Moves to embrace carbon offsetting

The oil and gas sector is under growing pressure to reduce carbon intensity. Dan Carter, Global Technical Leader, Oil and Gas Consulting, Wood, examines recent carbon offsetting initiatives.

While 2020 will undoubtedly be remembered as the year when COVID-19 turned our world upside down and forced us to adopt drastic changes in how we live and work, it was also a year that saw some encouraging progress made around the climate agenda.

The lockdown measures introduced resulted in a 7% year-on-year drop in global carbon emissions, while some of the world’s largest economies, including China, Japan and South Korea, joined the UK and the EU in formally committing to a net zero emissions goal. With the new US President Joe Biden signalling an intent to introduce a similar goal, we are approaching a point where the countries responsible for two-thirds of the world’s total CO2 emissions are now working towards a net zero target.

This will have big implications for the oil and gas industry, which is already under growing pressure to reduce the carbon intensity of upstream and downstream activities and the resultant impact of the products they produce. Many operators are stepping forward with their own decarbonisation commitments, particularly around Scope 1 and 2 emissions as they seek to preserve their licence to operate and secure a commercial edge ahead of the expected roll-out of stronger carbon tariffs over the coming years.

Solutions for a net zero world

While decarbonisation is clearly a business imperative for the industry, developing a credible roadmap towards net zero is a hugely complex challenge that requires multiple levers to be pulled as part of a blended solution.

Figure 1: Wood’s decarbonisation SCORE methodology to build a path to net zero

Source: Wood

At Wood, we are helping clients across multiple end-markets to tackle this very problem using our proprietary decarbonisation SCORE methodology (see Figure 1). In this instance, SCORE is an acronym that refers to the range of options we find are typically available when it comes to designing a pathway to net zero.

• Substitute: Switch fuel or feedstocks to renewable or less carbon intensive sources, eg switching electricity provision to a renewable source or considering the use of renewable and bio feedstocks.

• Capture: Employ carbon capture or emissions control technologies to substantially reduce or eliminate harmful emissions.

• Offset: Consider assets or product portfolios on a country or company-wide scale and explore opportunities to compensate in other areas for the carbon emissions that cannot be easily removed.

• Reduce: Adopt a holistic approach to asset optimisation, including energy efficiency, digitalisation and smart maintenance strategies to avoid potential emissions at source.

• Evaluate: Apply a structured and on-going evaluation process to drive continuous improvement towards net zero.

Offsetting opportunity

Offsetting is one part of the SCORE approach and is an area that many corporates, including oil and gas operators, are exploring as part of their overall decarbonisation strategy. While the market for carbon offsets has existed for over a decade, it is still an evolving discipline.

The EU Emissions Trading Scheme (ETS), for example, includes mechanisms to generate carbon credits via investment in developing economies. However, the range of projects excludes agriculture and forestry and the process of verifying emission reduction at a project level has proved challenging. Similarly, the methodologies and standards for defining carbon offsets, and the rigour with which these standards are enforced, are not yet set in stone, although they continue to improve each year.

Last summer, the Taskforce on Scaling Voluntary Carbon Markets (TSVCM) was set up and promptly launched a consultation process to assess how the governance of the market could be improved and then expanded to meet an anticipated surge in demand from sectors as diverse as aviation, energy and construction. Recent analysis by Trove Research forecast that the voluntary carbon market could increase from $0.4bn/y in 2020 to $10–25bn/y in 2030. While a study from Vivid Economics on behalf of the UN PRI (Principles for Responsible Investment) found that revenue from negative emissions or carbon offsets could reach $1.4tn/y by 2050.

Some of the key elements being addressed through the TSVCM consultation include defining the principles and processes that will help improve and standardise the environmental integrity of carbon offsets. Also included is the standardisation of contracts and information systems that drive greater transparency, and a solution around how to deal with legacy credits in the market that no longer meet today’s environmental standards. Removing (‘retiring’) carbon credits from offset markets, avoiding the potential for multiple organisations to purchase the same credits, is a crucial element of the process. The UK Woodland Carbon Code, for example, offers the purchase of carbon units via the UK Land Carbon Registry.

Typical offsetting approaches

While there is still on-going work to build maturity in the system, there is already an active market in place. In simple terms, carbon offset mechanisms typically fall into two categories – solutions that remove CO2 from the atmosphere or solutions that reduce CO2 emissions.

One of the most common options that energy majors are adopting is reforestation, with companies including Shell, BP, Total and many others all providing capital and building partnerships with NGOs to launch tree-planting programmes to help offset their Scope 3 emissions.

As an example, over the next three years, Shell will invest $300mn to plant over 5mn trees in the Netherlands and Spain, and support forest regeneration in Australia and future conservation activities in Malaysia. Similarly, Saudi Aramco has pledged to plant 1mn trees in the Kingdom by 2025; Equinor is purchasing 1mn tonnes of CO2 of tropical forest offsets from Emergent; and Eni plans to plant 20mn acres of forest in Africa to serve as a carbon sink.

There are other good examples that showcase the breadth of future opportunities that exist within this market. Shell is investing in electric vehicle battery charging stations and a fuel programme that will enable drivers to offset the carbon pollution from their tailpipes; BP has invested $5mn in carbon management company Finite Carbon to generate its own voluntary carbon market for businesses; and several companies are investing in carbon capture and storage (CCS) technologies.

Lessons from other industries

While the carbon offsetting market is still relatively nascent across the board, there are some best-in-class examples in other industries that showcase how offset solutions can be applied to not only reduce carbon emissions but also deliver wider environmental and community-related benefits. In many cases, organisations are looking for local initiatives that enable both demonstrable carbon reduction, while offering the chance for staff to volunteer their time in support work.

In Scotland, brewing company BrewDog is a good example of a brand that has taken a structured and wide-ranging approach to decarbonising its portfolio. As well as switching to more sustainable energy sources to power its production and retail activities (breweries and bars), it also took the bold step of purchasing over 2,000 acres of land in the Scottish Highlands. Some 1,400 acres will be used to create the BrewDog Forest, while the remaining 650 acres will be allocated for peatland restoration. As well as sequestering carbon from the atmosphere, the land will also provide a natural habitat for wildlife and a nature reserve that future generations will be able to access and enjoy. The BrewDog Forest initiative is a key part of the company’s longer-term goal to remove twice as much carbon from the atmosphere as it puts in.

Another good example of a local initiative is a case study from the residential construction market where a housebuilder set a goal of creating a carbon-neutral development. Faced with the challenge of being unable to address all of the embodied carbon that is inherent within the construction of new homes, the company took the decision to offset this carbon by retrofitting some of the existing housing stock it owned.

In the water sector, the use of tree planting to assist water quality and catchment management issues offers wider benefits due to natural carbon sequestration. Infrastructure projects, such as in the power sector, are increasingly seeking biodiversity gains when managing the impact of construction work on local habitats. When carried out effectively, these works can also provide carbon offset benefits.

Why the cynicism?

Although the oil and gas industry’s use of carbon offset solutions is ultimately helping to reduce CO2 levels, which everyone agrees is urgently needed, it has been met with a degree of cynicism in some quarters. Sceptics voice concerns that offsets are a means by which oil and gas companies can carry on ‘business as usual’ activities rather than accelerating the required shift to cleaner energy solutions. There is also a perceived risk that it could end up offshoring carbon emissions to geographies with less stringent emissions reporting requirements.

In our experience, a more nuanced view is required – offsets on their own are not a sustainable solution that will help the world to achieve the goals set out within the Paris Agreement. However, where they are used as the last resort within a hierarchy of measures, then they have an important and valid role to play.

Any organisation will have a finite amount of capital in which to support decarbonisation ambitions. As national carbon budget restrictions tighten, and costs of carbon increase, so the need for cost-efficient decarbonisation underpins our ability to deliver affordable power, heat and transport. In this context, offsets offer important flexibility that enables limited market investment to be targeted in areas where alternative solutions are technically and commercially viable and which ultimately help to deliver the greatest levels of CO2 reduction.

As we set out on the long and challenging road to net zero, we need every tool at our disposal. We should welcome the maturing of the carbon offset market and view it as an important element of the journey.