Oil & Gas

Oil & Gas - Exploration & Production

(E&P) companies explore for, extract, or produce energy products such as crude oil and natural gas, which comprise the upstream operations of the oil and gas value chain. Companies in the industry develop conventional and unconventional oil and gas reserves; these include, but are not limited to, shale oil and/or gas reserves, oil sands, and gas hydrates. Activities covered by this standard include the development of both on-shore and off-shore reserves. The E&P industry creates contracts with the industry to conduct several E&P activities and to obtain equipment and oilfield services.

Oil & Gas - Midstream

The industry consists of companies involved in the transportation or storage of natural gas, crude oil, and refined petroleum products. Midstream natural gas activities involve gathering, transport, and processing of natural gas from the wellhead, as well as the removal of impurities, production of natural gas liquids, storage, pipeline transport, and shipping, liquefaction, or regasification of liquefied natural gas. Midstream oil activities mainly involve transport of crude oil and refined products over land, using a network of pipes and pumping stations, as well as trucks and rail cars, and over seas and rivers via tanker ships or barges. Companies that operate bulk stations and terminals, as well as those that manufacture and install storage tanks and pipelines, are also part of this industry.

Oil & Gas - Refining & Marketing

(R&M) companies refine petroleum products, market oil and gas products, and/ or operate gas stations and convenience stores, all of which comprise the downstream operations of the oil and gas value chain. The types of refinery products and crude oil inputs influence the complexity of the refining process used, with different expenditure needs and intensity of environmental and social impacts.

Oil & Gas - Services

Oil and gas services companies provide support services, manufacture equipment, or are contract drillers for oil and natural gas exploration and production (E&P) companies. The drilling and drilling-support segment comprises companies that drill for oil and natural gas on-shore and off-shore on a contract basis. Companies in this segment may also manufacture jack-up rigs, semisubmersible rigs, and drill ships. Companies in the oilfield services segment manufacture equipment that is used in the extraction, storage, and transportation of oil and natural gas. They also provide support services such as seismic surveying, equipment rental, well cementing, and well monitoring. These services are commonly provided on a contractual basis, and the customer will purchase or lease the materials and equipment from the service provider. Service companies may also provide personnel or subject matter expertise as part of their scope of service. The contractual relationship between oil and gas services companies and their customers plays a significant role in determining the material impacts of their sustainability performance. Besides the rates charged, companies compete on the basis of their operational and safety performance, technology and process offerings, and reputation.

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Source: SASB

Companies in the sector are focusing on improving their economic and reputational resilience by considering ways to lower their carbon emissions. Currently, almost 15% of global GHG emissions come from the process of extracting and delivering oil and gas to consumers. The sector is working towards GHG emissions reporting standardization and advancing technologies to track emissions digitally. Complex facilities and high structural emission intensity assets are the main sources of emissions, as well as older plants and equipment. The decarbonization process involves improving operating efficiency and decarbonizing operations, as well as redirecting strategies towards renewable power, electrification, bioenergy, hydrogen, carbon capture and storage, negative emissions technologies, and carbon trading.

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Industry Characteristics

• This is a moment for oil and gas companies to make thoughtful choices: both to improve their economic and reputational resilience, and to consider whether and how to reposition themselves to take advantage of the accelerating low-carbon winds of change. Source: McKinsey
• The oil and gas industry faces the strategic challenge of balancing short-term returns with its long-term licence to operate. Societies are simultaneously demanding energy services and also reductions in emissions. Source: IEA
• No oil and gas company will be unaffected by clean energy transitions, so every part of the industry needs to consider how to respond. The industry landscape is diverse and there is no single strategic response that will make sense for all. Attention often focuses on the Majors, seven large integrated oil and gas companies that have an outsized influence on industry practices and direction. But the industry is much larger: the Majors account for 12% of oil and gas reserves, 15% of production and 10% of estimated emissions from industry operations. Source: IEA
• So far, investment by oil and gas companies outside their core business areas has been less than 1% of total capital expenditure. Source: IEA
• As of today, 15% of global energy-related GHG emissions come from the process of getting oil and gas out of the ground and to consumers. Source: IEA‍

Sustainability Impact

• Demands for oil companies to standardize reporting of greenhouse gas emissions produced by operations as well as entire value chains are growing. Some are working, as in the example of Open Group, to advance technologies that allow the digital tracking of the integrated carbon footprint of oil and gas companies. Others are pushing to test the robustness of investments against broader environmental, social, and governance (ESG) requirements. Source: McKinsey
• Assets with the highest structural emission intensity in our data set are complex reservoirs: viscous, in deep or ultra-deep water, compartmentalized, or high pressure and temperature. Pressure maintenance during primary production or secondary and tertiary recovery also increase energy and emission intensity. Source: McKinsey
• Complex facilities are typically more energy-intensive, and therefore more emission-intensive. Hub platforms with more equipment and personnel require more energy for running core and auxiliary systems, while high manning levels intensify their logistics, which again increases emissions. A small single-steel-jacket platform is less emission-intensive than an FPSO with complex subsea export infrastructure connecting many complex wells. Source: McKinsey
• Operations benchmarks—and our emission data—both show that the age of a production facility does not limit operational performance. However, older assets face more complex challenges in reducing emission intensity. Older equipment may be less efficient and economically challenging to replace. Aging production facilities may also suffer from higher fugitive emissions as wear parts degrade. On the other hand, process design choices can help offset the challenges of maturity. Source: McKinsey

Sustainability Investments to watch

• Actions to improve operating efficiency and capital discipline can drive down break-even economics in the same way that efforts to decarbonize operations can mitigate carbon-price exposure, and completely change the inherent position of an asset on the cost- or emissions-performance curves. Without significant efforts in these areas, opportunities for profitable growth in the hydrocarbon sector will narrow. Source: McKinsey
• Many oil and gas companies are currently reevaluating their strategic responses to the energy transition. For one, they may need to go well beyond decarbonizing their own operations to reduce their emissions considerably. Source: McKinsey
• Strategic responses among oil and gas players are typically spread across three broad archetypes: the resource specialist, the integrated energy player, and the low-carbon pure play. (1) Resource specialists are, in effect, sticking to their knitting. They are betting on a future that promises a material need for hydrocarbons for another 30 to 50 years, even on a declining trend; (2) Integrated energy players are looking to retain their profitable core while also capturing some of the large global opportunities now emerging in low-carbon markets, including renewable power, bioenergy, next-generation mobility, energy services, and hydrogen. Players are betting that they will emerge as the natural owners of some or more of these investment classes based on their capabilities, technologies, relationships, and other incumbent advantages; (3) Low-carbon pure plays are, in effect, taking this thinking one step further. They are betting heavily on building future-proof, low-carbon businesses while divesting themselves of legacy, high-carbon portfolios which could create management distractions and present investment propositions that are too mixed for both equity and debt investors. Source: McKinsey
• The primary technologies—renewable power; electrification of infrastructure; bioenergy; hydrogen; carbon capture, utilization, and storage (CCUS); negative emissions technologies, such as nature-based solutions and direct air capture; and carbon trading—all represent potential growth markets. Voluntary carbon markets, for instance, could scale 15 times by 2030 relative to their current size, and become a $15 billion to $40 billion a year market. To deliver these dramatic rates of growth, enormous capital investment is needed. According to McKinsey’s 1.5-degree-pathway scenario, over the next decade $750 billion is needed to flow to CCUS, $200 billion to EV infrastructure, and $700 billion to hydrogen-production capacity. Renewable power is another magnitude larger; capital expenditures of $8.5 trillion are required to build the solar and on- and offshore wind capacity required from 2020 to 2030. Source: McKinsey
• Optimizing Operations - Operating well equals operating responsibly. Above all, it is an economical first step in reducing intermittent flaring and venting and fugitive emissions, the third biggest source of emissions. Our analysis shows that across a global sample, once you correct for structural factors, assets in the top decile of production efficiency have the lowest emissions in the sector, based on the stability of their operations. The best can achieve less than 7 kg per barrel of oil equivalent, whereas assets in the third quartile emit at least three times as much. Source: McKinsey
• There are multiple sustainable design options to make processes less emission-intensive. However, their use is not yet routine: traditional investment stage gates weight up-front capital costs over other considerations, such as energy efficiency or cost-to-operate. With total life-cycle value as the target function, operators may be more motivated to explore sustainable design. Source: McKinsey

• Cogeneration of heat/cool and power from bioenergy
• Cogeneration of heat/cool and power from renewable non-fossil gaseous and liquid fuels
• Manufacture of biogas and biofuels for use in transport and of bioliquids
• Production of heat/cool from bioenergy
• Production of heat/cool from fossil gaseous fuels in an efficient district heating and cooling system
• Production of heat/cool from geothermal energy
• Production of heat/cool from renewable non-fossil gaseous and liquid fuels