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Methane emissions are heavily concentrated in oil and gas, which has prompted changes in upstream processes and investment in new technologies. In this episode, we'll discuss the size of the problem that methane emissions present in the oil and gas sector. We'll discuss measures that companies are taking to account for managing today's methane emissions, as well as the challenges in reduction. Finally, we'll cover where there are opportunities for investing in the market. Today you'll be hearing from Franco Ciulla, Nilesh Dayal, and Amar Gujral, all managing directors in our Houston office who specialize in energy and decarbonization.
Nilesh Dayal:
Hi, this is Nilesh Dayal, global head of energy for L.E.K.
Franco Ciulla:
Hello, everyone. I'm Franco Ciulla, partner with L.E.K. covering the energy and environment sub sector.
Amar Gujral:
Hey there, I'm Amar Gujral. I'm a partner in L.E.K.'s Houston office where I lead efforts across energy transition within our energy and environment practice. Welcome to you both.
Nilesh Dayal:
Thank you.
Franco Ciulla:
Thank you, Amar. Thank you, Nilesh. Good to be here with you guys.
Amar Gujral:
Okay. Since I have you both here, before we get into the topic at hand, methane emissions in oil and gas, I think we should discuss the most critical issue facing energy today, the Russia Ukraine conflict. The event has elevated oil prices, but what do you see as the longer term implications?
Franco Ciulla:
Well, certainly Amar, a situation in evolution and we keep looking at the market and how it evolves. Before talking about the long term, very quickly, the short term is probably more critical to understand, and certainly we see Europe trying to move away as fast as possible from the dependency on Russia. And that in our view will create an interesting dynamic when it comes to the balance of both crude oil, but particularly gas, and currently Europe already in conversations with different regions.
Particularly we saw the announcement of the United States committing to deliver more LNG, and the willingness to also switch sources from Russia to Africa of major E and P companies with interest in both continents. But the big question is how fast they can do that. And number two, how much Europe can take in the short term, which in both cases, we see challenges of Europe ramping up regas capacity and things like that.
So that points to the acceleration of renewable as the potential solution to this situation in the long run. And that's what we see evolving, certainly something that has been going on for few years already. And countries like Germany, France, making open comments about accelerating that via stimulating investments with, further and further incentives.
That is the European, which is obviously the center of all this situation. And then when it comes to other region, we see opportunities in North America. Certainly the oil prices are leading E and P companies to increase their spending in their drilling programs, taking advantage of the situation and keeping free cash flow as the main focus of their operation. But on the gas side is where we see most of the opportunities, given the situation with LNG exports to Europe.
Nilesh Dayal:
Yeah, I think just to add to that point, and thanks Franco for that explanation. We're seeing, before our eyes, sort of the medium and long term narrative around gas changing. Natural gas was previously viewed as maybe just a bridge fuel for the looming energy transition. And given the ESG concerns around carbon emissions from natural gas, well now we're back to natural gas and LNG specifically being critical and beneficial for society over the long term, just from a energy security and transition perspective. So we're seeing a little bit of evolution around natural gas being back in vogue.
Amar Gujral:
Thank you, Nilesh, for I think going through the how the gas narrative really has started to change. We've seen quite a bit of that over the last 18 months or so, and it's interesting to see how this is really coming first full circle in the discussion of natural gas as a critical bridge fuel. Going back to the discussion on methane emissions in oil and gas sector, maybe just a question for you Nilesh to start. So when we think about methane emissions in oil and gas, how big of a problem is it today?
Nilesh Dayal:
So, great question. Methane accounts for about 16% of all greenhouse gases, and is about 28 times more potent than CO2. Oil and gas specifically accounts for about 25% of all human sources of greenhouse gases.
Franco Ciulla:
Thanks, Nilesh. And yeah, I mean, within that 25% that Nilesh mentioned being oil and gas, obviously that's different based on the region where we talk about, but regions that are more tied to oil and gas production tend to be over the 25%. For example, the middle east at 68% and North America at 41%. So certainly an issue that both regions has to address.
And when it comes to where in the oil and gas value chain, this emission problem is happening upstream represent about 75% of total emissions in the industry, mainly from vented gas and fugitive emissions while the rest is mostly concentrated in downstream infrastructure.
Amar Gujral:
Okay. So understanding how we're seeing the issue across all streams of the oil and gas side of it and taking maybe that upstream consideration here, how are companies reporting on their emissions goals today and how are they accounting for emissions today?
Franco Ciulla:
Yeah, that's a good question, Amar. I mean, certainly not all companies are reacting the same way. We see majors are kind of leading the game, not only North America. Globally, they have very well defined long term goals in terms of emission reduction. And some of them actually announcing net zero by 2050. Mainly European companies are pretty much ahead of that type of announce announcement. When it comes to where in the value chain of emission, they're focusing the attention, again majors are pretty open on saying it's not just the emissions we produce, which is defined as scope one. And the emissions we actually get from direct suppliers, scope two.
But also extending that to their vendor base, which is obviously very ambitious to even set emission reduction goals for scope three type of situations. When we move to the tier two type of companies, and here, I want to mention obviously a diverse set of players.
Some of these companies are pretty aligned with the majors and I can take the sample of EQT, Oxy, Marathon Oil that are actually pretty much in the same boat, setting goals for scope one, two and three. But the majority of them are pretty much limited to what they control, scope one, and to some extent their energy sources, scope two. So certainly you see a very diverse landscape, different companies taking different initiatives.
And when it comes to the type of things they are doing, measuring and detection is probably the priority number one. They want to size the problem before actually doing anything about it. Right? So measuring and detection has been pretty much in the strategy of all of them via LDAR programs. And we see companies like Total, BP, Shell, Chevron, I mean the majors and some of the tier two, and even tier three programs, kind of announcing and implementing proactive measuring and detection programs.
The next step is actually the actual reduction of this emission. So that's typically take place by taking care of the infrastructure. You have all equipment, you have all infrastructure, and we see companies going into a massive replacement program, kind of using newer infrastructure with obviously less environmental impact to some extent.
There is a third step and only a few companies actually making moves in that direction, which has to do with capturing, and particularly ConocoPhillips made an announcement at the end of last year that they going to implement vapor recovery technology in every single operation they own in the United States and eventually moving outside, sorry, to other operations.
But in addition to that, you have major corporate goals. So companies like Shell and BP, and I would say, to some extent, all European major companies, thinking a little bit more broadly and taking a double look at their portfolio, doing a couple of things.
Number one, getting rid of those assets with higher carbon footprint on one end. And we see divestments are being announced by companies like BP and Shell here in the United States. But at the same time, we see a migration, let's say a diversification, from oil and gas into other forms of energy. And we see some of these companies making aggressive announcements in terms of investments in renewable technology all over the globe.
So certainly we see, again, very diverse depending on the company, depending on the financial position of each company, depending on the asset they own, we are going to see different reaction, different responses, when it comes to methane reduction.
Amar Gujral:
Yeah. And certainly, I mean, you have the super majors with bringing up gas reduction targets and the 20 to 30% range by even just halfway through the decade. You have companies like BP, Shell, Chevron, Total all advancing goals related to both scope one, scope two, and scope three emissions. And then even when you look at the independence, EQT, EOG, you mentioned Oxy, Franco. But, just adding on Marathon and Pioneer, they are also setting targets for themselves, both midway through the decade of anywhere from 20 to up to 70% of a greenhouse gas reduction target, like we're seeing with EQT.
Nilesh, this is certainly going to be weighing on the businesses, in terms of their own ability to address these. What are some of the obstacles and challenges that you see facing these companies over the next five to 10 years?
Nilesh Dayal:
Yeah, so I think each company, and as Franco mentioned, every one of these large majors, independents and smaller ones are facing different challenges, but it boils down to sort of cost and their ability to fund from cash flows. The head count, or excuse me, labor requirements to implement some of these solutions, and then in competing shareholder pressures. So let's just tackle one by one. So cost wise, monitoring these greenhouse gas emissions requires some extensive analytics and monitoring solutions, yet alone to address them, the leakages, if you will.
And so deciding to invest in emission solutions or putting money in the ground or other forms of competing capital, that's going to be an issue to deal with. Now, currently with elevated oil prices, we believe that, our hydrocarbon prices, we believe that decision might accelerate the need to implement these solutions because they might have some extra cash flows.
We actually firmly believe that's what's going to happen, the ESG concerns are not going to go away. These solutions will get implemented. The other challenge though, is around oil and gas players needing additional staff. These are specialized solutions to monitor and manage these initiatives in a constrained labor market. That could be a constraint, even if capital is there.
They may not have the people or the bandwidth to implement some of these solutions. And finally, shareholders are definitely more broadly, consumers and shareholders broadly are more focused than ever on greenhouse gas emissions. Some shareholders though, excuse me, E and P companies are diverting more money into energy transition solutions, while other sort of management or oil and gas companies, management teams, are being incentivized to reduce emissions.
So there's challenges there on where to prioritize. Some teams are going to have an incentive to reduce their emissions, and some are diverting capital back into the ground. Some are moving completely away into more aggressive carbon capture or hydrogen solutions. So there's a challenge from shareholders that the companies are facing.
Amar Gujral:
And a proposed SCC rule would potentially force publicly traded companies to report greenhouse gas emissions. And thinking about scope one, scope two and scope three, curious Nilesh your take the challenges that might pose the broader oil and gas industry, including private companies and suppliers and manufacturers to the E and P landscape. How do you think that's going to start to impact outside of just the public universe?
So a proposed SCC rule would force publicly traded companies to report greenhouse gas emissions. But given the inclusion of scope three into potential disclosure requirements, Nilesh, how do you think that might impact the broader oil and gas industry, including the oil field service and equipment suppliers who may not be publicly traded in the market today and directly impacted by the disclosure policy?
Nilesh Dayal:
Yeah, it's just going to force all companies, regardless of size, into measuring, managing, and reporting for their customers. Most oil field service companies, whether they're public or private, their customers are large. Most of them, many of them, large, publicly traded. So it's just going to force the measurement and the monitoring of these solutions to be implemented across the space.
Amar Gujral:
So Franco, there's a great amount of complexity and challenges then that we're seeing across the industry, just given the federal regulations, the potential SCC ruling, as well as corporate's own targets and objectives. What do you see as kind of the opportunities then for companies to start to take advantage of the complexity and change that we're seeing in the market?
Franco Ciulla:
Yeah, that's a good question, Amar. We see opportunities all over the place if we might say that. And technologies that are already in place and ready to be implemented. I mean, when we look at the different aspects of the value chain monitor, and let's say detection of emissions is priority number one, and then we go into reduction and eventually into capture. And we see a number of service and equipment providers with solutions that can be, as I said, used immediately. Particularly on the monitor side, we see a landscape of aerial technology, satellite based technology, and even field level technology that are set to measure with some level of accuracy, the type of the volume of emissions.
We see companies actually implementing a little bit of everything, kind of using a top down and a bottom up approach to triangulate the way they measure emissions and report emissions in a more consistent manner.
Obviously the framework to report consistently isn't there necessarily today. And what we hope to see is some level of standardization so every single company can report the same way. But in the meantime, obviously companies are implementing their own solutions. When it comes to reduction, it's probably an easier way of solving the problem, assuming that you know the size of the problem, going after the elements of emissions in your particular infrastructure is probably easier.
We have a lot of technology on the ground, equipment manufacturers, both traditional oil field equipment manufacturers and also incoming equipment manufacturers with higher level of, let's say, environmentally friendly solutions with equipment that are actually designed to minimize or completely avoid fugitive emissions, to the point of also resetting the infrastructure. Like the example of tankless solutions is basically eliminating devices in the flow from well heads to pipelines in order to obviously minimize with that, the emission goal.
So certainly we see a lot of activity going on and a lot of technology going on and we see more and more companies kind of joining that effort of expanding their particular offering to include more ESG related type of solutions.
Nilesh Dayal:
Yeah, that's right. There's definitely opportunities for all players here to come up with more innovative monitoring solutions, whether it be aerial or point or satellite. But importantly, now that you have that information, there's going to be focus on ways to reduce or potentially even capture some of those emissions.
And that's where I think oil field service players, technology players can come in, operators can come in and be innovative around addressing some of those solutions. So once you know where they are, it's going to be easier to fix.
Amar Gujral:
Great. Thank you both. Any final thoughts you'd like to share about the report?
Franco Ciulla:
Well, my final comment is the initial comment I made. This is a very fluid situation. And I mean, we certainly are in the seek of understanding how regulators are reacting, how companies are reacting, where the investments are actually being directed.
We see more and more comments. So certainly keep an eye on what we publish, delegate. We keep active in the space. And as we learn more from the industry, from our clients, happy to keep sharing our thoughts.
Amar Gujral:
Well, that wraps up the questions for today. Just wanted to give a big, thank you, Franco and Nilesh for your time and perspective on both the Russian Ukraine conflict impact on the oil and gas industry and energy industry more broadly, as well as the landscape for both investors and participants across methane emissions management.
Nilesh Dayal:
Thank you.
Franco Ciulla:
Thanks Omar for the opportunity.
Host:
Thank you, our listeners for joining us today at the insight exchange presented by L.E.K. Consulting. Links to resources mentioned in this podcast can be found in the show notes, please subscribe or follow for future episodes wherever you listen to your podcasts. Also, we encourage you to submit your suggestions for future insights online at lek.com.
