As the cause of nearly half of all global carbon emissions, according to the International Energy Agency, oil and gas companies are under increasing pressure to decarbonize both their supply chains and the fuels they produce. “If the world is to come anywhere near to meeting its climate-change goals, the oil and gas industry will play a big part,” wrote Chantal Beck, a partner in McKinsey’s energy sector, in a January 2020 report.
Those decarburization efforts aim to reduce direct emissions released during drilling, processing and transportation operations, which together account for 9% of global emissions, according to Beck. Another area of focus is emissions from the oil and gas supply chain, which includes everything from power stations that supply refineries to equipment manufacturers. Most significant are emissions released when burning fuels, which represents more than a third of global emissions, noted Beck.
The Ministry of Petroleum and Mineral Resources has announced several measures to reduce emissions in Egypt. In January, during AmCham Egypt’s Building Momentum to COP27 Conference, Minister Tarek El Molla said the ministry has a strategy to decarbonize the sector by 2035. However, the government has yet to publically announce milestones or timeframes.
Nonetheless, national and international oil companies are major players in the drive to decarbonize. “A big part of the challenge is the energy system,” said Bjørn Sverdrup, chair of the Oil and Gas Climate Initiative’s executive committee, in an October TED Talk. “We can’t fix the climate without fixing the energy system.”
Transition strategy
According to Molla, Egypt’s energy strategy began by gradually reducing subsidies to encourage fossil fuel consumers to find alternative energy sources.
In December 2018, the government said it would start aligning domestic and international prices every three months. In the past, petrol prices would go unchanged for years until the government subsidy didn’t cover the difference with global prices, at which point petrol prices would more than double overnight.
The government has also launched initiatives promoting natural gas instead of gasoline in passenger cars, commercial vehicles, factories, power stations and households. According to a 2016 Oxford University research paper, natural gas is the cleanest fossil fuel. In 2021, it accounted for 65% of burned fuel in Egypt compared to 48% in 2015, said Molla.
In January, the oil minister told the media that using locally sourced natural gas instead of importing refined oil is a “transitory step.” The ultimate goal is to use emission-free fuels, such as hydrogen.
Other ministry efforts include allocating $1.5 billion to NOCs in Egypt to reduce their fuel and electricity consumption, energy losses and emissions. Molla also created a department in the ministry to promote decarburization and said his top priority this year is introducing carbon capture technologies to companies in Egypt with the help of the World Bank.
The oil minister also told the media in January there are memorandums of understanding with international partners that ensure the sector “preemptively” reduces emissions. Molla noted that all oil companies in Egypt, domestic and international, already use renewables to power drilling sites.
Mounting pressures
Globally, major oil and gas companies are being pushed to decarbonize by “regulators, investors, customers and other stakeholders,” said James Thomas, a partner at Strategy&, in a 2021 report titled “Greening the Barrel.”
Beck of McKinsey said the most pressure is from “activist shareholders,” environmental advocates who own enough stock to have seats on corporate boards. Beck said they force those companies to “disclose consistent, comparable and reliable data” about efforts to combat climate change.
Additional pressure comes from casual investors who are “increasingly conscious of environmental issues,” said Beck. A 2020 Schroders study found “67% of the world’s top 650 institutional investors cite full environmental, social and governance guidelines integration as their favored investment approach.”
Perhaps the greatest challenge for oil companies is rising prices making oil less attractive as an energy source. Brent crude oil went from $79 a barrel on Jan. 1 to nearly $93 on Feb. 16. Meanwhile, equipment used to generate power from renewable sources has been getting less costly. In the United States, “the cost of solar … has fallen more than 70% since 2011 and the cost of wind by almost two-thirds,” noted Beck. “By 2025, they could be competitive with natural gas,” which is 80% cheaper than oil, according to the American Enterprise Institute think tank.
There also are concerns about eventual government regulations that might make fossil fuels, particularly petrol and diesel, more expensive. “Transparency and tangible action on emissions are already becoming important in certain export markets,” said Thomas. “Some governments are considering measures such as carbon border adjustment taxes for imported products based on emissions.” So far, only the EU has issued environment-related regulations in its markets, after designating natural gas and nuclear energy as “sustainable” in February. It has also proposed that all new cars sold after 2035 must be electric.
Difficult transition
Sverdrup of the Oil and Gas Climate Initiative noted that oil companies could continue focusing on quick and easy decarbonization gains for years, as demand for global oil and gas continues to be high. “We need to turn from an 80% fossil-fuel based system to a zero-emission system,” he said. That would require “massive investment, radical policy shifts and changing behavior,” which takes time and ultimately will make “changing the energy system … hard.”
Meanwhile, governments can’t rapidly clamp down on oil company emissions, which could cripple their own economies. Even with Egypt’s comparatively diverse economy, the country’s top exports are oil and refined petroleum products. According to the Central Bank of Egypt, they accounted for 49.2% of commodity exports and nearly 30% of total exports in 2020/2021.
That makes the sector’s decarbonization a delicate balancing act between the status quo and the need for pressing change. “Even if some would like these companies to just disappear, what they are doing matters to all of us every day,” said Sverdrup. “And time is very limited [to reduce emissions to avoid a climate catastrophe]. So it’s very hard to … comprehend the scale of the change.”
The solution could rest with major oil companies taking the lead in decarbonizing their operations at a manageable pace while avoiding permanent climate damage. “Although the long-term aim is net-zero emissions, it is vital to translate these targets into action in the near term and manage perceptual and commercial risks,” said Thomas of Strategy&. “Companies need to ensure they can provide … positive returns along with tangible progress toward emission reduction targets.”
