The ESG movement continues to grow, but with the growing pains, there continues to be a push and pull going on, just like it is with most things today. We are more divided today that at any other time I can remember. As an example, almost every super-major oil company has embraced a net zero, or lowering emissions goal. They are committed to decarbonization with Oxy, ExxonMobil, Chevron, Shell and others leading the way. Yet, Shell was sued recently for their ESG goals, even with emission reduction goals and decarbonization in place. Why? Because they continue to have investment in oil and gas.
We have already witnessed what happens when you focus entirely on alternative energy in the form of solar and wind. In Germany, they faced an energy crisis, as well as other parts of Europe, well before the Russian invasion of Ukraine. This led to the European Commission adding natural gas and nuclear to the list of “sustainable” energy sources. Today, Germany is burning coal in a complete reversal from its position previously, but honestly, this is more a result of cutting off Russian oil and gas and not having any other alternatives.
Balance. My point is it’s all about balance. We will see growth in solar and wind, but it has to make sense, and we can never get to elimination of oil and gas or we will end up like Germany with unreliable and terribly expensive energy. There will be a balance, with some energy coming from wind and solar and the rest likely from natural gas. In fact, for many years, natural gas was always labeled the transition fuel while we moved to cleaner energy. Today, natural gas is under attack, but what do people think will fill the energy void when the wind isn’t blowing, and the sun isn’t shining? There is still opposition to nuclear, and hydrogen isn’t fully developed yet. Again, we need a balanced approach. This is why the Shell lawsuit is so alarming, Shell, more than other majors, has turned away from oil and gas, selling their stake in the Permian basin and investing in decarbonization and solar and wind. Yet, a lawsuit is filed. But like I said, there is a push and pull going on.
And now for the pull. Republicans have launched a new ESG Working Group, aimed at coordinating ESG proposals, but specifically aimed at upcoming climate disclosure rules anticipated by the SEC. In fact, SEC chair Gary Gessner recently announced in an interview that the two hottest topics under review by the SEC are the 1% rule, where you only report climate impacts if they exceed 1% of a financial statement line item and the reporting of scope 3 emissions. Expect this working group to pull away from more reporting or disclosure requirements from the SEC.
In addition, the pushing and pulling is the terrible lack of transparency that exists. For example, Scope 1 is emissions from your activities, Scope 2 emissions are from power generation, and Scope 3 emissions are everything else, like vendors and indirect emissions from the products you make when they are used.
Let me give you an example. Let’s say that I convert my entire truck fleet to electric; I just went carbon zero. In reality, the manufacturing of the electric car has a much bigger carbon footprint, due to the mined minerals needed for EV batteries, so those are my scope 3 emissions, but I don’t count them. And the electric car battery is going to need continuous charging for more emissions, but that’s a Scope 2 emission, and I don’t report it. So, I can claim carbon zero, but in reality, it’s not.
Currently, we play a shell game of moving emissions around from Scope 1 to 2 to 3. So, it does seem to make sense to report all Scope 1,2 and 3 emissions, but many private companies don’t calculate all their emissions. Furthermore, the SEC doesn’t really have jurisdiction over private companies, and now we have the mess that is the disclosure rules.
We expect a proposal from the SEC later this year to address the disclosure rules, and we will have to see how this plays out. But, there is a significant push from the investment community to report Scope 1, 2 and 3 emissions. And, expect there to be more pushing and pulling form both sides. I just hope we can get to a reasonable common ground. It won’t be easy, when you have extreme opinions on both sides, ranging from ESG is a hoax to the oil industry needs to be abolished. The hope is that the extreme opinions get treated as outliers, and we let science and truth guide us to a more reasonable outcome. Ok, quit laughing—I can dream, can’t I?
Decarbonization will change our industry and will proceed. The investments have been made, and significant capacity will be coming in the next few years. And as we offset the oil and gas industry emissions, the investment community will come along. Just about every publicly traded super-major is committed to decarbonization, and the race to net zero is real and happening. This is an important step for our industry, as a whole. The winning back of our “social license to operate,” real or imagined, is part of that goal. With that, I want to talk a little about the decarbonization path we are on.
Based on data from Rystad Energy, the U.S. Carbon Capture market will exceed 200 million tons per year by 2030, and the global market will be close to 700 Million tons per year by 2030. There will be significant carbon capture capacity coming online. The problem is that we cannot create an offset or tax credit without capture and sequestration. Class 6 Sequestration wells are lagging, and the EPA predicts permitting will take even longer. We will likely see capture capacity without sequestration.
Additionally, capture capacity is continuous, and it needs to be for the economics to work, but a Class 6 sequestration is temporary. These types of wells are only granted permits for limited lives. We do have EOR, but EOR is strictly a conventional well practice, and we have been investing primarily in unconventional wells, where EOR is not currently an option. EOR doesn’t look to provide the growth opportunity to utilize all of the captured carbon coming online.
We will cover this important topic in future columns. We have, ourselves, developed a sequestration technology that can help, but for the success of decarbonization, we need to ensure there will be sequestration capacity that will keep up. I will continue to update you on all things ESG, but decarbonization is such an important aspect of the movement within our industry that we will keep focused on this topic.
- The last barrel (February 2024)
- Oil and gas in the Capitals (February 2024)
- What's new in production (February 2024)
- First oil (February 2024)
- E&P outside the U.S. maintains a disciplined pace (February 2024)
- Prices and governmental policies combine to stymie Canadian upstream growth (February 2024)
