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Oil and gas upstream, midstream operations primed for affordable decarbonization: IEA


$600 billion could cut scope 1 and 2 emissions in half

Oil and gas companies need to 'move faster'

  • Author
  • Brandon Mulder
  • Editor
  • Gary Gentile
  • Commodity
  • Electric Power Energy Transition LNG Natural Gas Oil

Reducing scope 1 and scope 2 emissions from oil and gas activities is the most cost-effective way to reduce emissions by 2030 compared to any other source in the global economy, the International Energy Agency said in a May 3 report.

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The IEA estimates that 15% of energy-related emissions, or 5.1 billion mt of CO2e, stem from upstream and midstream oil and gas activities – from extracting the fuels out the ground to delivering them to end users. But that 15% is also the lowest hanging fruit for reductions.

"These emissions can and should drop by more than half by 2030, and it's one of the cheapest ways of cleaning up the energy system," IEA Energy Analyst Peter Zeniewski said in a tweet announcing the new research.

The upfront cost for reducing those emissions by half by 2030 is $600 billion, which, as the IEA described, amounts to just 15% of the profits oil and gas producers generated during the 2022 energy crisis. In February, IEA Executive Director Fatih Birol said that the industry's 2022 income jumped to $4 trillion – a 166% rise over its annual $1.5 trillion average.

While a number of these oil and gas companies have announced commitments to reduce their scope 1 and 2 emissions, only a fraction of those commitments matches the pace of decline needed to reach net-zero by 2050, the IEA said. And many of those commitments rely heavily on the use of carbon offsets.

"Forward leaning companies need to recognize the need to move faster than the global average reduction in emissions and build a broader coalition of companies willing to play their part," the May 3 report said.

Five key levers

The IEA identified the five most cost-effective methods for reducing the industry's scope 1 and 2 emissions. The leading method is cutting methane emissions from oil and gas operations, which could reduce emissions by 1.2 billion mt of CO2e. According to Zeniewski, that reduction amounts to more CO2e than those associated with the aviation industry.

In the IEA's scenario, one third of methane emissions reductions is attributable to oil and gas demand declines. The remaining two thirds stem from widespread efforts across the supply chain, in which all producers would "have an emissions intensity similar to the world's best operators today."

The price of a Methane Performance Certificate was assessed at $0.014/MPC, or $2.307/mtc, on May 3, according to data from S&P Global Commodity Insights.

The second most important measure is an overall elimination of non-emergency flaring, a practice that sent about 500 mt of CO2e into the atmosphere in 2022. The IEA suggests bringing the excess gas to consumers via new or existing pipeline networks, converting it into compressed or liquified natural gas, or reinjecting it into reservoirs to increase pressure.

The third most important measure would be to electrify upstream operations, or using electricity to power drilling rigs, pumps, compressors and other equipment in the oil fields rather than diesel fuel or natural gas. Globally, these upstream operations resulted in more than 700 million mt of CO2 emissions in 2022. By taking advantage of on-site renewable resources or hooking operations up to the grid, electrification can halve CO2 emissions from the upstream sector by 2030.

These three methods – electrification, reducing methane, and eliminating flaring – all have the potential to create new revenue streams to recoup upfront costs. For instance, while eliminating flaring would cost the industry $70 billion today, it could also generate $91 billion in revenue by 2030.

"For facilities implementing these measures, the average cost of producing oil and gas would increase by les than $2 per barrel of oil equivalent," the IEA said.

Hydrogen, carbon capture

The final two methods involve increasing deployment of carbon capture technologies across oil and gas processes and expanding the use of low carbon hydrogen in refineries.

"Scaling up CCUS and expanding the use of low-emissions hydrogen play complementary roles but have significant potential for positive spillover into other aspects of energy transitions, by accelerating deployment and technology learning for these technologies," the report said.

At a cost of $110 billion, CCUS deployment could account for a reduction of 188 million mt CO2e by 2030. Hydrogen could account for a reduction of 66 million mt CO2e by 2030 at a cost of $83 billion.

The development of both technologies is being led by the oil and gas industry. While 90% of all carbon capture and storage capacity is operated by oil and gas companies four of the five largest green hydrogen plants under construction are also being developed by the industry.