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Carbon audits to ease stranded asset fears

The calculation of carbon intensity can be the starting point for making even seemingly uneconomic fields viable

The oil and gas industry would benefit from having a standardised method of calculating carbon intensity to support its investment decisions and smooth relations with financiers, investors and regulators, according to an industry authority on carbon management.

The traditional model of reserve-based lending, where a company’s value and ability to borrow money is predicated on the estimated future value of its reserves, will increasingly be impacted by views of assets’ carbon footprint in a world with a finite carbon budget, according to Nigel Jenvey, global head of carbon management at consultancy Gaffney, Cline & Associates (GCA). 

In order to ensure the quality and independence of reserve estimates, third-party assessments have long had a role. “The same is now going on with emissions, as they become important indicator in the assessment of a company’s value," he says.

Some hydrocarbon sources, such as Canadian oil sands, have attracted a negative public perception due to their perceived carbon intensity

Once carbon risk—in particular, the risk of future legislation and regulation making a find uneconomic—certain oil and gas discoveries can appear to become stranded assets. 

"But it is not as simple as that,” says Jenvey. “There are a lot of solutions that can be applied to counter original perceptions. That is really what we are trying to do—to derisk continued oil and gas investment during the energy transition."

Calculating carbon

Many oil and gas firms, of course, already conduct internal carbon intensity audits. The problem, according to Jenvey, is that that these cannot be easily compared as they are based on different definitions—such as what is considered scope 1, 2 or 3—and units of measurement.

While such audits may be interesting internally, their uniqueness to individual firms make them less useful for analysts, investors, regulators or any other bodies that an oil and gas company may wish to convince of its environmental credentials.

GCA is working on methodologies for the industry with trade associations and professional societies. The work is seeking to emulate the Society of Petroleum Engineers’ Production Reserves Management System (PRMS).  "We are working on a similar methodology around carbon management, from which the whole industry could benefit," says Jenvey.

“There are 2,000 different regulations in the world that impact oil and gas production associated with greenhouse gas emissions" Nigel Jenvey

Quantification of the carbon intensity of the asset base, now and into the future, is the first step. Once regulations have been factored in, a plan for implementing emission-reduction measures can be constructed in a cost-efficient way. Potential measures range from general efficiency savings and use of renewables for operations to carbon capture, utilisation and storage (CCUS) or nature-based solutions.

“There are 2,000 different regulations in the world that impact oil and gas production associated with greenhouse gas emissions," says Jenvey. “We evaluate policies and regulations—whether they are voluntary or compliance requirements—not just price of carbon.”

International regulation is a complicated situation—"people describe it as death by a thousand cuts”—as many requirements to reduce emissions flow from regulatory mandates and requirements. GCA has long provided third-party audits of reserves, among many areas of consultancy, but is increasingly focusing on carbon assessments across the value chain.

“There is not actually a financial impact until you do the assessment,” says Jenvey. “We evaluate common solutions—nature-based solutions, methane management, energy efficiency options—and then we would provide accreditation, verification, and assurance around the work.”

Some hydrocarbon sources, such as Canadian oil sands, have attracted a negative public perception due to their perceived carbon intensity—but Jenvey suggests an audit may reveal that well-managed oil sands resources have a lower footprint than badly-managed medium-heavy crude ones elsewhere.

"You cannot bucket these decisions into [rules such as] 'divest from Canadian oil sands',” he says. “That would be very simplistic. Some oil sands operators are making large emissions reductions in their operations."

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