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Moving targets: a complex, evolving regulatory and
policy situation
Over the past two years there has been renewed international
momentum and drive for an intensified policy response to climate
change. IHS Markit's research shows the number of countries with
net-zero goals increased from 10 in 2018 to over 100 in 2021,
representing approximately 70% of global greenhouse gas (GHG)
emissions.
Since the petroleum sector directly or indirectly accounts for
nearly 40% of global GHG emission, governments are taking steps to
develop practical policies and legislation to address GHG emissions
including these directly affecting the energy sector and the
upstream petroleum industry specifically.
Alongside intensifying government policy responses, we are
seeing a wave of climate-change litigation directed at governments
and petroleum companies. This creates further uncertainties for the
upstream petroleum industry, with more cases being heard in an
expanded set of jurisdictions and new legal arguments being
advanced in suits targeting both governments and companies.
Whereas US cases are concentrated at the state level focusing on
government action to cut emissions, European litigation
increasingly scrutinizes and challenges government energy policy,
licensing processes, and project approvals in the light of
zero-carbon goals, with corporate strategy as well, now a point of
legal focus. Furthermore, recent cases involving Super-Majors
highlight the potential impact of climate litigation on upstream
companies and the ability of the courts to extend their reach into
core industry practice. The breadth and complexity of
climate-related cases is evolving rapidly as plaintiffs leverage
Paris Agreement commitments and climate science to develop legal
challenges that question the alignment of upstream policy with
carbon targets and, in some cases, push for more ambitious
emissions cuts.
Turning up the regulatory heat on upstream petroleum
companies
Against this backdrop, upstream petroleum companies find
themselves under increased pressure to act from all stakeholders:
governments, financial institutions, civil society, and
shareholders. As such GHG emissions have become a leading
sustainability indicator with cascading policy and regulatory
frameworks and overlapping influences requiring company compliance.
Companies that operate across numerous jurisdictions need to
understand and navigate multiple regulatory policy environments. It
is anticipated that in mid-term the regulatory focus will shift
from the broader national policy level to specific sectoral
policies with regulatory regimes targeting framework implementation
by upstream petroleum companies.
Figure 1: GHG Emissions Accepted Framework
To date, addressing GHG emissions has presented many economic
challenges both in developing and implementing such measures, with
a heavy reliance on government subsidies, investment, and
support.
Under control? Relative certainty vs relative
uncertainty
The accepted framework for categorizing GHG emissions from
industrial operations classifies these into Scopes 1-3. Scope 1 and
2 emissions include those which are under direct control of
petroleum companies in their operations while Scope 3 includes
indirect downstream emissions that occur in relation to the
consumption of the petroleum companies' production. Scope 1 & 2
account for a relatively small percentage of the overall sector
emissions compared with Scope 3 emissions which account for the
majority.
While under constant review, measures and associated policies,
laws and regulations aimed to address Scope 1 emissions (deriving
directly from company operations) are typically relatively well
known and legislated for in some jurisdictions, however their
implementation is not adopted universally across the globe. These
include the following:
Strict environmental qualifications to hold relevant upstream
licenses
Reduction or elimination of routine flaring and venting
Leak monitoring, detection and repair schemes aimed
predominantly at reducing methane emissions
Use of Carbon Capture Utilisation and Storage technologies
(enhanced recovery techniques and reinjection of associated
gas)
Improvement in energy efficiency of equipment and
installations
Electrification (instead of diesel or other fuels use) for
powering equipment and machinery
Installation of vapour recovery units
GHG Emission Reporting
Measures to address Scope 2 emissions, which derive from energy
purchased by a Company, include the following:
Permitting process
Energy conservation
Efficiency upgrades
Switches to low-carbon electricity to power operations where
feasible
GHG Emission Reporting
Some policy tools and mechanisms that are used to account for,
reduce and eliminate predominantly Scope 1 and 2 GHG emissions
deriving from upstream petroleum industry are summarized in the
figure below:
Figure 2: GHG Emissions Country Specific
Initiatives
IHS Markit analysis suggests that companies can reduce Scope 1
and 2 emissions by up to 30-60% over the short to medium term, with
moderate capital investments. These opportunities lie primarily in
the areas of energy and operational efficiency, methane containment
and incorporation of low-carbon power sources as described
above.
While the policies, laws and regulations to significantly reduce
or eliminate Scope 1 and 2 emissions continue to evolve in some
jurisdictions, dealing with Scope 3 emissions presents a much more
uncertain picture.
By and large, Scope 3 emission reduction measures are yet to be
defined, agreed, and sufficiently regulated by governments and/or
be voluntarily adopted by companies.
Numerous policy consultations, regulatory developments, and
potential pilot schemes are under consideration in an increasing
number of jurisdictions. Some potential policy measures may
include:
design and implementation of sectoral decarbonisation
policies
changes to upstream petroleum licensing regimes
offering offsets and investing in low-carbon technologies
transparent and consistent reporting of Scope 3 emissions
enabling customers to lower their emissions through increasing
use of renewable products
It is noted that companies are also taking proactive steps to
address these emissions as well, for example, by way of announcing
targets to reduce either their upstream emissions or overall
operational emissions.
What can companies do?
The global challenge of climate change continues to precipitate
a complex array of responses, largely at the national level, with
each country adopting its own strategy and timetable to tackle the
issue. This trend is expected to accelerate in the coming years.
The evolving regulatory and policy framework is becoming ever more
complex with an increasing number of stakeholders involved across
multiple jurisdictions.
This rapidly changing framework creates a unique set of
opportunities and risks for companies and necessitates a strategic
response to the inherent challenges.
It is anticipated that the pace and breadth of changes will only
intensify as sub-nationals, industry sectors and regulators are
increasingly involved, policies being more volatile and regulatory
burden being increased. For companies operating across many
countries this creates a monitoring challenge to remain current on
the latest developments and to plan compliance programs
accordingly.
Companies whose operations are exposed to regulatory risk may
consider the potential competitive advantages in understanding and
acting on those risks in a timely fashion. Equally, opportunities
may arise to benefit from evolving government policies through
strategic investment decisions and engagement with government
agencies.
Companies that establish a methodical, structured approach to
monitoring, understanding, and engaging in the evolving regulatory
and policy environments relevant to their operations and strategic
objectives may find themselves in the best position to navigate
these changing landscapes.
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Jul 01
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