US oil, gas operators diverge on climate plans
About half of large US oil and natural gas producers currently have a formal program to reduce their carbon dioxide emissions, according to questions posed by the Dallas Federal Reserve as an addendum to its Energy Survey for the fourth quarter of 2020.
The Dallas Fed conducts quarterly surveys of the energy industry, and its latest survey reported a significant turnaround in activity in the third quarter of last year. The Dallas Fed's energy business activity index jumped into positive territory for the first time since the first quarter of 2019, rising to +18.5 from -6.6 in the prior quarter.
As part of the most recent survey, conducted 9-17 December 2020, the regional reserve bank asked exploration and production (E&P) companies a series of questions about emissions reductions today and in the future. A significant gap emerged between the plans of small operators (production of 10,000 barrels per day of oil or less) and those of large operators. Large E&P firms account for more than 80% of US oil output.
For the large firms, 50% of executives said their company had a plan to reduce carbon dioxide emissions, 50% a plan to reduce methane emissions, and 63% a plan to reduce flaring. However, for smaller operators, only 10% of executives said their firm had a plan to reduce carbon dioxide emissions, 30% a plan to reduce methane emissions, and 27% a plan to reduce flaring.
A similar divergence was found when it came to the level of emissions reductions the companies anticipate on a per-barrel production basis through 2025, with 22% of small E&P companies saying they have no target, and only 1% having a target of at least 10%. In contrast, 21% of large producers have a target of at least a 10% cut. But on this question, the data are inconclusive, as nearly half the executives responded that they "don't know" if their company had a per-barrel emissions target.
Given that the Dallas Fed's survey represents both private and public companies, the mid-level percentage of companies with climate commitments isn't surprising, said Chris DeLucia, research and analysis associate director with the upstream companies and transactions team for IHS Markit. "Those numbers sound about right, particularly given that some of the companies surveyed are likely private, where a lack of investor pressure on [environmental, social governance (ESG)] issues may reduce the urgency to implement those types of targets. That said, I imagine those numbers have grown in recent years, and would expect that rising trend to continue in the near term, especially after some of the larger US companies introduced more explicit targets in 2020," he said.
Among the small E&P operators that responded to the survey, 54% said they don't have any climate mitigation plans, compared with 17% of large E&P firms.
However, Reid Brooks, director of Opportune LLP's Complex Financial Reporting practice, based in Tulsa, Oklahoma, said that the apparently low level of activity for smaller producers could be an understatement, as they are likely to be engaged in carbon control and methane reduction, but might not have spelled it out as a formal strategy.
"Opportune has over 100 private equity oil and gas clients, and almost every one of them is actively discussing and demonstrating positive emissions reduction trends. We frequently engage with our private clients who are looking for ways to differentiate themselves through environmental stewardship, employee safety, and operational efficiency," he said.
Meaningful progress on emissions-related issues will continue in 2021 and beyond, Brooks added. "Producers get it and are actively working to implement or continue programs to achieve reductions in their carbon footprint," he said. "The incoming Biden administration has been vocal about an energy transition to more sustainable and renewable forms of energy, and the results of the Georgia runoff [to give Democrats control of the US Senate] will only help the administration's ability to roll out new policies."
Public pressure is key, Brooks said, as it drives regulation, which in turn drives economics. Government must be careful about creating the right incentives. "I think economics often get overlooked in discussions about public policy," he said. "Creating additional regulations to limit flaring and venting will lead to increases in costs and hydrocarbon prices through lower production and increased breakeven points."
Texas, where the producers surveyed by the Dallas Fed operate, is an example, Brooks said. Two new bills have been filed for the 2021 Texas session (HB 896 and HB 897) intended to reduce or eliminate flaring and venting. "However, the net benefit [of new controls] to both producers and consumers is unknown. There is not enough discussion about identifying the optimal benefit/balance to both the environment and worldwide prosperity," he said.
Renewables in the future?
In the survey, the Dallas Fed also asked E&P service companies about their current and expected revenue streams from fossil fuels and renewable energy. In the relatively short term of the next five years, these will be rooted in fossil fuels, according to respondents.
Overall, 82% of firms said that today they obtain 0% of current revenue from serving wind, solar, geothermal, hydrogen, and the carbon capture industries; and 55% of firms said they expect the same condition in 2025. Only 13% of the firms said they expect to generate up to 20% of their revenue from alternative energy services in 2021, but that increases to 36% of respondents by 2025.
As for the outlook overall for E&P companies, the Dallas Fed's report found that "oil production stabilized after three quarters of decline… [and] the natural gas production index increased."
More specifically, planned capital spending moved into the positive side of the ledger, but spending by oilfield service firms remained negative, though less so than in the prior quarter's survey, which the Dallas Fed said, indicates that "the pace of decline slowed notably in the fourth quarter."
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