Climate Change Regulations – Opportunities for Oil and Gas Companies

A recent McKinsey Quarterly article by Scott Nyquist and Jurriaan Ruys identified both challenges and opportunities for the oil and gas industry stemming from looming climate change regulations.  While many know of the downside risks to the oil and gas industry stemming from pending climate change regulations, I would like to highlight some of the revenue opportunities that Nyquist and Ruys point out in their article.  These include greenhouse gas trading, energy efficiency consulting, biofuels and other renewable fuels and carbon capture and sequestration.

Oil and gas companies are directly responsible for only 6% of CO2 emissions (approximately 2.9 billion tons of CO2 equal vent split equally between upstream and downstream operations), the end uses of oil and gas hydrocarbons account for almost half of global CO2 emissions.  Emissions from the industry are projected to grow by a third, primarily through more energy intensive upstream production methods as we move toward more unconventional sources – think tar sands and heavy crude production, even after a significant reduction of gas flaring (mainly in Africa).  Downstream emissions will likely stay constant, but there may be a major shift in the country originating the emissions.  Pending climate change legislation in the US (Waxman-Markey and Kerry-Boxer bills) will make it difficult if not impossible to refine crude domestically as refineries will not only be responsible for the emissions in their operations but also for the combustion of the fuel they sell.  America may move from a country reliant on foreign imports of crude to a country reliant on imports of refined products which may pose an even more ominous national security issue.  

First, many oil and gas companies have trading capabilities that can be expanded to greenhouse gas markets.  Profits can be made in the CO2 markets as companies that have both CO2 emissions and abatement credits, the combination of these can provide arbitrage opportunities for the firms.  Due to their direct involvement in the industry, companies will be able to develop proprietary views on the CO2 market and potentially profit from price movements.

By being leaders in the realm of energy, oil and gas firms can identify and implement energy efficient programs through a consulting arm.  This knowledge can be sold to industrial firms everywhere to generate revenue for the firms and cost savings for clients.

Related to biofuels and other alternative transportation fuels, oil and gas companies have well developed marketing groups and retail operations that can provide electricity, hydrogen or CNG to customers.  Many firms have even begun looking at adding biofuel production to their portfolio of assets.  This provides a first mover advantage vs. new entrants that will need to develop an extensive infrastructure.

One of the biggest opportunities will be to develop and provide carbon capture technology and storage capacity to utilities and other industrial concerns.  This technology will most likely have to be developed in order to meet regulatory requirements for refineries and upstream production with high CO2 emissions.  Oil and gas companies have experience injecting CO2 and other compounds in reservoirs undergoing enhanced oil recovery, in addition to access to and knowledge of depleted fields that could be potential storage sites.

As Nyquist and Ruys state, “Top performers in this sector will be the ones that stay ahead of these changes by mitigating the downside risks through internal abatement efforts and by taking advantage of value creation opportunities that this rapidly changing business environment presents”.  Investors would be well served to seek out those companies that are already looking ahead to leverage their existing strengths, assets and knowledge to win in this evolved market. 

 

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One response to “Climate Change Regulations – Opportunities for Oil and Gas Companies

  1. stevenfernandez

    Nice article! To me, the current carbon regulation question seems a lot like a repeat of the sulfur oxides (SOx) emission question of the 90’s, except on steroids. The solution in the previous case was technology, as the installation of scrubbers and retrofitting of power plants dropped SOx emissions to new standards set by The Acid Rain Program of the Clean Air Act. The legislation really did its job, as SO2 emissions have dropped by about 40%.

    The reduction in SOx emissions may have been easily achieved because the sources were centralized (mainly smokestacks in coal-fired power plants). There was one weak-spot that was clearly responsible for almost all of the SOx emissions, and the companies that changed their operations to address their weak-spot survived.

    The sources for greenhouse gases, on the other hand, is much more decentralized. The CO2 weak-spots are tailpipes of cars, homes, buildings, power plants, and refineries. As you stated, half of the CO2 is emitted at the end-use, yet oil & gas companies are targetted as the weak-spot, eventhough zero-carbon operations would only drop emissions by 6%. But in the end, it’s harder to tax millions of drivers than it is to tax a handful of corporations, so companies will just have to plan around looming legislation.

    No matter what strategy the government takes, a company’s decision will be clear: start addressing carbon, or start paying for it. The biggest point of interest will definitely be in developing carbon capture and storage technology.

    The first leap will be to develop zero-carbon-emission operations. The second leap will be to get present carbon out of the air. The third leap, and likely the most challenging, will be in disposing of carbon. Waste streams are problems with any operations. What do you do with produced water? What do you do with nuclear waste? What do you do with sulfur?

    SOx technology addressed the first leap, and though the second and third leap still remain challenges, the problem of acid rain seems to have been curbed. Oil & gas companies have the capabilities in place: R&D, technology centers, reservoir characterization techniques, marketting programs, and (most importantly) a talented workforce of Engineers and Scientists. If the Energy industry were to lead the charge to develop technologies for even one of the leaps, climate change problems may be solved or slowed.

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