Addressing methane and flaring emissions remain the key priority for the industry, but achieving net zero needs increased use of electrification and CCUS across the value chain.

Over half of scope 1 and 2 emissions result from methane venting, fugitive emissions and gas flaring. Energy consumption across the value chain constitutes approximately 15% of the emissions, with the remaining from process emissions (refining, natural gas processing and midstream operations). Globally, the emissions intensity of operations average 90 kgCO2e/boe, but this varies by operator and asset type.⁴⁴⁵ For instance, Middle Eastern assets are, on average, 26% less emission-intensive than their North American counterparts.⁴⁴⁶

Methane emissions increased by 4% from 2020 to 2022 due to recovering oil and gas demand,⁴⁴⁷ but 150 countries have pledged to reduce them by 30% below 2020 levels by 2030 under the Global Methane Pledge.⁴⁴⁸

Flaring emissions have dropped by 3% between 2020 and 2022, with a 12% reduction in flaring intensity (flared volume per barrel of oil produced).⁴⁴⁹ The Zero
Routine Flaring by 2030 initiative is endorsed by 35 countries and 54 oil and gas companies.⁴⁵⁰

To align with net-zero ambitions, the industry aims to achieve the following by 2030: a more than 50% reduction in scope 1 and 2 emissions intensity, a 75% reduction in methane emissions451 and a 95% reduction in flaring emissions.⁴⁵² Achieving these objectives requires deploying methane abatement technologies, eliminating non-emergency flaring, electrifying oil and gas facilities, adopting CCUS in gas processing and decarbonizing refinery operations through CCUS and clean hydrogen, where possible. Energy efficiency will also be vital.

Five leading decarbonization pathways have emerged to address energy and process-related emissions: methane abatement, zero gas flaring, electrification, CCUS and clean hydrogen. Methane and flaring reduction technologies, along with upstream electrification technologies, are already available with little to no cost increase. CCUS technology for gas processing operations is available with a cost increase of 7%.⁴⁵³ However, refining decarbonization measures, including CCUS and clean hydrogen, are still in their early stages and are expected to raise refining costs by 7-9%.⁴⁵⁴

Many methane abatement technologies, like vapour recovery units and leak detection and repair (LDAR), enable methane capture and reduction without added costs when considering the value of recovered gas. However, barriers to technology deployment include limited access to gas markets, higher upfront equipment costs for smaller operators and the absence of technology standards. These technologies also require support from effective methane detection tools and reporting guidelines. To enhance methane detection and mitigation, the UN introduced the Methane Alert and Response System (MARS) at COP27, a satellite-based system that notifies governments, companies and operators of methane leaks for faster response times.⁴⁵⁵

Zero-flaring techniques involve on-site gas use, treatment, storage or distribution to existing gas markets, aided by appropriate infrastructure like gas pipelines, on-site gas compression and gas reinjection. Most of this technology is available with minimal cost increase. Many major players are committed to eliminating routine flaring, as seen with Exxon’s cessation of all routine flaring in their Permian operations.⁴⁵⁶

The electrification of oil and gas facilities reduces dependence on diesel or natural gas for energy requirements. Technologies for electrifying upstream operations and LNG processes are readily available and can be deployed with incremental production costs. For instance, bp’s US shale subsidiary, bpx, has already electrified 80% of its Permian operations with the aim to increase coverage up to 95% by the end of 2023.⁴⁵⁷ To address energy consumption and associated emissions, energy efficiency initiatives are also being explored, including energy demand optimization using digital and AI-based technologies. Some examples
include the use of digital twins to optimize the power consumption of electric submersible pumps, reducing the energy consumption of turbines using analytics and data-driven asset maintenance programs to improve efficiency.^458,459

Decarbonization technologies for gas processing, such as CCUS, are commercially available, albeit with a modest 7% increase in production costs.⁴⁶⁰

CCUS is the primary decarbonization pathway for refineries, particularly for reducing emissions from burning waste fuel gases and pet coke. Refinery hydrogen production units generate a sufficiently pure stream of CO2, making carbon capture suitable. Additionally, emerging technologies like clean hydrogen and electrification of heat and power sources offer potential decarbonization alternatives, albeit at early stages of development.

Decarbonization of the oil and gas sector relies on three key factors: the capacity of clean power generation available for facility electrification, robust CO2 handling and storage capacity for CCUS deployment at processing plants and refineries, and clean hydrogen generation capacity for refineries. The required infrastructure investments are estimated to be up to $300 billion,⁴⁶¹ a figure that falls below the industry’s annual CapEx. Considering the industry’s experience in CCUS, natural gas and hydrogen infrastructure, and renewables position the industry as a potential leader in developing infrastructure hubs.

Electrifying production sites can be achieved through grid-sourced renewable electricity or captive power generation systems, necessitating an investment of approximately $120 billion to enable 70 GW of clean power capacity by 2050.⁴⁶²

To meet the demand for clean hydrogen in refineries, an additional 8 MTPA of clean hydrogen generation capacity is needed, requiring investments of $30-90 billion.⁴⁶³

The construction of up to 380 MTPA of CO2 handling infrastructure is necessary, with over 50% of its capacity dedicated to managing carbon captured during gas processing, and the rest to support refineries.⁴⁶⁴ Approximately 28 MTPA of CO2 handling infrastructure is already in place for existing gas processing operations.⁴⁶⁵ Building this infrastructure will require an investment of $30-70 billion.⁴⁶⁶ Exxon’s acquisition of Denbury, a provider of carbon transport and storage solutions, is a significant development that positions the company to expands its CO2 handling infrastructure, not only for its operations but for adjacent industries like clean ammonia, clean hydrogen and synthetic transportation fuels.⁴⁶⁷

The ability of oil and wholesale gas buyers to absorb a green premium of 7-10% remains untested at scale as low-emission oil and gas represents less than 1% of global supply.⁴⁶⁸ A 10% increase in production costs leads to 3-10% green premium for end users.⁴⁶⁹ Historically, the market has shown limited price elasticity of demand, indicating that it can absorb the required green premiums.

Government intervention will be needed to safeguard lower-income households affected by rising fuel prices.

However, green premiums to end consumers will disproportionately affect developing countries and emerging economies, which are importers of oil and gas, especially without sufficient policy support.⁴⁷⁰

To achieve early breakeven and sustained demand for low-emission products, the oil and gas industry will need to identify the right market -sector clusters. Examples include petrochemical feedstock in Asian markets, heavy transport, fuel and gas as a transition fuel for power in South-East Asia. In the long term, especially in developed countries, markets will shift towards low-emission substitutes like biofuels, clean hydrogen-based fuels for transport and renewable energy for power as they become cost-competitive. There is an opportunity for oil and gas companies to also diversify as the market for these substitutes grow. For example, Shell plans to offer biofuel-based SAF for aviation customers from its Rotterdam plant by 2025.⁴⁷¹ Strategic collaborations with downstream consumers
will also be vital as the companies diversify. A key development includes bp and car rental service provider Hertz planning to work together on installing a network of EV charging solutions in North America to service the car rental customers.⁴⁷²

Increased transparency on emissions can improve demand signals for low-emission oil and gas. Some standards, guidelines and frameworks exist currently to standardize the MRV of emissions across the oil and gas value chain. The Oil & Gas Methane Partnership 2.0 (OGMP 2.0) provides a robust, measurement-based reporting framework for industry’s methane emissions.⁴⁷³ The Global Reporting Initiative (GRI) Sector Standard for Oil and Gas, effective from 2023, provides a
reporting framework and disclosure guidelines for sustainability topics including GHG emissions.⁴⁷⁴ The International Group of Liquefied Natural Gas Importers’ (GIIGNL) MRV and GHG Neutral Framework provides consistent definitions and emissions measurement approach for LNG cargoes. The first LNG cargo aligned to this framework was supplied by Shell to Taiwan’s state refiner CPC in January 2023.⁴⁷⁵

The oil and gas industry is strategically vital for regions and nations due to its role in ensuring energy security. Therefore, effective policies and regulations are crucial for decarbonizing the sector. To reach net-zero targets, a comprehensive blend of policies is essential. These policies should incentivize the adoption of zero-methane and zero-flaring technologies while promoting CCUS implementation across the oil and gas value chain. Policy tools to support this effort may include incentives for low-emission technologies, technology standards, methane MRV guidelines, methane taxation, flaring bans and R&D funding.

While key producing regions have announced emissions targets, action plans and MRV guidelines, more action is required to translate these policies into tangible implementation and widespread adoption. Countries like Norway, the US and Canada are leading the way by demonstrating ambitious policy commitments to address oil and gas emissions.

The oil and gas sector is well-positioned to invest in sectoral decarbonization. Oil and gas will need to re-direct capital towards deploying low-emission technologies across the value chain, including methane and flaring reduction technologies, upstream electrification, CCUS for gas processing and transforming refineries.⁴⁹¹ Investments required by 2050 can reach up to $880 billion or $32 billion in annual investments.⁴⁹² This represents only 4-6% of the total annual CapEx of the industry, and with industry average profitability of 20%493 and WACC of 9%,⁴⁹⁴ the industry is in a good position to fund its additional CapEx by self-generated cash flows. For example, Petrobras plans to invest $4.4 billion in low-carbon initiatives in the upcoming five years, which represents 6% of total CapEx. Of that $4.4 billion, $2.1 billion will be invested in low-carbon solutions for new upstream projects.⁴⁹⁵

The business case for investment is attractive in upstream, where the sale of captured methane generates sufficient returns for investors. The business case for investing in refining needs to be strengthened, as technologies remain in the early stage and returns remain uncertain.

Oil and gas supermajors, large independents and most national oil companies are well capitalized to fund their decarbonization efforts. Smaller players will rely on industrial collaboration and government support in some regions for raising the required capital. Investors and policy-makers will also play a crucial role for creating the right enabling conditions for investment. The geographic distribution of oil and gas producing nations and existing infrastructure aids the transition as CapEx need not be concentrated in a particular geography.

Approximately 92% of large publicly-traded oil and gas companies consider climate change as a key consideration for their strategic assessment and integrate it into their operational decision-making.⁴⁹⁶ Meanwhile, 4% of companies are building basic emissions management systems and process capabilities. Finally, 4% of companies acknowledge climate change as a business issue.