Weighing the cost of carbon upstream

As more countries across the globe place a price on carbon or impose carbon-related regulations, the costs of doing business in the energy sector are rising. Many of those operators active in the upstream industry are keen to better understand what impact climate policies and the move to a low-carbon future could have on their portfolios. In response, market analyst Wood Mackenzie has published a report entitled Positioning for the future, claimed to be the first comprehensive study carried out into carbon emissions in the upstream oil and gas sector.

Dr Gavin Law, Head of Gas & Power Consulting, Wood Mackenzie, notes: ‘The carbon emissions targets set by the Paris Agreement, together with potential policy changes, are starting to influence investors’ capital decisions and shape companies’ long-term corporate strategies. More countries are placing a price on carbon or imposing carbon-related regulations. This increases cost. It has never been more important to understand the value at risk.’

The study looked at 25 majors, national oil companies and internationally focused large caps. According to co-author Amy Bowe, Director, Upstream Consulting, Wood Mackenzie: ‘The most intriguing finding was that, on the whole, the risk is less than we expected.’ When assessing regulatory risk, the study found that the majority of upstream emissions – 64% – are dispersed between countries with a medium-to-low risk of sector-specific carbon regulations.

‘As a result, under a $40/t carbon dioxide cost – which we believe represents a realistic average – the value of companies’ upstream assets could be reduced by up to 7%, depending on the regulatory regime,’ Bowe says. ‘However, we expect this will actually be closer to 2% under the most likely fiscal and regulatory scenario. In this scenario, liquid asset costs would increase by about $0.80/b on average, although the impact could be more than twice that for high-intensity operations. Under this most likely scenario, total value at risk would be an estimated $45bn. This is far less than many expect in terms of the direct impact of carbon costs on company portfolios.’

Another key finding of the study is that gross emissions from the assets examined are growing slightly faster than production, at about 17% to 2025 versus 15% for production. Bowe comments: ‘This is being driven largely by the higher intensity of primary growth themes – heavy oil, oil sands and LNG. Conventional onshore assets are still the largest single source of emissions and production to 2025, but they represent a declining share in each case. In contrast, LNG emissions are forecast to realise the largest – and fastest – absolute increase, with liquefaction emissions also growing at the fastest rate of all the sources, about 43% versus 22% production growth.’

The study also found that asset mix influences a company’s emissions intensity. Portfolio emissions intensities range from 1.8 to 8 grammes of carbon dioxide per megajoule (CO₂/MJ) of production, with the majors having the highest emissions intensity on average, but the least variation as a group, while the large caps are most diverse.

Photo: BP