How oil and gas companies can decarbonise
As the pressure to act on climate change remains, the industry should consider a range of options.
If the world is to come anywhere near to meeting its climate-change goals, the oil and gas (O&G) industry will have to play a big part. In 2015, the industry’s operations accounted for 9% of all human-made greenhouse gas (GHG) emissions.
To play its part in mitigating climate change to the degree required, the oil and gas sector must reduce its emissions by at least 3.4 gigatons of carbon dioxide equivalent (GtCO2e) a year by 2050, compared with “business as usual” (currently planned policies or technologies) – a 90% reduction in current emissions pre Q1 2020.
The current environment has demonstrated that it would clearly be easier if the use of oil and gas declined for the long term. But even if demand recovers to pre Q1 2020 levels, the sector can abate the majority of its emissions, at an average cost of less than $50 per ton of carbon dioxide equivalent (tCO2e), by prioritizing the most cost-effective interventions.
What upstream operators can do
Upstream operations account for two-thirds of sector-specific emissions. Here are some ways in which oil and gas companies are taking action. The economics will vary greatly, depending on the option and local conditions.
Changing power sources.
One oil and gas company is using on-site renewable power generation to provide a cost-effective alternative to diesel fuel. By replacing generators with a solar PV and battery setup, the company not only reduced emissions significantly but also broke even on its investment in five years. Connecting onshore or nearshore rigs and platforms to the central grid (as opposed to decentralized diesel generation) can also work well. If upstream producers electrified most of their operations, that could add up to 720 tCO2e a year in abatement by 2050, at an estimated cost of $10/tCO2e, depending on local electricity costs.
Reducing fugitive emissions.
Companies can cut emissions of methane, a powerful GHG, by improving leak detection and repair (LDAR), installing vapor-recovery units (VRU), or applying the best available technology.5 One company replaced the seals in pressure-safety valves, which had been found to be a frequent source of leaks, and then was able to monetize these streams of saved or captured gas. We estimate that reducing fugitive emissions and flaring could contribute 1.5 GtCO2e in annual abatement by 2050, at a cost of less than $15/tCO2e.
One company replaced gas boilers with electric steam-production systems, including high-pressure storage for nighttime steam supply, to support separation units. The project will pay for itself in less than ten years. In many circumstances, there is already a good business case, for combining the use of solar and gas in place of conventional boilers.
Reducing nonroutine flaring through improved reliability.
One operator found that 70% of all flaring emissions came from nonroutine flaring, mainly as a result of poor reliability. It, therefore, focused on improving its operations – for example, by carrying out predictive maintenance and replacing equipment. These actions not only reduced emissions but also raised production. Best-in-class operators are making significant strides in reliability thanks to area-based maintenance and multiskilling. Predictive analytics can reduce the frequency of outages to compressors or other equipment.
Reducing routine flaring through improved additional gas processing and infrastructure.
While some flaring may be unavoidable, the capacity constraints of infrastructure can lead to more than either companies or the public might want. In the Permian Basin, for example, a record 661 million cubic feet a day (mcf/d) were flared in the first quarter of 2019. Addressing this challenge requires additional gas-processing facilities, as well as gathering and transport infrastructure.
Increasing carbon capture, use, and storage (CCUS).
While this technology is projected to play only a minor role in the sector’s overall decarbonization, O&G players can still significantly influence its adoption and development. There are 19 large-scale CCUS facilities in commercial operation; four more are under construction and another 28 in development. There are also a number of demonstration and pilot projects. Together, plants under construction and in operation can capture and store about 40 MtCO2e a year. Total CCUS capacity could increase by as much as 200 times by 2050.
What downstream operators can do
Downstream operators are exploring many of the same ideas, but they have distinctive options as well.
Efficiency is a factor in every part of the industry, but new downstream-specific technologies can make a big difference. Waste-heat-recovery technology and medium-temperature heat pumps in refineries, for example, reduce the amount of primary energy used in distillation. One company saved €15 million in capital expenditures by forecasting its required steam usage hour by hour and incorporating this into a thermodynamic model to determine the required specifications for replacement equipment.
Hydrogen production through electrolysis has become both more technically advanced and less expensive. Bloomberg New Energy Finance estimates that the cost of hydrogen could drop as much as two-thirds by 2050. Using renewable energy rather than steam methane reforming (SMR) to power the electrolysis could offer refineries a way to reduce emissions – a result known as “green hydrogen.” An alternative, “blue hydrogen,” uses SMR plus CCUS. The attractiveness of the different technologies depends on the local economics – in particular, the availability of cheap storage capacity for CCUS or cheap renewable electricity.
High-temperature electric cracking.
In refining, several pilot projects use electric coils (instead of fuel gas) to provide heat. The technology is still at an early stage and small in scale. Moreover, the economics are sensitive to the price of electricity compared with gas and to the options for selling the fuel gas. Those economics improve if investment is coordinated with the natural investment cycle to support additional capital expenditures – and, of course, if power can be purchased or generated under favourable financial terms.
Replacing some conventional oil feedstocks in refineries with biobased feedstocks or recycled-plastic materials (initially, through pyrolysis or gasification) would also reduce emissions – not only Scope 1 but also, to a large extent, Scope 3 emissions. In an increasingly decarbonizing world, this may extend the lifetime of refining assets.
The oil and gas sector will play an important role in the global energy transition; how it will face that future is a matter of strategy. As transparency increases, so may expectations. Oil and gas companies that get ahead of the curve could find themselves better positioned for change.
Planning a decarbonization strategy: Questions to ask
Companies are at different stages of preparing their GHG-reduction plans: some are ready to act, others are just getting started. Here are questions companies should ask as they plan and execute strategies to reduce GHG emissions.
What is the baseline for setting targets? What are the targets over the next three to five and five to ten years, as well as to 2050?
What is the most cost-effective way to decarbonize our different sources of emissions? What is the business case for each asset? How can our company manage the trade-offs between longer-term decarbonization and shorter-term growth, revenue, and sustainability targets?
What capabilities do we need centrally or in business units? What is the right organizational setup? How do we allocate capital for decarbonization across the portfolio? How do we measure and track success?
How can we get investors, employees, customers, and governments to support our decarbonization agenda? What is the investment case? Are new sources of funds available? How can we differentiate our products? When should we collaborate or go it alone?
How do we align our decarbonization goals with the larger energy transition? What is the right timeline and payback period?
By Chantal Beck, Sahar Rashidbeigi, Occo Roelofsen, and Eveline Speelman
This content has been adapted from The future is now: How oil and gas companies can decarbonize, January 2020,McKinsey & Company, www.mckinsey.com. Copyright (c) 2020 McKinsey & Company. All rights reserved. Reprinted by permission.
Marketing matters: from IBM to Kyndryl
Prior to joining Kyndryl as Chief Marketing Officer, Maria had a 25-year career at IBM, most recently as the tech giant’s CMO where she oversaw all marketing professionals and activities across North America, Canada and Latin America. She has held senior global marketing positions in a variety of disciplines and business units across IBM, most notably strategic initiatives in Smarter Cities and Watson Customer Engagement, as well as leading teams in services, business analytics, and mobile and industry solutions. She is known for her work with teams to leverage data, analytics and cloud technologies to build deeper engagements with customers and partners.
With a passion for marketing, business and people, and a recognized expert in data-driven marketing and brand engagement, Maria talks to Business Chief about her new role, her leadership style and what success means to her.
You've recently moved from IBM to Kyndryl, joining as CMO. Tell us about this exciting new role?
I’m Chief Marketing Officer for Kyndryl, the independent company that will be created following the separation from IBM of its Managed Infrastructure Services business, expected to occur by the end of 2021. My role is to plan, develop, and execute Kyndryl's marketing and advertising initiatives. This includes building a company culture and brand identity on which we base our marketing and advertising strategy.
We have an amazing opportunity ahead at Kyndryl to create a company brand that will stand apart in the market by leading with our people first. Once we are an independent company, each Kyndryl employee will advance the vital systems that power human progress. Our people are devoted, restless, empathetic, and anticipatory – key qualities needed as we build on existing customer relationships and cultivate new ones. Our people are at the heart of this business and I am deeply hopeful and excited for our future.
What experiences have helped prepare you for this new opportunity?
I’ve had a very rich and diverse career history at IBM that has lasted 25+ years. I started out in sales but landed explored opportunities at IBM in different roles, business units, geographies, and functions. Marketing and business are my passions and I landed on Marketing because it allowed me to utilize both my left and right brain, bringing together art and science. In college, I was no tonly a business major, but an art major. I love marketing because I can leverage my extensive knowledge of business, while also being able to think openly and creatively.
The opportunities I was given during my time at IBM and my natural curiosity have led me to the path I’m on now and there’s no better next career step than a once-in-a-lifetime-opportunity to help launch a company. The core of my role at Kyndryl is to create a culture centered on our people and growing up in my career at IBM has allowed me to see first-hand how to prioritize people and ensure they are at the heart of progress in everything Kyndryl will do.
How would you describe your leadership style?
I believe that people aren't your greatest assets, they are your only assets. My platform and background for leadership has always been grounded in authenticity to who I am and centered on diversity and inclusion. I immigrated to the US from Chile when I was 10 years old and so I know the power and beauty that comes from leaning into what makes you different from other people, and that's what I want every person in my marketing organization to feel – the value in bringing their most authentic self to work every day. The way our employees feel when they show up for themselves authentically is how they will also show up for our customers, and strong relationships drive growth.
I think this is especially true in light of a world forever changed by the pandemic. Living through such an unprecedented time has reinforced that we are all humans. We can't lead or care for one another without empathy and I think leaders everywhere have been reminded of this.
What’s the best leadership advice you’ve received?
When I was growing up as an immigrant in North Carolina, I often wanted to be just like everyone else. But my mother always told me: Be unique, be memorable – you have an authentic view and experience of the world that no one else will ever have, so don't try to be anyone else but you.
What does success look like to you?
I think the concept of success is multi-faceted. From a career perspective, being in a job where you're respected and appreciated, and where you can see how your contributions are providing value by motivating your teams to be better – that's success! From a personal perspective, there is no greater accomplishment than investing in the next generation. I love mentoring younger professionals – they are the future. I want my legacy as a leader to include providing value in work culture, but also in leaving a personal impact on the lives of professionals who will carry the workforce forward. Finding a position in life with a job and company that offers me a chance at all of that is what success looks like to me.
What advice would you give to your younger self just starting out in the industry?
I've always been a naturally curious person and it's easy for me to over-commit to projects that pique my interest. I've learned over years of practice how to manage that, so to my younger self I’d say… prioritize the things that are most important, and then become amazing at those things.