As the pressure to act on climate change remains, the industry should consider a range of options.
If the world is to come anywhere near to meeting its climate-change goals, the oil and gas (O&G) industry will have to play a big part. In 2015, the industry’s operations accounted for 9% of all human-made greenhouse gas (GHG) emissions.
To play its part in mitigating climate change to the degree required, the oil and gas sector must reduce its emissions by at least 3.4 gigatons of carbon dioxide equivalent (GtCO2e) a year by 2050, compared with “business as usual” (currently planned policies or technologies) – a 90% reduction in current emissions pre Q1 2020.
The current environment has demonstrated that it would clearly be easier if the use of oil and gas declined for the long term. But even if demand recovers to pre Q1 2020 levels, the sector can abate the majority of its emissions, at an average cost of less than $50 per ton of carbon dioxide equivalent (tCO2e), by prioritizing the most cost-effective interventions.
What upstream operators can do
Upstream operations account for two-thirds of sector-specific emissions. Here are some ways in which oil and gas companies are taking action. The economics will vary greatly, depending on the option and local conditions.
Changing power sources.
One oil and gas company is using on-site renewable power generation to provide a cost-effective alternative to diesel fuel. By replacing generators with a solar PV and battery setup, the company not only reduced emissions significantly but also broke even on its investment in five years. Connecting onshore or nearshore rigs and platforms to the central grid (as opposed to decentralized diesel generation) can also work well. If upstream producers electrified most of their operations, that could add up to 720 tCO2e a year in abatement by 2050, at an estimated cost of $10/tCO2e, depending on local electricity costs.
Reducing fugitive emissions.
Companies can cut emissions of methane, a powerful GHG, by improving leak detection and repair (LDAR), installing vapor-recovery units (VRU), or applying the best available technology.5 One company replaced the seals in pressure-safety valves, which had been found to be a frequent source of leaks, and then was able to monetize these streams of saved or captured gas. We estimate that reducing fugitive emissions and flaring could contribute 1.5 GtCO2e in annual abatement by 2050, at a cost of less than $15/tCO2e.
One company replaced gas boilers with electric steam-production systems, including high-pressure storage for nighttime steam supply, to support separation units. The project will pay for itself in less than ten years. In many circumstances, there is already a good business case, for combining the use of solar and gas in place of conventional boilers.
Reducing nonroutine flaring through improved reliability.
One operator found that 70% of all flaring emissions came from nonroutine flaring, mainly as a result of poor reliability. It, therefore, focused on improving its operations – for example, by carrying out predictive maintenance and replacing equipment. These actions not only reduced emissions but also raised production. Best-in-class operators are making significant strides in reliability thanks to area-based maintenance and multiskilling. Predictive analytics can reduce the frequency of outages to compressors or other equipment.
Reducing routine flaring through improved additional gas processing and infrastructure.
While some flaring may be unavoidable, the capacity constraints of infrastructure can lead to more than either companies or the public might want. In the Permian Basin, for example, a record 661 million cubic feet a day (mcf/d) were flared in the first quarter of 2019. Addressing this challenge requires additional gas-processing facilities, as well as gathering and transport infrastructure.
Increasing carbon capture, use, and storage (CCUS).
While this technology is projected to play only a minor role in the sector’s overall decarbonization, O&G players can still significantly influence its adoption and development. There are 19 large-scale CCUS facilities in commercial operation; four more are under construction and another 28 in development. There are also a number of demonstration and pilot projects. Together, plants under construction and in operation can capture and store about 40 MtCO2e a year. Total CCUS capacity could increase by as much as 200 times by 2050.
What downstream operators can do
Downstream operators are exploring many of the same ideas, but they have distinctive options as well.
Efficiency is a factor in every part of the industry, but new downstream-specific technologies can make a big difference. Waste-heat-recovery technology and medium-temperature heat pumps in refineries, for example, reduce the amount of primary energy used in distillation. One company saved €15 million in capital expenditures by forecasting its required steam usage hour by hour and incorporating this into a thermodynamic model to determine the required specifications for replacement equipment.
Hydrogen production through electrolysis has become both more technically advanced and less expensive. Bloomberg New Energy Finance estimates that the cost of hydrogen could drop as much as two-thirds by 2050. Using renewable energy rather than steam methane reforming (SMR) to power the electrolysis could offer refineries a way to reduce emissions – a result known as “green hydrogen.” An alternative, “blue hydrogen,” uses SMR plus CCUS. The attractiveness of the different technologies depends on the local economics – in particular, the availability of cheap storage capacity for CCUS or cheap renewable electricity.
High-temperature electric cracking.
In refining, several pilot projects use electric coils (instead of fuel gas) to provide heat. The technology is still at an early stage and small in scale. Moreover, the economics are sensitive to the price of electricity compared with gas and to the options for selling the fuel gas. Those economics improve if investment is coordinated with the natural investment cycle to support additional capital expenditures – and, of course, if power can be purchased or generated under favourable financial terms.
Replacing some conventional oil feedstocks in refineries with biobased feedstocks or recycled-plastic materials (initially, through pyrolysis or gasification) would also reduce emissions – not only Scope 1 but also, to a large extent, Scope 3 emissions. In an increasingly decarbonizing world, this may extend the lifetime of refining assets.
The oil and gas sector will play an important role in the global energy transition; how it will face that future is a matter of strategy. As transparency increases, so may expectations. Oil and gas companies that get ahead of the curve could find themselves better positioned for change.
Planning a decarbonization strategy: Questions to ask
Companies are at different stages of preparing their GHG-reduction plans: some are ready to act, others are just getting started. Here are questions companies should ask as they plan and execute strategies to reduce GHG emissions.
What is the baseline for setting targets? What are the targets over the next three to five and five to ten years, as well as to 2050?
What is the most cost-effective way to decarbonize our different sources of emissions? What is the business case for each asset? How can our company manage the trade-offs between longer-term decarbonization and shorter-term growth, revenue, and sustainability targets?
What capabilities do we need centrally or in business units? What is the right organizational setup? How do we allocate capital for decarbonization across the portfolio? How do we measure and track success?
How can we get investors, employees, customers, and governments to support our decarbonization agenda? What is the investment case? Are new sources of funds available? How can we differentiate our products? When should we collaborate or go it alone?
How do we align our decarbonization goals with the larger energy transition? What is the right timeline and payback period?
By Chantal Beck, Sahar Rashidbeigi, Occo Roelofsen, and Eveline Speelman
This content has been adapted from The future is now: How oil and gas companies can decarbonize, January 2020,McKinsey & Company, www.mckinsey.com. Copyright (c) 2020 McKinsey & Company. All rights reserved. Reprinted by permission.