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An accountant's perspective on decarbonisation

Thursday, May 19, 2022

Reid Morrison, Global Energy Advisory Leader, Net Zero and ESG, and Global Client Partner, PWC, provided an accountant's perspective on oil and gas decarbonisation.

'When you get into the ESG conversation it's been very chaotic over the last few years,' said Reid Morrison, Global Energy Advisory Leader, Net Zero and ESG, and Global Client Partner, with professional services and accounting firm PWC.

He was speaking at OFS Portal's 19th Annual Virtual Conference - Energy Transition: Deploying E-commerce for New Energy, held on September 23.

'What is ESG? it's a bit of an alphabet soup. What is the actual objective of this? It is not actually based on facts but based on perception.'

One of the challenges is that high quality measured data is not always available.

Something which is not widely known is that the Greenhouse Gas (GHG) Protocol (which contains the definitions of Scope 1, 2, 3 and is widely followed) is based on an ISO standard which does address data quality. It identifies four 'types' of measurement which are available to use, classed as worst to best, he said.

The best source of data is direct measurement, or 'primary' data.

But you may use 'secondary' data, from a provider such as the US Environmental Protection Agency. 'They've done calculations of the carbon footprint of certain parts of materials.'

Under the ISO standard, if you want to do a calculation as part of your reporting, the calculation has to be verified.

This is a similar process to audit in the accounting world, when a company's financial procedures and data are assessed, to attest they follow the accounting standard. In the ISO taxonomy the term used is "verified".

'The GHG protocol was an attempt to translate engineering language in ISO to accounting and corporate language,' he said.

'Some of my colleagues helped write the first draft of the GHG Protocol. I asked them, 'explain to me the logic'. [I found] the logic in the GHG Protocol is very clear.'

'It is on the company to translate the standard to procedures that matter to their business, so there's confidence you'll have that procedure followed.'

Every company needs to determine what their boundary is, in terms of what data they do and don't count. 'There's a lot of nuances around decisions companies need to make.'

Lack of precision

'It is interesting how many companies make net zero commitments without understanding their baseline. Very few have an appreciation of the lack of precise data.'

The data which companies provide about their emissions 'is based on estimates of estimates'.

'The best data is that direct measurement [but] we don't have the measurement devices in place right now.'

Mr Morrison drew a comparison with the financial world, where currency is a robust unit of measure.

While people are willing to accept the term 'CO2 equivalent', nobody would account for their business based on 'dollar equivalent', which could turn out to be anything between 60 and 140 cents.

The term 'net zero' is itself a maths equation, based on starting with a baseline, and calculating which steps will help you remove emissions, and then finding out how emissions you can't remove can be replaced by offsets.

In the oil and gas industry, the standard 'bill of materials' document, (a list of parts needed to make up a product) is likely to include carbon footprint data in future.

'A lot of people understand the concept, but they don't appreciate the lack of accurate data,' he said.

Some big purchasers outside the oil and gas industry, such as Walmart, have given their suppliers clear instructions about data they need to provide.
'The expectation I have - it will move from 'Request for Information' to a pre-requisite to tender,' he said.

Some buyers have gone further to dictate that by 2025, they will only work with suppliers who use renewable energy for all their activities.

Some companies are required to get their carbon footprint calculations to be reviewed by an ISO accredited verifier.

In future, it is possible that emissions audits could be as complex as financial audits, with specialist companies like we have today in financial audit.

Although if a company is making separate calculations for each of its products, and it makes tens of thousands of products, it would also be a lot of work for a third party to verify each of them.

So maybe we would see different kinds of audits, such as internal audit of processes, and an outside audit firm taking a view about how well a company manages the data overall, he said.

Scope 3 requirements

There are 15 different categories in the Scope 3 requirements (emissions from your value chain). Two which may be particularly tricky for oil field services companies are category 11 'use of sold products' and category 1 'purchased goods and services.

'There's a lot of questions being asked of that,' he said.

For example, many companies do not have much transparency about how their services are used and what emissions are created from doing so. As an extreme example, consider a company providing cloud computing services.

Perhaps what's most important is to develop a model which you can use consistently, even if it includes estimates. 'As long as that model is consistent, its acceptable,' he said.

'Very few people that I talk to know there are 15 categories in Scope 3. It is also rare to find people who have read the four GHG protocol documents or the ISO standard,' he said.

'If you do that homework, then [you see it explains] 'how do you do carbon calculation for a service'.'

The protocol includes guidance of how you define your boundary and say what should be attributed to this specific tender.

Using the data

Once the data is available, customers may make choices, such as whether to buy a product with lower cost but higher emission, just as they have to consider whether to buy a product which is more expensive but may have more durability.

Many companies are already introducing other schemes related to carbon accounting, such as incentive plans linked to ESG goals.

Some companies are applying 'shadow pricing' schemes, incorporating a price on carbon in their long-range planning, or applying a carbon 'tax' internally in figures they use to make business decisions.

In the chemical industry, BASF is calculating a carbon footprint for all of its products or SKUs (stock keeping units), based on the ingredients of all of their products, with data gathered together on a digital platform.

Schneider Electric offers products to help companies reduce emissions as part of a carbon footprint package.

Business opportunities for OFS

There are business opportunities for oil field services (OFS) companies related to decarbonisation, if they can get the accounting right. They should take particular interest in CO2 sequestration, which Mr Morrison thinks 'is likely to come online in the next 10 years.'

'My own view [is that] you need brilliant engineering and science, you have to have the knowledge of the subsurface, you have to build large capital projects and operate complex equipment at scale. This industry checks those three boxes.'

'The oilfield service industry is seeing the opportunities but not seeing themselves as the operator. The [services] industry has the ability to do this on their own. I believe oil field services doesn't need to have upstream give them permission to do this.'

'In some cases, a joint venture will be smart. My personal view, it does not require an upstream customer.'

'The question is does it generate a return. If you look at tax incentives, you get a $50 credit if you capture a tonne of CO2.'

'I've had my tax colleagues talk to people in DC they say, 'if you want, you can sell that offset to a 3rd party.' Right now, it is trading at $46.
I believe that there will be a lot more demand for offsets.'

'If you're a company that's publicly traded, you're going to want to make sure the offsets are publicly verified. It is going to pass the smell test of, 'it was a tonne of CO2 taken out of the environment.'"

Another possible business opportunity is in geothermal energy. 'It is expensive to build the geothermal well, but it produces a lot of clean energy for a long time.'

'With the mix of capabilities that are needed, my view is that the oil field service industry is the only one that has the capabilities.'

'There's 3 pathways for oil field services. One is pure play hydrocarbon,
but understand you're going to have a customer expectation of carbon footprints that are verified. The second pathway is to diversify. The third is to pivot.'

'The opportunity right now is stepping forward into it and thinking about the different pathways.'

Looking more broadly, 'we're all on the same rock and trying to work out how to make this the most sustainable system that we can,' he said.

In the US, the industry can appear to be more reactive than proactive when it comes to managing emissions, which is not necessary. 'If we can all agree we have the same goal, the NGOs and regulator will be fair in their conversation, as opposed to industry opting out of the conversation.'

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