The ESG perspective
A few years ago, my son tried to convince me that Bitcoin was where I should be investing. I couldn’t wrap my head around cryptocurrencies in general and couldn’t get over the fact that they weren’t some tangible assets. I thought it was a scam, a house of cards ready to fall.
Well, fast forward and many people made lots of money on cryptocurrency, and many still believe it’s a viable market while others declared it dead in 2022. Regardless of your thoughts on the matter, an industry was born out of nothing, and new cryptocurrencies seem to crop up every year. And we still see “crypto” mining in the oil field. So, what does this have to do with decarbonization? Like “crypto,” people can’t wrap their heads around ESG and decarbonization.
A credibility problem? Part of the problem is the “new math” that people use when calculating carbon footprints and the lack of transparency or logic. If I buy an electric car and get rid of my combustion engine, I am now carbon-zero—hooray. But wait, I’m charging my car, and the generation of electricity is generating emissions somewhere—just not out of my tailpipe. Or better yet, the cobalt needed for my lithium battery is mined and generates a significant carbon footprint. So, I really need to operate that car for a while to offset my carbon footprint, and I’m not carbon-zero, day one.
The same is true of solar panels—typically blast furnaces are used that run on coal, and then more coal and silica are used, generating a significant emission source and carbon footprint. But the day I go solar, I’m carbon-free—umm, not really. The transparency issue exists with the Scope 1,2 and 3 reporting being proposed by the SEC. If I subcontract my operation to a third party, I no longer have to report these as scope 1 emissions. They are now scope 3, and I don’t have to report them. I achieved a big carbon footprint reduction—not really—actually, not at all. In a world where “virtue signaling” has become so important, we are ignoring facts and science for a feel-good story. I’m carbon-zero, whether I really am or not.
Time for a reality check. Yes, there is a credibility problem, but is it wrong to want clean air or clean water? Yes, I know, if I clean the air one place, and dirty it somewhere else, did I really accomplish anything? I grew up in Southern California and remember “smog alerts,” with my chest hurting from playing outside too long or not being able to take a deep breath without coughing. Today, that doesn’t exist.
So yes, we can make tangible differences in our environment. And the reality is New Mexico recently enacted regulations for Volatile Organic Compounds (VOCs), and the EPA has threatened the Permian basin with a non-attainment status, both of which indicate a trend toward more emission reductions in our future. Is this a burden on our industry or an opportunity? Aren’t they just forcing ESG down our throats? Or, like Bitcoin, did I just miss the bigger picture?
The bigger picture. A recent article in The Wall Street Journal slapped me across the face with a dose of reality. The article was about Oxy Low Carbon Ventures (Fig. 1) and their investment in Carbon Capture. Today, we have seen tax credits increase to $60/ton for EOR, $85/ton for carbon capture and $180/ton for direct carbon capture. The big picture is a tax credit for reducing CO2, but also the selling of carbon offsets, which is a growing market. In the article, Oxy projected revenues of $300-$430/ton. This is significantly more than the tax credit. In Europe, the article mentioned as much as $1,300/ton. Just hold on a second, you’re going to pay me to reduce emissions? This changes everything—no I’m not AOC and think I can spend a tax credit, but once you have a registered credit, you can sell it for cash, so in this case, it is cash or can be cash.
So yes, decarbonization, here we go. While we sit and argue about greenwashing or virtue signaling and the lack of transparency or the illogical way carbon footprint is calculated, a new industry is developing. Many major corporations are taking the carbon-zero pledge, but that means they reduce emissions or buy offsets, and most seem to be going to the offset market, and that market is evolving and growing. Oxy is pre-selling offsets they haven’t even created yet, according to the same article. No, I don’t think this will go the way of Bitcoin, because it is tangible, a tax credit you can sell as an offset in different markets. And the market for offsets seems to be getting hot, and not from global warming—sorry couldn’t help myself.
What’s next. Decarbonization is our future. Tax credits, carbon offsets and yes, a bump in stock price when I get to carbon-neutral. But we are so focused on CO2. There are more greenhouse gases, most with a higher warming potential than CO2. Methane, for example, has a CO2 equivalence (CO2e) of 25. That is 25 times the impact of CO2. Nitrogen oxide (NOx) has a CO2e of 248-298 times. In some of the carbon markets today, and those developing, they look at CO2e, not just CO2. We should expand the federal tax credit to CO2e. You want to reduce VOCs—methane is a big part of VOCs with a 25 CO2e—or reduce other emissions like NOx and get 248-298 CO2e. Now, that’s progress.
You’ll see flaring completely eliminated, and you’ll see more money towards fugitive emissions and leaks. There will be more pollution reduction efforts. The Clean Hydrogen Production Tax Credit is already based on CO2e; it’s not like it would be a foreign concept, but it makes so much more sense. So, all you Super Majors out there, get on the phone with your lobbyists, let’s get this done. It’s all about the carrot or the stick—fine people for emissions or give them incentives to create emission reductions. Believe me, I am all in on decarbonization. I missed Bitcoin, but I won’t miss this one. See you all next column.