Scope 3 hyperopia

The energy industry can barely tame its own emissions, let alone yours and mine

May 11, 2023

Hyperopia [noun] :: Far-sightedness, also known as long-sightedness, hypermetropia, or hyperopia, is a condition of the eye where distant objects are seen clearly but near objects appear blurred.

Big Oil companies are coming under increased scrutiny for their lack of ambition towards reducing so-called ‘Scope 3’ emissions (those of their customers). At the same time, the oil industry’s own enormous emissions footprint is not getting the attention it deserves. Something is amiss.

If web search data is a reliable indicator, interest in Scope 3 has never been higher. The phrase ‘Scope 3 emissions’ now gets more online attention than ‘Scope 1 emissions’ (those produced during operations) or ‘Scope 2 emissions’ (derived from the energy a company purchases).

The interest is understandable. Scope 3 emissions represent by far the biggest ‘target’, accounting for 80-95% of total carbon emissions from oil and gas companies. Eradicating them means waging a war against incumbent business models, because it requires proven hydrocarbons reserves to be left in the ground.

Net zero can’t be achieved without eliminating or drastically reducing greenhouse gases emitted by end-consumers. These emissions are the hardest of all for the oil industry to mitigate because they lie outside of the direct control of oil field operators. Offsets and carbon removals can’t do the heavy lifting so will play only a marginal role (regardless of what big emitters might want us all to believe).

While some aspire to become integrated energy companies, oil companies today exist primarily to do one thing: make money by finding, extracting and marketing oil to consumers. These businesses were built on Scope 3 emissions, so there is no real motivation for them to throw money and resources at fixing a problem that keeps them in business.

Shell alluded to this at its 2023 annual general meeting. “The Board has considered adopting a Scope 3 absolute emissions target and found it would be against shareholders’ financial interests,” the oil major said in its AGM report, “and would not help to mitigate global warming”. That last point is debatable but the former is a cast-iron certainty. Without a credible plan to pivot into a profitable green energy company, passing this resolution would be akin to Shell writing its own death warrant.

This explains corporate resistance to setting concrete targets for Scope 3 reductions. To overcome this, activist shareholders are pushing the Scope 3 net zero agenda hard.

Emissions-related shareholder resolutions filed at this year’s Big Oil AGMs focus on trying to force boards to adopt net zero or ‘Paris-aligned’ targets for Scope 3 greenhouse gases. There was scant mention of companies’ own operational emissions. The phrase ‘Scope 3’ appears roughly four times as often as ‘Scope 1’ or ‘Scope 2’ in this year’s proxy statements (see XOM, SHEL, CVX, BP).

Kamikaze lobbying

If focussing on the end-use emissions of customers comes at the expense of everything else, then this is problematic. Sure, Scope 3 is by far the biggest segment, but Scope 1 and 2 are not exactly irrelevant. Oil and gas operations produced 5.1 gigatonnes of carbon dioxide-equivalent in 2022 (IEA). If ‘drilling for oil’ was a country, it would be the second largest emitter in the world after China (12.1 GtCO2-e).

Gas flaring is still routine and methane leaks are still going undetected or unfixed. This is an area where upstream operators can and should be making meaningful progress but aren’t. Worse still, there is now a fresh effort to roll back existing (inadequate) ambitions for cleaning up oil and gas production – and this is in danger of going unchecked thanks to Scope 3 hyperopia.

In the run-up to the next UN climate conference in Dubai, the United Arab Emirates – which holds the COP28 presidency – is trying to water down targets to cut oil and gas production emissions. The vehicle for this campaign is a new oil industry climate initiative provisionally known as the Global Decarbonisation Alliance (GDA). The official launch was due on 10 May (it is unclear if it has been delayed).

According to a draft framework document seen by Energy Flux, the GDA’s headline goal is “to reach net-zero emissions (Scope 1 and 2) under our control, and work with partners to achieve the same in non-operated assets, by or before 2050”. It says its members will aspire to achieve “zero routine flaring and near-zero methane emissions by 2030 on our upstream operations. We aim for zero routine flaring and near-zero methane emissions by 2030 on our upstream operations (e.g., below 0.20% methane intensity).”

These pledges might at first glance sound noble, but on closer inspection they are woefully lacking. With the right leadership and regulation, the oil industry could hit most of these targets within a couple of years, not decades from now. The GDA is even less ambitious than existing oil industry organisations such as the Oil and Gas Climate Initiative (OGCI), which set a target of achieving 0.20% methane by 2025 – also inadequate, but five years earlier than the GDA.

Nearly all major oil and gas companies already have more ambitious targets than ‘net zero Scope 1 and 2 by 2050’. Promising another 27 years of business-as-usual when radical change is both desperately needed and good for business is, to say the least, ill-considered. In the words of flare capture specialist Capterio:

“There remains… little evidence to suggest that the world is remotely on track to reduce flaring to deliver so-called ‘zero routine flaring’. Existing commitments are not being delivered sufficiently quickly, which makes meeting ‘net zero’ ambitions (even just for scope 1) very challenging for many. This situation is increasingly becoming untenable and will soon undermine the industry’s license to operate.” – Capterio (emphasis added)

If the GDA prevails as the industry standard, the reputational and environmental harm would almost certainly outweigh the benefits (presumably, these amount to not having to invest so heavily in flare mitigation solutions or methane detection equipment — meagre gains).

Pushing for this outcome is perverse because taking immediate decisive action could yield big results quickly and add some much-needed credence to Big Oil’s stated claim to be taking climate issues seriously. Also, oil companies are flush with cash after posting record-breaking profits on the back of the energy crisis.

Immune to incentives

The International Energy Agency said in a recent report that halving the emissions intensity of global oil and gas production by 2030 would require upfront investments of $600 billion – a “fraction” of the record windfall income that oil and gas producers accrued in 2022 thanks to sky-high prices. Recovering these investments would add a mere $2 on average to each barrel of oil.

Two thirds of gas flaring could be avoided “at no net cost because the value of the captured methane … cover[s] the cost of the abatement measure,” it adds. This holds true even in the IEA’s Net Zero Emissions (NZE) scenario, in which natural gas prices fall due to cratering demand. In scenarios with higher gas prices, the share of cost-neutral flare mitigation solutions “would be even higher”.

The same is true for methane mitigation, which “is amongst the lowest cost option of any technology that can bring about a step-change in global GHG emissions,” according to the IEA report. This MAC curve speaks a thousand words:

Better rules, better governance

The fact that so many cost-negative solutions have not been implemented is proof that market forces alone will not fix this problem. This is a challenge of regulation and corporate governance.

On governance, the situation is not straightforward. Boards could oblige C-suite management to prioritise Scope 1 and 2, but are not motivated to do so. Ultimately they answer to shareholders, whose activism to date has focussed more on distant Scope 3 targets. They should also be clamouring for absolute cuts in Scope 1 and 2 emissions, with executive pay pegged to tough near-term goals.

There are also nuances between differing ownership and corporate structures. Publicly traded Western international oil companies (IOCs) are typically among the cleanest operators. IOC bosses must answer to asset managers and pension funds beholden to environmental, social and governance (ESG) criteria. While climate protestors would seek to paint them as villains, they are not generally the worst culprits.

With some exceptions, the dirtiest operators tend to be state-owned national oil companies (NOCs) and smaller independent producers. These companies do not attract the same level of ESG scrutiny and are not beholden to the same rules on reporting and transparency as the listed majors. And remember that the incentives are slightly different for a CEO who answers to politicians or private investors.

Since corporate governance structures can’t easily be changed, it falls upon governments and regulators to break the deadlock on Scope 1 and 2 emissions. There are signs of progress in the US in the form of a new methane tax from 2024. The EU is extending methane emission rules to gas imports (although there are concerns around loopholes). Much more is needed, but this is a move in the right direction.

Proximity bias

There was a diplomatically-phrased critique of Big Oil bosses in the IEA’s flaring report. It called on “forward-leaning companies … to recognise the need to move faster than the global average reduction in emissions and build a broader coalition of companies willing to play their part”. Translation: stop being so damned complacent, set an example and fix this mess.

If the GDA is an indicator, complacency is the order of the day. But keep an eye on who signs up to the GDA charter. Some oil and gas majors steered clear because they know it is a step backwards, according to sources close to GDA talks. They are said to be concerned that participation would only cast light on the inadequacy of their existing climate commitments. ESG-sensitive European IOCs would probably fall into this bucket.

Initial media coverage (FT) of the GDA has focused, predictably, on the alliance’s lack of a firm target date for Scope 3 emissions. So far there has not been any pointed coverage of the backsliding on Scope 1 and 2 emissions that it envisages. This slant mirrors the lopsidedness of activist shareholders: overlook the industry’s own failings, while selectively focussing on the toughest segment to abate.

This is a weirdly far-sighted approach. Tackling Scope 3 is an urgent and multifaceted societal challenge that requires reimagining almost every aspect of modern life. The oil industry probably can help with the right will, but it can barely tame its own emissions — let alone yours and mine. Asking it to do the hard bit first when easy money-saving wins are being squandered is a recipe for more failure and recrimination. This fuels the energy culture wars and promotes unhelpful cliches (e.g. ‘woke’ activists make unrealistic demands, and ‘evil’ oil companies cynically delay climate action etc.).

To move beyond these tropes, there needs to be movement from both sides towards a more cooperative place where incentives align. Instead of only filing AGM resolutions that gain only minority support, a more pragmatic line of activism would be to also demand swift ‘no-regrets’ cuts in Scope 1 and 2 emissions that boards might be able to get behind. And instead of all the hubris, oil companies of all flavours must throw more than spare change at the long overdue task of cleaning up their operations. Another oil industry climate talking shop can only achieve the opposite.

Seb Kennedy | Energy Flux | 11 May 2023