Shale 2022: Sector Embraces Carbon Management

Oil and gas companies must operate today in an evolving environment that demands they provide energy to power the world, turn a profit for their shareholders and do it all while reducing their carbon footprint.

Shale players are increasingly meeting the energy transition with a fundamental shift in their business models to incorporate—and in some instances, embrace—carbon management and the technology necessary to reduce their emissions.

Shareholders in public companies and investors in small and large firms continue to ratchet up the pressure on shale producers to align with the Paris Accord, which set an ambitious goal of capping global warming to about 34.7 F (1.5 C).

Engineers and business leaders will need to harness the technological prowess and spirit of cooperation that many demonstrated during the early years of the shale revolution, when U.S. producers upended global supply dynamics.

Still, it’s a daunting task at hand.

The U.S. Energy Information Administration (EIA) projects that global energy consumption will almost double by 2050. Petroleum and other liquid fuels will still be the largest source of energy, but renewables, including solar and wind, will be closing in, according to EIA data.

Throughout the supply chain, companies recognize there will be a continued role for oil and gas even as the world shifts toward a cleaner future.

“The world economy is forecast to grow, is going to need energy and we’re going to be a significant part of it, the oil and gas industry,” said Simon Edmundson, Schlumberger’s low-carbon technologies marketing manager. “We have to help and provide this energy while decarbonizing.”

Edmundson said it’s going to be a big challenge.

“Within the industry, we have a history of innovation and collaboration and solving some extremely tough engineering challenges with amazing technology,” he added. “The whole history of the oil industry is littered with these examples of amazing engineering projects where we’ve collaborated and been able to achieve things previously considered impossible.”

Servicing the transition

With an enterprise value of $55 billion at the end of the third quarter in 2021, Schlumberger is almost double the size of its nearest competitor.

While most of the public angst about the industry’s carbon emissions targeted the upstream sector, executives with Schlumberger noticed and executives decided to take action. The firm aligned with the United Nations Net Zero Coalition in June 2021 to achieve net-zero emissions by 2050 across Scopes 1, 2 and 3.

“The majority of our emissions accounting is within Scope 3, and the majority within that scope is associated with products and services that we provide for our customers,” Edmundson said. “For us to get to net-zero by 2050, it’s going to be very important for us to reduce our Scope 3 emissions, which corresponds to reduction in our customers emissions because we’re operating on their projects. By reducing our Scope 3 emissions, we’ll simultaneously help our customers reduce their Scope 1 and Scope 2 emissions, and even their upstream supply chain Scope 3 emissions in some cases.

“Or you could look at it the other way around,” he added. “By providing technologies to reduce our customers’ Scope 1 and Scope 2 emissions, [it] will help reduce our Scope 3 emissions. It’s really a sort of collaboration between us and our customers.”

Schlumberger has announced a portfolio of products and technologies that is aimed at sustainability with a focus on reducing emissions on customer operations.

“These are called our transition technologies,” Edmundson said. “With these, we’re aiming to reduce emissions across the entire value for our customers’ operations and simultaneously drive down our own net-zero emissions toward our net-zero commitment.”

At this point, there are about 25 technologies aimed at five different themes in oil and gas: addressing methane emissions, minimizing well construction, CO₂ footprint, reducing or eliminating flaring, electrification of infrastructure, and full-field development solutions.

To qualify as a transition technology, a product or service must have a repeatable, significant and scalable impact, Edmundson said.

“We are quantifying the impact reductions that come by use of these transition technologies with a very clear, transparent quantification process,” he said. “If we say something has a benefit that will reduce emissions in a certain operation, we can back that up with clear numbers and calculations.”

“With direct air capture, not only can we remove CO₂ from the atmosphere, but also that helps us to develop and produce oil that’s either net-zero or net-negative carbon.” —Vicky Hollub, Occidental Petroleum

Moreover, the transition technologies disprove the common perception that decarbonization comes with a negative connotation attached.

“The transition technologies offer sustainability benefits, such as reduced emissions while driving on traditional values such as performance and cost,” Edmundson said.

Indeed, the new paradigm is breaking a long-established mold, said Lisa Rushton, a partner in the environmental practice at law firm Womble Bond Dickinson.

“While ESG is perceived by some to be difficult to implement, and it may seem like a profit-killer, the irony is that for most companies that implement ESG programs, including those within the oil and gas industry, it has the opposite effect,” she said.

For example, Schlumberger’s PowerDrive Orbit G2 rotary steerable system technology can shave off two to three days’ drilling time in a shale play such as the Permian Basin.

“That’s going to have a significant amount of emissions reduction simply from the rig,” Edmundson said. “We’re going to have to work together—service companies and operators alike—to develop and deploy the best combinations of technologies to reduce emissions and combine these with digital solutions that will help us rapidly figure out what’s going to be the best option in a given scenario to decarbonize, no matter how complex it might be, so we can act quickly.”

Pioneer Natural Resources CEO Scott Sheffield was an early adopter of limits on the flaring of natural gas associated with oil production in the Permian Basin. Shortly after returning to the top job at Pioneer in 2019—just as news reports and satellite data unveiled the scope of flaring in the Permian Basin—Sheffield deployed a comprehensive methane leak detection and repair program that includes routine aerial surveys. The firm reported this summer that annual flaring is down to less than 1% of its production.

Adding scope

Occidental Petroleum is pressing ahead of its peers to solve the industry’s emissions problem. The company released an ambitious plan in 2020 to zero out CO₂ from the combustion of its oil and gas by 2050.

Most viable U.S. independents and majors are working on methods and technologies to limit Scope 1 and 2 emissions. But Occidental stands alone in crafting a technological plan to shut in Scope 3 emissions. Meanwhile, ConocoPhillips has pledged to advocate for a price on carbon to offset Scope 3 releases.

Scope 1 emissions represent those emitted by the fuel combustion that occurs in vehicles, furnaces, boilers and other equipment; these are direct emissions from controlled sources. Scope 2 covers the indirect emissions from purchased electricity, steam, heating and air conditioning; they are consumed by those who control the Scope 1 category. Scope 3 emissions account for the rest of the value chain, such as transporting the hydrocarbons and delivering them as fuel or other products. Historically, producers have argued the category is tricky to quantify; moreover, it is unfair to hold them accountable for how customers use their products.

For many businesses, Scope 3 emissions comprise more than 70% of their carbon footprint, according to a Deloitte analysis. For example, a manufacturer may have to accelerate its emissions release by extracting, producing and processing its raw materials.

Occidental is designing the world’s largest direct air carbon capture facility, which will have the capacity to suck up to 1 million tons of CO₂ from the atmosphere annually.

The facility, in the heart of the Permian Basin, is intended to support Occidental’s existing EOR operations; the CO₂ would be injected into aging reservoirs to boost recovery rates and permanently store carbon underground.

Dozens of carbon capture technologies have been deployed around the world, according to the Global CCS Institute. Combined, these facilities have the capacity to capture and store 97.5 million tons per year of CO₂. Still, that is a fraction of the 33 billion tons of CO₂ annually produced by global energy consumption, according to the International Energy Agency (IEA).

Managing their carbon footprint to reduce emissions, particularly those within their own Scope 1 and Scope 2 categories, will be an expensive enterprise, bankers and attorneys say.

An infusion of investment worth trillions of dollars is critical to investors’ apparent mandate that oil and natural gas companies work to cap global warming to less than about 35.6 F (2 C) relative to pre-industrial temperatures.

Bankers also say the money will flow to those companies willing to evolve.

“One out of every three professionally managed investment dollars in the United States is in an ESG fund,” said Pavel Molchanov, Raymond James’ senior vice president and energy analyst. “That’s $16 trillion debt plus equity.”

The figure was about half that size four years ago, Molchanov said during a discussion of public and debt capital in the energy transition during Hart Energy’s Energy Transition Capital Conference on Oct. 19 in Houston.

“It’s not a matter of whether there was a Democrat in the White House or oil prices were high. It has nothing to do with any of that. It’s just a secular trend that there’s more money flowing into ESG funds,” he said. “And believe me, you do not want to be on the wrong side of ESG funds.”

Isaac Griesbaum, a partner in the oil and gas practice of Winston & Strawn’s Houston law office, said the focus on carbon management is present throughout the industry and translates into enormous investment in the technology necessary.

“Money is available for that,” he said. “Close to $1 in every $3 of assets under management is earmarked for ESG-related activity” particularly when it is geared toward carbon sequestration, emissions reductions or other ways that help firms decarbonize.

“There’s going to be a lot more change coming,” Griesbaum said. “Throughout the shale revolution, these energy companies are going to have to become more and more like technology companies to survive.”

Oil and gas companies that developed technology to become more efficient producers—both in capital and operations—must pivot to either develop their own carbon management technology or invest in it.

As such, these firms are making different kinds of investments in technology. Griesbaum said the investments will be less headline-grabbing but no less effective.

“They’re taking minority stakes in tech companies, kind of the Silicon Valley venture capitalist style model. They may take a bunch of minority stakes in a lot of technology development companies just to essentially ensure they have access to what is developed,” he said. “And that is going to be a bigger and bigger part of their portfolio, as well as their long-term survival and ability to actually go carbon emissions neutral in the next two years.”

Making markets

While there are instances in which emissions reduction efforts don’t have a negative impact on other parts of the business, there are also opportunities for companies to create new streams of business.

“Oil and gas companies can create markets they didn’’ have before,” said Alan Trench, a director with consultancy Partners in Performance who leads the oil and gas practice. “For instance, if you have one operator looking at building solar power and they’re working at building enough supply to where they can also sell that power to other operators. I do think there’s some opportunities if you look at it from a more holistic view of not just your operations, but a base of operations and how you can be the developer.”

Occidental has been in the carbon capture business for 40 years, and the company intends to leverage that experience beyond its initial role in EOR. As such, Occidental is exploring ways to reduce its emissions via direct air capture and carbon capture, utilization and sequestration.

Occidental CEO Vicky Hollub said that ultimately the carbon capture business is going to grow into a trillion-dollar industry on the strength of how much carbon will need to be captured worldwide to meet emissions goals.

“It’s going to be a probably $3 [trillion] to $5 trillion industry if you look at how much carbon capture is going to be needed around the world,” Hollub said in an October episode of CERAWeek Conversations. “We think ultimately it’s going to generate as much earnings and cash flow as our oil business does today. We believe it’s a long-lasting business.”

“A lot of operators are struggling with how to balance the goal of emissions reduction with the goal of delivering oil and gas at a cost that makes it economic.” —Todd Blackford, Partners in Performance

Occidental is still moving toward “becoming a carbon management company,” Hollub told investors during a third-quarter 2021 earnings call.

“We think that’s going to be needed for the energy transition, and we’re actually filling a gap with what we’re doing,” she said. “Direct air capture is going to be critical for that to happen. With direct air capture, not only can we remove CO₂ from the atmosphere, but also that helps us to develop and produce oil that’s either net-zero or net-negative carbon.”

That effort will enable Occidental to provide the offsets to help decarbonize other industries, such as aviation or maritime, with fuels that are net-zero carbon, Hollub added.

Given the magnitude of the carbon that needs to be offset around the world, thousands of such facilities will need to be constructed, she said.

“It provides us the opportunity to be a big part of that and to actually be a leader in developing the technology,” Hollub said. “The transition will take some time. But over the next 10 to 15 years, I think we’ll make a lot of progress toward becoming a net carbon management company and a go-to company for those that need the CO₂ offsets.”

Integration

Ultimately, the industry needs more integration of its best practices to give the various technologies the best chance of success, said Todd Blackford, a director at Partners in Performance. But they also need to earn a profit.

“A lot of operators are struggling with how to balance the goal of emissions reduction with the goal of delivering oil and gas at a cost that makes it economic,” he said.

Midstream companies, like Targa Resources Corp., intend to source renewable electricity from Concho Valley Solar to power its natural gas infrastructure in the Permian Basin. Concho Valley Solar will deliver low-cost, renewable electricity to Targa under a long-term power purchase agreement (PPA). This PPA continues to advance Targa’s long-term sustainability strategy to reduce its emissions intensity, the firms said in a November statement.

As joint owner in much of Targa’s Midland subbasin gas processing infrastructure, shale giant Pioneer Natural Resources may use the renewable electricity sourced from the Concho Valley Solar project, enhancing its emissions reduction initiatives through renewable electricity purchases and related renewable energy credits.

Shareholders say

Whether it is doubling down on legacy business lines like Occidentl or reaching out to renewables, shale companies and those that work with them to produce oil and gas in the U.S. are making broad strokes to paint a cleaner portrait of their carbon management.

At the end of the day, the time is right for shale producers to clean up their emissions because it is what their shareholders and investors want.

“That’s driving the industry to wake up and say, ‘We need to do better,’” Blackford said. He added that, in general, the industry does strive to reduce its environmental impact. “They’ve put a lot of effort in, but it just happens that their product is environmentally intensive,” he said.

At Pioneer Natural Resources, the top executive has warned peers that shareholders and investors will abandon the space if executives decline to make changes. Shareholders and private equity firms may “end up not doing business or sell” their interests in firms that refuse to reduce flaring, Sheffield said.

Executives at the largest independent firms are listening to their shareholders. Dominic Macklon, ConocoPhillips’ executive vice president for strategy, said the ongoing dialogue is important.

“As an [E&P] company, we continue to believe our Paris-aligned climate risk framework that we launched about a year ago is both credible and ambitious and addresses the realities of our triple mandate,” he said, adding that the mandate calls for meeting transition pathway demand, delivering competitive returns and achieving net-zero emissions on Scope 1 and Scope 2 emissions.

To that end, ConocoPhillips established a dedicated low-carbon technology group in 2021 to support the firm’s net-zero ambition.

“But we are not ignoring Scope 3 end-use emissions,” Macklon said. “Our new low-carbon group is also working to develop new opportunities in low-carbon businesses with a focus on carbon capture and storage and hydrogen, both of which have a strong adjacency to our core business and our competencies.”

However, he added, all options must “deliver competitive returns for shareholders.”