Decarbonization in oil and gas sector has risen to the top of strategic agendas. There is a wide scientific consensus on the various threats of climate change. Moreover, the increasing policy and societal pressure is making oil and gas companies reduce GHG emissions. However, achieving net zero emissions across hydrocarbon value chains is a complex challenge. It requires comprehensive, integrated transformation on multiple fronts.
The focus has often centered around investing in low-carbon technologies and advanced materials. However, transforming contractual relationships, collaboration structures, and regulatory frameworks is equally important. Reimagining procurement strategies, partnership models, and policy regimes can drive systemic change. It can embed climate performance requirements throughout value chains. This article analyzes the pivotal role of contracts and regulations. They are the unseen drivers of decarbonization in oil and gas sector. Moreover, these are the right elements if you wonder how do you decarbonize the oil and gas industry.
Embedding Climate in Procurement & Commercial Agreements
Procurement policies and commercial contracts may seem mundane compared to advanced technologies. However, they hold transformative potential to catalyze decarbonization in oil and gas sector. As major consumers of goods and services, hydrocarbon firms have significant purchasing power. This is to require and incentivize their suppliers to improve sustainability performance. Systematically embedding emissions reduction provisions across agreements can thus propagate decarbonization in oil and gas sector.
Supplier Contracts
Equipment and materials procurement contracts can be taken in this instance. It can stipulate that suppliers demonstrate the use of low-carbon production processes. It includes green hydrogen instead of unabated fossil fuels in steel fabrication. Services agreements can mandate third-party contractors implement energy efficiency measures. It can also mandate to conduct emissions monitoring and meet targeted carbon reduction milestones. Including such environmental criteria or requirements in supplier contracts sustains demand-pull. It also sustains growth for lower-carbon solutions while contractually obligating indirect emissions mitigation.
Furthermore, procurement contracts can build differentiated pricing mechanisms. They can also build performance bonus structures tied to meeting designated sustainability targets. Suppliers thereby have financial incentives. This is to continuously improve their emissions profiles beyond minimum contract requirements. As bonuses get paid out for achieved emissions cuts, service providers are commercially motivated. They can then double down on decarbonization in oil and gas sector.
Oil and gas operators can additionally impose sustainability requirements. This is in supplier qualification and selection processes. Prioritizing procurement from vendors with verifiable emissions reduction programs incentivizes the broad transition. This is the transition toward low-carbon operations across linked industries.
Joint Venture Agreements
Joint ventures (JVs) between operators for major capital projects provide leverage points. These points help to contractually drive decarbonization in oil and gas sector. JV agreements can stipulate that project development/operations meet strict GHG benchmarks. It includes implementing zero routine flaring.
JVs enable shared ownership of assets. So, the agreements can embed differentiated carbon pricing systems. They can also embed equitable allocation of costs and benefits from emissions reduction initiatives. As a result, this incentivizes each partner to proactively pursue sustainability solutions. It will help to maximize economic gains.
Furthermore, JV contracts can establish unified targets. They can help in adopting clean power and emerging lower-carbon technologies like carbon capture systems. Partners would then collaborate in investing in such solutions. They would also integrate them across shared operations. It helps to contractually ensure emissions mitigation ambitions are achieved. As a result, it is a powerful solution for professionals wondering how do you decarbonize the oil and gas industry.
Decarbonization in oil & gas: Policy & Regulatory Frameworks
Voluntary sustainability initiatives have a role to play. However, government policy and regulatory interventions are critical. It helps to motivate comprehensive decarbonization across oil and gas value chains. Well-designed regulations address systemic market failures. It also improves the cost competitiveness of low-carbon solutions and creates investment certainty. This is needed to drive material emissions reductions.
Carbon Pricing
Carbon pricing policies are widely considered the single most impactful regulatory tool. It is powerful for achieving economy-wide decarbonization in oil and gas sector. Carbon taxes directly impose fees on GHG emissions or the carbon content of fossil fuels. Cap-and-trade programs create market systems capping total emissions. As a result, it allows the trading of emissions permits. So, both provide tangible economic incentives for public and private entities to cut carbon footprints.
When environmental externalities are priced in, low-carbon technologies become more cost-competitive. Carbon pricing also generates revenue. This can be invested into emissions mitigation programs and sustainable infrastructure. Importantly, carbon pricing policies prompt anticipatory action. This is because firms act early to avoid escalating tax and compliance costs in the future.
Most jurisdictions have relatively low carbon prices. However, tightening caps and rising fees under the carbon pricing system will increase pressures. It will force the oil and gas companies to keep cutting operational emissions. They will have to do this to stay financially healthy.
Clean Energy Standards
Governments are also mandating increased adoption of renewables and clean energy. This is through portfolio standards obligating minimum shares in the electricity mix. Such policies directly create a demand pull for wind, solar, hydrogen, and other energy supplies. It also encourages shifts away from unabated hydrocarbons.
Utilities and grid operators work to meet ambitious portfolio standards. However, they will progressively prioritize purchasing from renewable energy producers. This dynamically discourages high-carbon hydrocarbon-fueled power generation. Moreover, it provides existential motivation for oil and gas companies to invest in clean power. It also motivates them to pivot generating capacities toward sustainable energy sources.
Climate Risk Disclosure & Access to Capital
Financial regulators worldwide are also beginning to introduce climate risk disclosure mandates. This is for banks, investors, insurers, and other financial institutions. These policies aim to make the financial system more transparent on risks. This is by requiring climate risk and carbon exposure reporting. As a result, it allows capital flows to gradually realign away from carbon-intensive sectors.
Oil and gas firms will find it increasingly challenging to secure affordable capital. Moreover, it will be difficult to secure insurance without aggressive decarbonization action. This is because leading financiers and insurers come under growing pressure. This is to demonstrate commitment.
Maintaining a license to operate will require preemptive emissions reductions. It will also require conspicuous sustainability improvements. This will help to retain access to competitive financing and investment.
Methane Regulations
Targeting methane emissions can be impactful decarbonization drivers for oil and gas operations. It stands true because of methane’s extremely high global warming potential, and regulatory frameworks. Jurisdictions like the U.S., Canada, Mexico, and the EU have recently introduced or proposed rules. These rules talk about limiting methane leaks, venting, and flaring. These elements result from new and existing wells, processing facilities, and infrastructure.
Such regulations impose monitoring requirements, binding performance standards, and penalty systems. Moreover, these compel hydrocarbon producers to systematically deploy sensing technologies. It also forces them to regularly inspect and maintain sites, repair leaks, and invest in capturing systems. Methane rules focus on one emissions category. Nevertheless, compliance catalyzes more proactive environmental management practices.
Collaborative Initiatives Complement Regulations
Voluntary initiatives also play important roles in decarbonization in oil and gas sector. They bring companies, governments, and civil society organizations together. They do it by providing pre-competitive forums to build consensus on challenges. It also helps build consensus to develop technical knowledge and pilot solutions. These collaborative platforms help inform better practices. It also helps in performance standards that often get codified into new policies and regulations.
Oil and Gas Climate Initiative
The Oil and Gas Climate Initiative (OGCI) convenes over a dozen leading global hydrocarbon producers. This is to accelerate industry response to climate change. The OGCI has established a target to reduce member collective methane emissions intensity. They plan to get it to below 0.20% by 2025. Moreover, they are coordinating for development and deployment of methane detection and reduction technologies.
The OGCI also collaborates on large-scale carbon capture and storage projects. It helps to drive down costs. The OGCI aims to help catalyze broad CCS adoption through knowledge sharing. It informs policies and enables commercial scaling. They can easily do it by demonstrating technology viability and investment opportunities.
Oil & Gas Methane Partnership (OGMP)
OGMP is led by the Climate and Clean Air Coalition, the UN Environment, and the European Commission. It engages companies, governments, and nonprofits. They collectively improve methane emissions measurement and facilitate mitigation solutions.
The OGMP provides technical guidance. It also serves as a public platform for participants to consistently report methane emissions. As a result, it allows transparent benchmarking and revealing leaders and laggards. So, this drives voluntary mitigation action. That too while producing extensive emissions datasets that enable stronger methane regulations.
Getting to Zero Coalition
The Getting to Zero Coalition led by the Global Maritime Forum unites over 200 organizations. These companies exist across the maritime shipping value chain. They accelerate the decarbonization of oceangoing fleets. Coalition members collaborate in developing and committing to action plans. They also collaborate on investments, policy advocacy, knowledge generation, and technological innovation. As a result, it drives the adoption of zero-emissions fuels. It includes green hydrogen and ammonia as well as carbon capture systems.
The partnership aims to influence international regulatory bodies. They then enact standards and incentives needed to transform marine transportation energy sources. It also transforms value chains linked to oil and gas production.
Integrated Contractual, Regulatory and Collaborative Action
Government policy interventions and collaborative initiatives must work in tandem. It helps to enable deep decarbonization in oil and gas sector. Regulations establish boundary conditions, incentives, and requirements. It prompts companies to embed substantive emissions reduction provisions in procurement contracts. Contracts then provide concrete implementation measures and propagation mechanisms. It drives change across linked enterprises in fulfillment of regulatory aims.
Furthermore, collaborative partnerships between firms, government entities, and civil society organizations inform the design of new policies, regulations, and contractual best practices. They also help foster industry buy-in and readiness for regulations. They do it by demonstrating solutions, revealing opportunities, and standardizing emerging good practices.
Wrapping up
Working together across contracts and regulations is key to transforming systems. Focusing on just one area won’t decarbonize fast or widely enough. Holistic and coordinated efforts are needed for decarbonization in oil and gas sector. Moreover, group action must happen in both public and private spheres. Buying power, policymaking, and collective efforts must come together. That is how net zero emissions can be achieved economy-wide, especially in the massive oil and gas sector. Furthermore, integrated approaches utilizing procurement, regulations, and teamwork are crucial. This will drive the systemic changes needed for rapid decarbonization in oil and gas sector.
The Global Summit on Net Zero Energy Production is an unmissable event. It will help drive impactful change in decarbonizing oil and gas. This January 2024 summit in Amsterdam convenes industry leaders ready to pave the low-carbon future. It is your chance to investigate cutting-edge technologies, best practices, legal frameworks, and business models that reduce environmental impact and support climate goals. Oil and gas hold great ability to transform the energy landscape. This is by embracing emission-cutting solutions without compromising profits.
So, by diversifying energy sources, making low-carbon investments, and advocating smart policies, the industry can dramatically curb its carbon footprint. Join us at this catalyst event and be part of inspiring oil and gas decision-makers to balance environmental responsibility and financial performance through the adoption of decarbonization strategies.
