Many companies in the global oil and gas (O&G) industry are moving forward in their efforts to decarbonize. Yet the gap between the leaders and the laggards is growing: The evidence shows that huge differences remain in both the speed and the cost of decarbonization between companies and even among similar assets at the same company. Closing this gap will be critical: to reach net zero by 2050, the average energy intensity of the global supply of oil and gas in 2030 will need to be more than 50% lower than it was in 2022.
Companies that lead on decarbonization have proven that they can gain not just a smaller carbon footprint but also a material bottom-line impact, potentially higher revenues, and real competitive advantage. They do so by pulling every abatement lever applicable to their portfolio—including greater energy efficiency, reductions in escaping gases, and switching to low-carbon sources of power and heat—in the most effective way possible.
We analyze how these leaders have gotten past the decarbonization commitment stage and are now reaping the benefits of developing superior decarbonization capabilities. Finally, we lay out how other companies can follow in their lower-carbon footprints.
Good News and Bad News
We looked at 40 O&G companies, which together contribute more than 25% of the sector’s GHG emissions. The good news is that our analysis shows that 20% of them reduced either their emissions or their emissions intensity by more than 20% between 2017 and 2022.
To get there, these companies have pulled on one or more decarbonization levers, including:
- A shift to lower-emitting products (from oil to gas, for example)
- Operational and energy efficiencies
- Flaring reductions
- Methane emissions reductions
- Renewable energy
- Carbon capture, utilization, and storage (CCUS)
- Switching to bio-based fuels for power and heat generation
Many of the companies that are making progress on decarbonization are actively using revenue opportunities to help fund their further decarbonization efforts. Some are installing solar panels to replace the electricity generated by their gas power plants, for example, and at least one plans to sell the surplus energy to generate cash. And one petrochemicals company was able to capture enough CO2 through CCUS technology to use it to increase its methanol production.
The bad news, however, is that the gap between what the industry has accomplished so far and what needs to be done is still huge. Producers of around 40% of global oil and gas production have not yet announced any commitment to a net zero target, and at least half of that is concentrated at the top ten companies. In fact, at least 40% of companies in our analysis actually increased their emissions or emissions intensity between 2017 and 2022. Moreover, there is frequently a large variance in emissions intensity among a company’s assets in the same asset class. Despite similar levels of complexity and maturity, and even when they are within the same jurisdiction and under the same operator, some assets are as much as seven times more emissions intensive than others.
Yet those O&G companies that are developing superior decarbonization capabilities have already begun to capture competitive advantage through both bottom-line improvement and strategic gains.
Consider, for example, an offshore O&G platform in a mature basin. Many of the multiple gas turbines, compressors, pumps, and boilers it runs are redundant, serving primarily as back-up, and are operating with less-than-optimal energy efficiency. Leading companies are removing such unnecessary equipment and run the rest as efficiently as possible. Less equipment directly cuts operations and maintenance activities, and thus costs. By reducing its equipment needs, one North Sea platform operator lowered emissions by 30% and operating costs by 20%.
In addition, according to reports, 23% of global GHG emissions across industries are subject to an emissions trading system or carbon tax of some kind, and another 13% to various carbon reduction incentives such as carbon credits. In these jurisdictions, less emissions directly results in either savings or new sources of income. In the UK, for example, where carbon prices on the Emissions Trading System hit close to £100 per ton of CO2e in 2022, removing a single gas turbine could reduce emissions permanently by 20 kilotons of CO2e and could lead to up to £2 million in savings per year.
According to our analysis, a carbon price of $100 per ton would add between $2 and $4 per barrel to oil refineries’ operating costs. That’s a lot, given that refineries operate at low margins, so the additional cost could risk the refinery’s competitive advantage. A further risk is that a company’s performance on environmental, social, and governance (ESG) metrics, including its emissions performance, is beginning to influence its borrowing costs, with sustainability leaders securing a significantly lower cost of capital—an average of around 266 basis points less than O&G sector laggards, according to our analysis.
O&G companies that can decarbonize quickly will also gain a real strategic advantage. In jurisdictions with decarbonization targets, for example, the advantage will go to producers of oil and gas with the lowest carbon footprint. The result: a greater likelihood that they will retain their regulatory and social licenses to operate and earn the right to redevelop their current assets and to gain access to new acreage. And they can use their advantage as leverage to pursue M&A deals in these jurisdictions.
Moreover, the technologies required to decarbonize current assets can also give companies a head start in entering and scaling up new, higher-value energy and low-carbon businesses. For example, building an electrolyzer to decarbonize the supply of refinery hydrogen could open up future opportunities in the nascent low-carbon hydrogen market.
Four Imperatives for the New Paradigm
In our experience, taking the right approach to decarbonization can cut the typical O&G company’s abatement costs by up to 20% and increase revenues, boosting the return on their investment in some decarbonization projects by as much as 25%. To achieve these gains, companies must put into practice four key imperatives. (See Exhibit 1.)