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Oil, gas companies under pressure to manage Scope 3 emissions to reach net-zero goals: analysts

22 June 2021 Amena Saiyid

Companies producing, supplying, and consuming fossil fuels anywhere in the world—but especially in Asia—will find it challenging to reach net-zero carbon goals by midcentury unless they can find a way to manage their Scope 3 GHG emissions, according to IHS Markit analysts.

Scope 3 emissions are GHG emissions generated indirectly across the entire value chain of creating an end product, beginning with sourcing the raw materials, and continuing through manufacturing, transporting, and using the product.

For the energy sector, Scope 3 emissions are a "big deal" because they include emissions released by the use of sold products such as combustion of aviation fuel in aircrafts or gasoline in car engines, Nick Lowes, vice president of IHS Markit's Energy Transition & Cleantech Consulting arm, said during the 17 June "Climate Readiness and the Journey to Net Zero by 2050" webinar.

Because the pathway to reaching net-zero carbon goals in alignment with the 2015 Paris Agreement remains unclear, the task of reporting and limiting Scope 3 emissions becomes "very, very difficult," but not impossible, Lowes said.

The reason, he said, is the trajectory a petroleum product can take varies, and trying to track the GHGs emitted can become incredibly complex, especially as there is no standard method for defining these emissions from a standard barrel of oil.

Managing Scope 3

There is growing recognition though that a low-carbon economy is not possible without managing Scope 3 emissions from the energy sector, according to IHS Markit Global Head of Strategic Governance Advisory and ESG Integration Christine Chow, who organized the webinar.

Global oil and natural gas companies are now under pressure from recent court rulings and shareholders to report their Scope 3 emissions, which until recently were under wraps.

After the seminar, Chow recalled that a climate change resolution backed by the Church of England Pensions Board and Church Commissioners was rejected by a 95% majority at Shell's 2018 annual general meeting.

"I remembered it being the turning point. When investors began to seek not only disclosure, but active management and reduction of emissions, even for Scope 3. At the time, it was deemed a demanding ask, it still is, but it is more widely recognized as needed. Fast forward to 2021, the Dutch court ruling and shareholders' support for Shell to report Scope 3 emissions shows that norms are shifting fast," Chow said.

The experts participating in the webinar agreed that collaboration across the key GHG emitting sectors—energy, transportation, and agriculture—is one way of tackling GHG emissions across the entire value chain.

During the webinar, Lowes cited the example of burning biofuels instead of diesel or gasoline as one way for tackling Scope 3 emissions because it would involve collaboration and partnerships among the agriculture, transport, and energy sectors. However, some critics have argued that using nature-based solutions like investing in carbon offset projects may be a better way of collaboration and GHG reduction.

IHS Markit data show Scope 3 emissions in 2019 accounted for an average of 75% of total GHG emissions from the electric utility sector, and about 88% from the oil and gas sector. These figures do not do not account for the fact though that some double counting of GHGs may be involved. That is because GHGs released by combustion of aviation fuel, a fossil fuel product, may be deemed Scope 1 for the airlines, but also may be considered Scope 3 for the oil producer or refiner that manufactured the end product.

Not fully aligned with Paris Treaty

It therefore came as no surprise when Lowes displayed a graphic that showed that not a single oil and gas company is fully aligned with the Paris Agreement goal to reduce emissions enough to limit the increase in temperatures compared with pre-industrial levels to 2 degrees Celsius, let alone to 1.5 degrees Celsius. The power sector is faring better as wind and solar energies have allowed it to meet its net-zero goals, he added.

TotalEnergies, a global oil and gas producer, is among seven companies that have agreed to report Scope 3 emissions, but only for its products in Europe where clear protocols and targets are in place for tracking and monitoring emissions and the product itself.

Although France-based TotalEnergies has oil and gas investments in Asia as well as North America, the company has chosen Europe because Lowes said it has provided clear decarbonization policies under the EU's Green Deal, which aims for a 55% reduction in GHG emissions by 2030 compared with 1990 levels. The EU deal includes a 90% reduction in transport sector emissions by 2050, with European authorities working to release a 2030 climate and energy framework package in July.

Apart from rebranding itself as a company focused on clean renewable energy, the French company also is being eyed as a business model for a transition to a low-carbon economy because it is not only tackling Scope 3 emissions, but it also is developing sensors to monitor and track GHGs released during transportation of its petroleum-based products.

The task of reporting Scope 3 emissions becomes even more daunting in Asian countries that are net consumers of energy to fuel economic growth, said Gauri Jauhar, executive director of IHS Markit Energy Transition & Clean Tech Consulting, who also participated in the webinar.

According to the US Energy Information Administration, India was the third-largest consumer of crude oil and petroleum products after the US and China in 2019. The gap between Indian oil demand and supply is widening. Demand for crude oil in 2019 reached 4.9 million b/d, compared with less than 1 million b/d of total domestic production, the EIA said.

Meanwhile, China remains the world's top crude oil importer, surpassing the US in 2017, with annual crude oil imports in 2019 increasing to an average of 10.1 million b/d, an increase of 900,000 b/d from the 2018 average.

The EIA said China's net imports increased in part because its production has remained essentially flat since 2012, ranging between 4.8 million b/d and 5.2 million b/d. The agency also attributed the rise to an increase in refining storage capacity as well as to a jump in China's consumption of petroleum and other liquids, which grew 0.5 million b/d in 2019 to 14.5 million b/d.

In these countries, "there is a level of carbon lock-in" that Jauhar said can only be overcome through major changes in the transportation and industrial systems, which is likely to prove to be more difficult than the power sector.

Until that transformation takes place through clear policy drivers, the price of oil remaining above $70/b matters more than the price of carbon exceeding $60/mt, Jauhar said.

This is despite the fact that Asian countries are responsible for bringing down the cost of installing renewables to affordable levels globally to the point where China and India are considered sinks for capital investment in renewables, Jauhar said.

Agricultural GHGs

Beyond the transportation and energy sectors is the agriculture sector, which was responsible for nearly 12% of global GHG emissions in 2018 after excluding land use and forestry data, according to the World Resources Institute's ClimateWatch online platform.

If no steps are taken, GHG emissions from the agriculture sector are mostly likely to increase in the next two decades because population growth will demand more food that in turn will compel farmers to increase cultivation of lands and livestock numbers, according to Edward Oliver, executive director for IHS Markit's agribusiness division.

Curbing emissions from this sector may prove challenging because the "substitutability" of technologies is "not quite there," Oliver, said. In the energy sector, renewable fuels can replace fossil fuels, or in the automotive sector, electric vehicles can replace internal combustion engines, he said, but "the same is not true for agriculture at least without impacting production volumes and/or food choices for the consumer significantly."

However, investing in carbon offsets and sequestering carbon dioxide in soils are two ways farmers can reduce their carbon footprint, according to Oliver. Carbon sequestration in soils involves rotating crops in fields, reduced or targeted tillage to reduce fossil fuel use while using farm equipment, and planting cover crops such as clover and small grains.

Investors who have tapped into clean energy technologies and solutions also are eyeing nature-based solutions to protect, sustainably manage, and restore ecosystems to halt climate change and resulting biodiversity loss that global warming is causing, according to Chow.

Nature-based solutions involve planting the right kind of vegetation, restoring wetlands, and building resilience against climate effects like flooding, and using the soil as a sink for storing carbon dioxide.

With the Nature Action 100 collaborative investor initiative kicking off this month, Chow said: "I am expecting investors' engagement on environmental issues to take a broader perspective, connecting climate to land use, species extinction, and even recommend biodiversity due diligence before investing in a project."

Climate and Sustainability News has been renamed Net-Zero Business Daily™ in order to better reflect our focus on the business and financial impacts of the global transition to a lower-carbon and, eventually, net-zero carbon global economy. Each day, IHS Markit will bring you accurate and detailed information on recent developments, as well as far-sighted analysis on the challenges that lie ahead.

Posted 22 June 2021 by Amena Saiyid, Senior Climate & Energy Research Analyst, IHS Markit

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