.Using predictive analytics and improved reliability, nonroutine flaring can be reduced. One upstream operator found that more than 60% of all flaring emissions came from nonroutine flaring, mainly as a result of poor reliability. The operator then channelled their efforts to improve operations — for example, by carrying out predictive maintenance and replacing equipment.

Another mechanism would be to reducing routine flaring through improved additional gas processing and infrastructure. Increasing CCUS is another tool by which companies can embark on decarbonisation pathway. Even though there are less than 30 CCUS projects under commercialisation with majority being demonstration and pilot projects, still the oil and gas can significantly influence the adoption and development.

Clear scrutiny of upstream portfolio

Upstream operators have started becoming more cautious and scrutinising their upstream portfolio choices with a microscopic lens. The highest-emitting reservoirs are nearly three times more emissions intensive than the lowest. For example, operators are evaluating the future attractiveness of developing complex reservoirs.

The global power system accounts for nearly 28% of CO2 emissions. Under a fully decarbonised pathway, power generation from fossil fuel plants would be replaced with renewable energy like solar, wind or nuclear, and other forms of low emissions power generation. Most equipment and machinery would be progressively replaced with assets that run on low-emissions electricity. This shift to green power, along with population growth and widening access to energy, would cause a substantial increase in electric power use — necessitating a build-out of power systems worldwide.

Best practices to decarbonise energy sector

To sum, the energy and oil and gas companies to decarbonise and to effectively adhere to ESG best practices, they can adapt and/or implement some of the practical measures listed below:

• Conduct deep dive of (Scope 1 and Scope 2) emissions baselining value chain analysis and validate the findings so that initial base line assessment is a good starting point
• Set ambitious but realistic targets for the portfolio and its constituent assets; and track improvements, based on a robust baseline of greenhouse-gas emissions.
• Inculcate rigor in evaluating emission-reduction initiatives
• Robust execution and performance tracking is key to achieve emissions reduction and thus pave the way for decarbonisation and sustainability
• Leverage the use of green hydrogen and have a thorough understanding and effectively deploy them for decarbonisation
• Inculcate the use of energy efficiency across different processes and operations within their segment
• Increased usage of CCUS, reduced non routine and routine flaring are some of the measures that can be effectively tapped to achieve decarbonisation

Investors and stakeholders need to understand the origin and carbon footprint of the energy oil and gas companies consume across their operations, and take appropriate action to procure cleaner electricity. This will further drive the decarbonisation of their operations, making 24/7 carbon-free energy a reality. Having a transparent and responsible assessment of activities has become paramount to sustainable business. Going forward, it will be interesting to see how energy companies and other industrial sectors can effectively decarbonise and embark on their sustainability journey with balancing the ESG stakeholders and other investors effectively targeting to improve their triple bottom line in 2023 and beyond.