The Players

Industry: Turning the Titanic

PRESSURE ON THE oil and gas industry to act more decisively to combat the effects of climate change is long overdue. In the summer of 1988, sickening clouds of smog blanketed much of the United States. I was living in Washington, DC, and was working on Capitol Hill for Representative David Skaggs, who served on the House Committee on Science, Space and Technology.¹

My most vivid memory from that summer on the Hill was attending a congressional hearing on global warming with testimony by Dr. James Hansen (then director of the National Aeronautics and Space Administration [NASA] Goddard Institute for Space Studies). I had first learned about the greenhouse effect while studying chemical engineering in college when Hansen published his seminal 1981 paper in Science forecasting that manmade global warming would “emerge from the noise level of natural climate variability by the end of the [twentieth] century.”²

The prospect of climate change set off alarm bells in my ears that never stopped ringing. In his testimony, Hansen even tied climate change to that summer’s heat wave.³ At the time, however, poor local air quality was a more pressing national concern. (I even remember suffering an acute case of bronchitis from swimming outdoors.)

Instead of acting on climate change, experts called for a reduction in gasoline volatility (its evaporative characteristics) to lower emissions from cars and trucks and reduce ground-level ozone—a move that would also inadvertently shave off some volume of climate-forcing gases. While the regulators in charge previously had been focused squarely on automakers to clean up the air, they now turned their sights on petroleum refiners. On the heels of Californian state regulators, the US Environmental Protection Agency (EPA) set out to reformulate gasoline.⁴

Oil companies en masse resisted, stating it was not technically possible or affordable to reformulate cleaner gasoline—except the Atlantic Richfield Company (ARCO), the one company that was already refining cleaner gasoline before doing so was required.⁵ Not only was cleaning up gasoline doable, but also this reformulation only cost 2 cents a gallon more to make.⁶ Once ARCO committed, the government adopted new regulations, and every oil company followed suit.

Which of today’s industry leaders will step up and be tomorrow’s low-greenhouse-gas (GHG) energy companies? And how do we stop leading companies from simply transferring their dirtiest assets to another cadre of industry laggards?⁷

Climate change is a long-term societal risk calculated by businesses that seek short-term petroleum commodity profits. Talk is cheap, and companies can claim they are making headway without offering proof. As such, it is difficult to separate a company’s ecofriendly rhetoric from action, confirm constant progress amid moving company targets, and gain access to data to verify corporate actions. Without leadership to turn this titanic-sized industry in a more environmentally responsible direction, the world will stay on course for a severe environmental reckoning.

This chapter introduces the large and varied ensemble of actors that make up the oil and gas industry. Durable climate progress rests on a better understanding of the industry’s structure and the positioning of its different actors. The membership of this ensemble extends far beyond large international companies that are household names to include lesser-known national oil and gas companies and countless small and independent producers, refiners, and shippers worldwide. This cast is also joined by ancillary actors—from investors and consultants to traders and assurance agents—who round out the industry. These oil and gas actors contribute different GHG emissions that they self-report in ways that are inconsistent and that therefore do not allow comparisons. Notably, no single company is currently positioned to meet the climate change targets of the 2015 Paris Agreement.

Concrete examples showcase how some companies are better positioned than others to be climate leaders. While it will not be easy to reform this mature industry, tangible progress is possible. A series of corporate benchmarks is provided for companies that intend to improve their climate leadership position. The chapter concludes with the most pressing question for climate progress: will it ultimately be more productive to partner with or defeat the mighty oil and gas industry?

The Structure of the Petroleum Industry

The oil industry reaches far beyond ExxonMobil, the most renowned petroleum company, heir to the Standard Oil empire.⁸ Unlike Exxon, most companies are not household names nor do they operate a corner gas station. Still, all of these firms play vital roles in one or more ways.

Figure 5.1 depicts the three main functions and ancillary activities that make up the oil and gas industry. Upstream operators explore for and produce oil and gas. Midstream companies move and store oil and gas and may do some processing as well. Downstream entities refine oil and also market petroleum products.⁹ Several other entities do not fall neatly into these supply chain categories. Traders store and ship crude between upstream producers and downstream refiners and also ship refined petroleum products to end users. Gas is moved regionally by various pipeline operators and a growing number of corporate entities are expanding worldwide operations to liquefy, ship, and regasify gas. Petrochemical companies acquire feedstock from upstream producers to manufacture petroleum-based commodities. Oil and gas service companies work alongside upstream, midstream, and downstream operators, installing and maintaining equipment. Individual companies throughout the supply chain engage consultancies and join industry associations. Atop the entire petroleum value chain sit investors, shareholders, and governments who infuse the industry with money and receive dividends, collect royalties, or redistribute rents.

FIGURE 5.1 Actors in the Oil and Gas Supply Chain

Source: Author’s depiction.

Not all companies partake in all aspects of the oil and gas business. Some are vertically integrated across the value chain, while others focus on a specific unit operation. Companies are typically identified by their ownership and reach. Supermajors like ExxonMobil and Shell are international oil companies (IOCs) that are publicly traded and globally engaged. State-owned enterprises (SOEs) like PetroChina and Gazprom are national oil companies (NOCs) that are directly affiliated with a specific country.¹⁰ Independents like Marathon Oil and EOG Resources are privately held companies that operate on a more limited geographic basis. The newest arrangement is international national oil companies (INOCs) like Saudi Aramco and Qatar Petroleum, which are majority SOEs that also acquire outside investments and release public stock offerings.¹¹

Assets in the Trillions

This expansive array of companies—large and small, public and private, domestic and international, and vertically integrated and operationally differentiated—all have at least one business interest in common: hydrocarbons. Together, companies engaged in the oil and gas industry had an asset valuation of over $10 trillion (in 2017).¹² For comparison, after rising nearly 20 percent between 2017 and 2018, the net income of the 150 largest global oil and gas companies plummeted nearly 60 percent in just two years amid the global pandemic in 2020 and then rose by 73 percent in 2021.¹³ Although their fortunes dip from time to time, these companies continue to wield tremendous clout worldwide, especially when it comes to climate change.

Table 5.1 summarizes the asset values of different types of companies based on their roles in the supply chain as of 2017.¹⁴ NOCs make up the lion’s share of the industry’s asset value today at 45 percent.¹⁵ Supermajors are about half as wealthy as the NOCs, estimated at 20 percent of total assets. The remaining industry actors—independent producers, independent refiners, chemical companies, shippers, oil service companies, and traders—each make up under 10 percent of industry assets. Despite their smaller share of the overall pie, the industry could not function without their distinct roles in the oil and gas value chain.

Table 5.1 Where Companies Fit into the Oil and Gas Supply Chain (2017)

Companya	Country	Estimated Assets (in billions of USD)	Upstream	Midstream	Downstream	Other
Supermajors
Royal Dutch Shell	Netherlands	$407	x	x	x	Chemicals
ExxonMobil	US	$349	x	x	x	Chemicals
BP	UK	$277	x	x	x	Chemicals
Chevron	US	$254	x	x	x	Chemicals
Total	France	$243	x	x	x	Chemicals
Eni	Italy	$138	x	x	x	Chemicals
Equinor	Norway	$111	x	x	x	Chemicals
Other IOCsb
Occidental	US	$84	x	x		Chemicals
ConocoPhillips	US	$73	x
Repsol	Spain	$72	x	x	x	Chemicals
Suncor	Canada	$71	x	x	x
NOCsc
PetroChina	China	$631d	x	x	x	Chemicals
Gazprom	Russia	$316	x	x	x	Chemicals
Petrobras	Brazil	$251	x	x	x	Chemicals
Rosneft	Russia	$212	x	x	x	Chemicals
PdVSA	Venezuela	$190	x	x	x
Pemex	Mexico	$108	x	x	x	Chemicals
Lukoil	Russia	$90	x	x	x	Chemicals
Pertamina	Indonesia	$56	x	x	x	Chemicals
NIOC	Iran	n/a	x	x	x	Chemicals
INOCs
Saudi Aramco	Saudi Arabia	$359e	x	x	x	Chemicals
KPC	Kuwait	$135e	x	x	x	Chemicals
Qatar Petroleum	Qatar	n/a	x	x	x	Chemicals
Midstream Companies
Enbridge	Canada	$121		x		Oil pipelines
TransCanada	Canada	$78		x
KinderMorgan	US	$74		x
Maersk	Denmark	$49		x
PJSC Transneft	Russia	$32		x
Other Refiners
Sinopec	China	$226			x	Chemicals
Vitolf	Switzerland	n/a	x	x	x	Traders
Gunvor	Switzerland	$63	x	x	x	Traders
Phillips 66	US	$54			x
Valero	US	$50			x
Marathon	US	$14			x
Service Companies
Siemens	Germany	$163				Consult
Schlumberger	US	$71				Consult
UOP/Honeywell	US	$58				Consult
Baker Hughes	US	$52				Consult
Halliburton	US	$26				Consult
Transocean	Switzerland	$26	x	x

^a While collectively they amount to a nominal share of the oil and gas industry’s asset valuation, there are thousands of small independent oil and gas companies (family operations and “wildcatters”) in the United States and elsewhere.

^b There are at least 100 midsized companies that, in the aggregate, are valued at over $1 trillion. They are too large to be “wildcatter” independents but not large and integrated enough to be supermajors.

^c This is a subset of the estimated seventy-one NOCs operating in sixty-one countries.

^d PetroChina includes CNPC in its financial entries.

^e 2018 data.

^f In 2019, Vitol sold a stake of its company to ADNOC.

INOCs, international national oil companies; IOCs, international oil companies; NOCs, national oil companies.

Sources: Energy Intelligence, “Big Oil’s Emissions,” EI New Energy, May 9, 2019; Oil & Gas Journal, OGJ150, September 3, 2018, https://digital.ogj.com/ogjournal/20180903/MobilePagedReplica.action?pm=2&folio=Cover#pg1; Oil & Gas Journal, “O&GJ Refining Survey 2018”; OGJ100, September 3, 2018, https://digital.ogj.com/ogjournal/20180903/MobilePagedReplica.action?pm=2&folio=Cover#pg1; NRGI National Oil Company Database, https://resourcegovernance.org/analysis-tools/publications/national-oil-company-database; Platts Top250 Rankings, https://www.spglobal.com/platts/top250

Deep Pockets, Tight Margins

The markets for oil and gas have historically been more valuable than those for all other raw materials combined,¹⁶ making up a significant share of the global economy.¹⁷ The industry’s network of infrastructure is extensive, is constantly under development, and contains trillions of dollars in assets.¹⁸ Successful development fills investors’ pockets and national coffers.

Despite its outsized reach and massive pocketbooks, the oil and gas sector operates on tight margins, especially when it comes to refining. Small changes in demand (driven exogenously by demographics, macroeconomics, and policy decisions) can cause price volatility that has drastic short-term impacts. As such, oil and gas companies and their affiliated businesses are laser-focused on short-term profits.¹⁹

Corporate sustainability, which calls for a more long-term mindset that companies can no longer publicly deny, takes a back seat to the immediate bottom line. Yet climate change poses an existential threat to oil companies’ profit-making model, striking at the heart of the petroleum industry’s very being. With damages escalating dramatically over time, the intergenerational costs of global warming are at odds with the long-term returns required to cover the cost of major upfront capital investments as well as the need to meet short-term demand for petroleum. The diverse range of corporate actors in the industry differ markedly along financial and climate dimensions, as discussed later.

Different Actors, Different Emissions

NOCs tend to emit more GHGs for similar levels of asset value than IOCs. Independent producers create fewer emissions than independent refiners. And chemical companies and oil and gas traders and shippers operate somewhere in the middle. By far, those that provide the highest asset value for the least climate impact in this sector are oil and gas consultancies and field service providers. Although they do not account for their clients’ GHG emissions, these actors play an outsized role in decisions that can have tangible climate-impacting results. Figure 5.2 plots this relationship between the levels of GHG emissions and asset values for dozens of oil and gas companies, disaggregated by industry actor. This information offers insights on which parties are most responsible for high GHG emissions levels and where to focus attention on mitigation countermeasures to the greatest effect.

FIGURE 5.2 GHG Emissions versus Asset Values for Various Oil and Gas Companies

GHG, greenhouse gas; IOCs, international oil companies; NOCs, national oil companies. Sources: Author’s calculations; Energy Intelligence, “Big Oil’s Emissions,” EI New Energy, May 9, 2019, https://static1.squarespace.com/static/5b85ce643917ee06a7c16d3f/t/5f4808de95ab552bfc3658a2/1598556382887/EI+8.2020.pdf; CDP, Corporate GHG Table, https://www.cdp.net/en/investor/ghg-emissions-dataset; and individual company websites.

Responsible Parties

Assigning GHG emissions to the responsible party depends on the particular assets involved. For example, some producers ship their own oil and gas, while other producers may sell their oil and gas to traders or source shipping out to independent midstream companies. Table 5.2 details estimated ranges of total lifecycle emissions assigned to responsible parties. For example, oil and gas producers may account for as little as 4 to 7 percent of the lifecycle GHG intensity if the asset they extract readily flows and they use low-emitting operations.²⁰ Conversely, emissions can increase dramatically to as high as 31 to 63 percent of GHG emissions when they recover difficult, unconventional assets and do not take precautions to operate with extreme care.²¹ The same holds for refiners. While midstream shippers contribute a smaller share of emissions intensity overall, there is a significant spread in GHG intensity between how they handle their lowest- and highest-emitting assets. Liquefied natural gas (LNG), for example, can significantly boost shippers’ GHG footprint to upward of 13 percent of total lifecycle emissions.²²

Table 5.2 Total Lifecyle GHG Intensity by Industry Actors

Responsible Industry Actor	Crude Min.	Oil Max.	Natural Min.	Gas Max.	Sample Oil and Gas Resources Averages and/or Rangesd
Oil and Gas Producersa	4%	31%	7%	63%	19%
Oil Refinersb	1%	32%	<1%	4%	6%
Midstream Operatorsc	<1%	9%	<1%	13%	<1–5%

Note: Shares are calculated for different resources and are not additive; assumes 100-year GWPs (20-year GWPs differ, but generally represent similar min. and max. GHG ranges).

GHG, greenhouse gas; GWPs, global warming potentials; LNG, liquefied natural gas.

Source: Author’s estimates using OCI+ Preview Web Tool, 2020.

^a Gas producers include gas-processing GHGs.

^b Petroleum coke emission shares added to refiner responsibility.

^c LNG shippers represent max values.

^d Sample includes twenty oil and gas resources in OCI+ Beta Preview.

Self-Reporting Corporate GHGs

Public GHG emissions reporting is increasingly becoming the norm for all corporations. Although self-reported GHG levels are technically certified, as discussed later, estimating emissions is complicated and error prone. As such, the figures that companies put forth offer a starting point for comparisons.

Many (but not all) oil and gas companies self-report their GHG emissions on an ongoing basis, usually as part of their annual, sustainability, or climate reports. Emissions reports are guided by various suggested GHG accounting methods that have been revised over the past twenty years to reflect changing oil and gas practices.²³ Still, companies have different objectives for reporting their GHG levels that can include miscellaneous emissions sources at the asset, facility, division, or corporate level.

Figure 5.3 details self-reported Scope 1 and Scope 2 emissions and GHG intensities for select oil and gas companies. These are the supply-side GHGs that are directly and indirectly emitted by the oil and gas company itself in its production, processing, refining, and shipping operations. Supply-side GHG intensity (signified by gray bars) vary by a factor of five, from high (Sontratach) to low (Equinor), with a sample mean of 52 kilograms of carbon dioxide equivalent (CO₂e) per barrel of oil equivalent (BOE). Absolute Scope 3 GHGs result from the consumption of the petroleum products sold by each oil and gas company. These end-use emissions are based on product sales (see the black “x” markers), which are not currently widely reported by oil and gas companies. Just over half of the twenty-six companies in this sample reported their Scope 3 GHG levels, and their annual average emissions of 555 million tonnes of CO₂e range by a factor of fourteen from high (the Saudi Arabian Oil Company or Saudi Aramco) to low (Repsol).

FIGURE 5.3 Self-Reported Company Scope 1 and 2 GHG Emissions and GHG Intensity (Various Years)

Note: Companies’ Scope 3 GHGs marked with “O” indicate that these emissions were not disclosed as recently as 2019. BOE, barrel of oil equivalent; CO₂e, carbon dioxide equivalent; GHG, greenhouse gas.

Sources: Energy Intelligence, “Big Oil’s Emissions,” EI New Energy, May 9, 2019; CDP, Corporate GHG Table; CDP, “Carbon Majors Report,” 2017, https://b8f65cb373b1b7b15feb-c70d8ead6ced550b4d987d7c03fcdd1d.ssl.cf3.rackcdn.com/cms/reports/documents/000/002/327/original/Carbon-Majors-Report-2017.pdf; and author’s calculations using data from individual company websites.

Inventorying Company GHGs

GHG levels are typically inventoried using bottom-up analysis. This entails counting individual sources of emissions (equipment) or totaling onsite consumption of individual fuel types and applying relevant emission factors. A corporate inventory is then prepared by aggregating emissions from all reporting units.

While reporting units group activities and assets to the parent company, the petroleum industry is notable for its complex ownership structures and operating agreements. Facilities are not necessarily owned and operated in their entirety by a single parent company, a feature that presents a wrinkle in GHG accounting.

As such, companies can choose themselves whether to use an equity-share or operational-control basis to document their GHG emissions. An equity-share approach accounts for the proportion of GHGs in each business unit that a company has an ownership percentage (equity stake) in.²⁴ The reporting of GHG levels based on operational-control accounting holds the company liable for 100 percent of the emissions for each facility it controls (either operationally or financially). The units that a company owns an interest in but does not fully control are entirely omitted from their GHG emissions reporting. There are also sizable GHG levels from third party–owned and third party–operated businesses that provide products or services exclusively to an oil company. Examples include hydrogen or electricity generation plants, chartered shipping vessels, well drilling and testing activities, and remediation work done on behalf of a single company.

Generic GHG inventory guidelines are subject to interpretation and may not convey actual emissions responsibilities because GHG levels depend not only on company structure but also on the nature of oil and gas operations and the characteristics of the hydrocarbons handled. Consequently, side-by-side climate comparisons of petroleum companies remain limited.²⁵

Gaming Emissions Reporting

The two different corporate models for tracking emissions can give rise to accounting chicanery, as a case involving BP shows. (By all means, however, BP is not the only company caught up in the gaming of emissions reporting.) In 2020, the corporation unveiled a new ambition to become a net-zero GHG company by 2050.²⁶ The company then announced plans to become an integrated energy company, and by 2030, it plans to cut its oil and gas production by 40 percent and its refining by 30 percent.²⁷ BP (along with other EU oil and gas supermajors like Shell and Total) are setting out to become low-carbon enterprises that dilute their fossil fuel profits with renewable energy revenues.²⁸ If this is the case, this decision is likely motivated by the fact that the European Union has limited oil and gas supplies and squelching demand is doable.²⁹

But just because a company ceases its production of oil and gas does not mean that it is no longer in the petroleum business. BP CEO Bernard Looney’s announcement did not reveal, for example, that BP is a joint-venture partner in the world’s largest refinery (Jamnagar) in India.³⁰ At 1.2 million barrels per day, this single facility operated by Reliance Industries markets over 1 percent of the entire global petroleum supply.³¹ BP is the Indian firm’s major equity partner with plans for 5,500 new gasoline stations fueling a growing fleet of hundreds of millions of cars in India over the next five years.³²

These kinds of business arrangements can let major companies game the system on emissions reporting. BP does report its Scope 3 emissions for the petroleum products it sells (see Figure 5.3). But, since BP does not operate the Jamnagar refinery, these massive emissions—estimated at over 200 million tonnes of CO₂e per year (a level nearly equivalent to half of all BP’s Scope 3 GHGs)—are not included in the company’s GHG inventory.³³ Reliance Industries, however, does not report its Scope 3 GHG emissions. As BP doubles down on its GHG pledge, emissions for which it still generates profits are shuffled to an NOC with less transparent reporting standards.

All oil and gas companies should be required to report their GHG levels on both an equity and an operational basis. This is the only way to affirm whether corporations have actually reduced GHG emissions or merely shifted them to other less responsible operators. Profits made through equity shares impose real GHG impacts that must be disclosed to investors and civil society actors. On the other hand, reporting GHG levels on an operational basis provides direct oversight for investors, which comes with the added benefit of greater data transparency and the ability to change practices when responsible, high-quality management companies are at the helm and mindful of this operational reporting.

Allocating Corporate GHGs

Once inventoried and reported, corporate GHG levels still tend to be so highly aggregated that it can be hard to establish climate priorities and develop targeted strategies. In other words, knowing where emissions reside is critical for assessing climate risks, pricing carbon, establishing research and development (R&D) priorities, and a host of other decisions. The Oil Climate Index + Gas (OCI+) is an effective tool for estimating emissions, by operation and sources, as well as those of an individual well or an entire facility. This comes in handy since not every company is sufficiently transparent when it comes to disaggregating their emissions.

For example, compare Chevron to Shell. The two companies had similar levels of direct operational (Scope 1) GHG emissions in 2019 (Chevron reported 65 million tonnes of CO₂e versus Shell at 81 million tonnes of CO₂e).³⁴ Table 5.3 offers insights into how Chevron and Shell each attributed their relatively consistent emissions in the prior year largely to upstream operations, but in highly varying proportions and combustion sources. Moreover, on an equity basis, Chevron and Shell had wide ranging direct emissions in 2019 of 58 and 117 million tonnes, respectively.³⁵

Table 5.3 Representative Corporate GHG Allocations: Shell versus Chevron (2018)

By Operation	Shell Share	Chevron Shareb	By Source	Shell Sharec	Chevron Share
Upstream	60%	68%	Combustion	15%	72%
Refining	21%	24%	Flaring	19%	19%
Power and Integrated Gas	19%	4%	Process emissions	48%	5%
Transport	n/a	3%	Venting	d	3%
Other	n/a	1%	Fugitive sources	18%	1%

Note: The figure’s CO₂e emissions are based on direct Scope 1 GHG emissions on an operated basis.

CO₂e, carbon dioxide equivalent; GHG, greenhouse gas;

Sources: Shell, “GHG Breakdown,” https://www.shell.com/sustainability/sustainability-reporting-and-performance-data/performance-data/greenhouse-gas-emissions.html; Shell, “Methane Emissions,” https://reports.shell.com/sustainability-report/2018/sustainable-energy-future/managing-greenhouse-gas-emissions/methane-emissions.html; Chevron, “What We’re Doing,” https://www.chevron.com/corporate-responsibility/climate-change/greenhouse-gas-management.

^a Chevron shares estimated based on charts published by Chevron.

^b Shell reports its emission sources for methane and not total CO₂e.

^c Shell combines process and venting in reporting its methane emissions by source.

^d Shell does not break out transport.

Stating Climate Priorities

Some subsectors of the oil and gas industry are inclined toward climate leadership, while others remain on the sidelines and avoid making climate disclosures and pledges.³⁶ Figure 5.4 offers a snapshot of the estimated volumes of oil and gas that are currently capitalized by companies with and without stated climate priorities.

Upstream oil and gas producers are currently split almost evenly between companies that state that climate change is a corporate priority and those that do not. Generally, the largest IOC producers are more likely than the NOCs to acknowledge climate change and make corporate commitments, whereas the range of small independent producers runs the gamut between those that prioritize climate change and those that do not. The same general rule regarding prioritizing climate change between IOCs, NOCs, and independents applies to refiners. Meanwhile, the petrochemical companies and midstream shippers who handle the greater volumes prioritize climate change over those that process more modest volumes. But the reverse is true for oil and gas traders and service companies: the majority of them have not historically made the global climate a priority.

FIGURE 5.4 Estimated Oil and Gas Volumes Aggregated by Companies’ Stated Climate Priorities (2018)

BOE, barrel of oil equivalent. Sources: Author’s calculations using individual company annual financial reports, along with other databases, including Oil & Gas Journal, OGJ150, September 3, 2018; Energy Intelligence, 2019; OGJ100, September 3, 2018; NRGI National Oil Company Database, December 2019; Adam Muspratt, “The Top 10 Oil & Gas Companies in the World: 2019,” May 1, 2019, https://www.oilandgasiq.com/strategy-management-and-information/articles/oil-and-gas-companies; Oil & Gas IQ, May 1, 2019, https://www.oilandgasiq.com/strategy-management-and-information/articles/oil-gas-industry-an-introduction; Oil & Gas Journal, “O&GJ Refining Survey 2018”; Alexander Tullo, “Top 50 Chemical Companies of 2018,” C&EN 97, no. 30 (July 29, 2019), https://cen.acs.org/business/finance/CENs-Global-Top-50-chemical/97/i30; Statista.com

Separating Industry Leaders from Laggards

Most industry actors are reluctant followers rather than able leaders. Once rules do change, however, companies adopt a compliance mindset, whereby they adhere to the minimum requirements necessary, the letter of the law. But to earn their social license to operate, oil and gas companies need to enable climate action and ultimately adhere to the spirit and not merely the letter of the law. In other words, in all they do, companies need to be intent on mitigating their climate footprints rather than loosely abiding by rules while exploiting any loopholes.

Separating the leaders from the laggards can reveal where change is happening and offer climate lessons for the industry as a whole. Table 5.4 ranks the clean energy strategies of supermajors with those of major NOCs. Such snapshots are useful, but showing real leadership requires ongoing tracking and reassessing over time. The OCI+ can be used to evaluate corporate claims. Like ARCO’s clean gasoline breakthrough, climate action requires durable commitments by all industry actors.

Table 5.4 Ranking Supermajors’ and NOCs’ Clean Energy Transition Strategies

^a Ranked high (1) to low (6) and companies with same ranking are loosely tied.

^b Methane and CO₂ emission reductions are based on the strength of intensity targets and evidence of their implementation.

^c Low-carbon gases include low-carbon, green hydrogen.

^d Power generation investments reflect commercial sales (and not companies’ own use).

^e Electric services include battery storage and electric vehicle charging.

^f Strategy ranking was assessed by totaling all company strategic priorities.

Key: black square = highest rank: observed strategic investments and/or capital/operational expenditures in commercial activities; gray square = middle rank: company has announced strategy and/or minor investments, venture capital, and/or R&D spending; white square = lowest rank: limited evidence of investment activity. CCUS, carbon capture utilized but not stored; CO₂, carbon dioxide; EOR, enhanced oil recovery; IOCs, international oil companies; NOCs, national oil companies. Source: Adapted from International Energy Agency assessment of investment and strategic responses to energy transition by select companies, based on 2015–2019 activities. International Energy Agency, “The Oil and Gas Industry in Energy Transitions,” 2020, https://www.iea.org/reports/the-oil-and-gas-industry-in-energy-transitions, and updated based on 2019–2020 company announcements.

European IOCs appear to be adapting to climate risks more rapidly than their competitors. They are the companies to closely watch.³⁷ Regardless, at present the stated actions of every oil and gas company are not enough to meet the climate targets of the Paris Agreement, and the manner in which companies report their GHG emissions does not allow for clear comparisons. All companies—even those in the lead—need to do more to meet growing energy demand in a more competitive environment while reducing their operating emissions and cutting GHG levels in their value chain.³⁸ Several examples follow describing actions by companies that are endeavoring to lead and others that are trailing behind.

No Place for Shell Games

Shell is viewed as an industry leader on the climate, especially for scenario planning. In its most far-reaching scenario to date (Sky, 2019), Shell claims that it aspires to reinvent world energy supplies with carbon-free renewables, biofuels, carbon capture and storage (CCS), and green hydrogen.³⁹ In reality, Shell is still planning to invest billions in the future in oil and gas production—deepwater and shale resources—dwarfing these low-GHG supplies.⁴⁰ And while the company currently sells about three times more oil and gas than it produces, Shell is now hewing its global refining portfolio down to about ten large refineries compared to the roughly fifty-four it held a decade ago.⁴¹ In 2020, for instance, Shell sold one of its dirtiest refineries in Martinez, California, to little-known PBF Energy for over $1 billion.⁴² And in 2021, Shell announced that it is planning to exit its Aera partnership with ExxonMobil that operates Midway Sunset, one of California’s dirtiest oil fields.⁴³

While these moves reduce Shell’s own net carbon footprint, they do not cut GHG emissions entering the atmosphere. To be a real climate leader that delivers the “healthy planet” that Shell has pledged, the company cannot merely sell its refineries, production facilities, and other assets.⁴⁴ Instead, the company must zero out GHG emissions in its own operations, starting with methane, and decommission rather than offload its dirtiest assets.⁴⁵ The need to avoid playing shell games with resources and properties applies to every oil and gas company.

Making Refining Greener

Refining is the lynchpin for the clean energy transition. Because the world will rely on petroleum products for a long time to come, companies need to re-engineer refining to be a low-carbon endeavor—a major undertaking. This wholesale shift will involve more than incremental fixes like substituting renewable diesel for petroleum-based diesel (as discussed in chapter 2). To date, Repsol is the only company that has shared its climate plan for refining. By incorporating green hydrogen into its refining operations, Repsol is directly tying this noncarbon fuel and renewable energy source into its own business.

In other words, Shell may be shedding refineries, but Repsol is tackling them head on. This makes the Spanish oil company stand out among its rivals. Moreover, Repsol was the first supermajor to pledge net-zero emissions by 2050, with specific intermediary targets between now and then.⁴⁶ Shell and BP did follow suit on this climate target some months later, but they did not immediately specify tangible operating plans like Repsol did to meet their climate goals.⁴⁷

Pursuing Alternatives

In the summer of 2013, I received an invitation from Total to speak about the energy transition at an international conference that the company was organizing. This was the sixth year in a row that the attendees of Total University assembled to search for paradigm shifts and tipping points.⁴⁸ Then-CEO Christophe de Margerie seemed immensely excited by the prospects of finding a breakthrough solution—nanotechnologies, biocatalysts, and CCS—which he appeared to be more intent on than oil and gas.

Today, Total is a leader in the quest to reshape the future of energy.⁴⁹ In 2020, the company announced a 50 percent increase in its capital expenditures on renewables⁵⁰ and plans to halt refining in the Paris region and focus on making renewable fuels and plastics instead of petroleum products.⁵¹ On par with its EU rivals, Total is assuming a new role as a national electricity retailer.

Reconciling GHG Emissions

Weeks before the 2015 United Nations (UN) Climate Change Conference in Paris, the CEO of Norway’s Equinor (then Statoil) issued a challenge to his 22,000 employees: “I want Statoil [now Equinor] to be a company recognized for shaping the future of energy.”⁵² Shortly after, Norway’s oil association declared that, as the nation with the cleanest oil and gas in the world, it had earned the right to expand its operations.⁵³ This claim was based on estimates running three Equinor-produced oils through the OCI+. One of the oils (Ekofisk⁵⁴) ranked among the ten lowest-emitting resources we evaluated at the time.⁵⁵

But the industry group’s bold assertion raised national concerns because Norway’s oil was not estimated as the world’s lowest-emitting oil. Moreover, Equinor reported that its GHG levels were even lower than the OCI+ had estimated.⁵⁶ To address these issues, in December 2016, Equinor invited Adam Brandt and me to Stavanger to reconcile its GHG levels. The technical exercise highlighted opportunities to tailor the OCI+ to unique operating conditions (such as running a platform entirely on renewable power and interconnecting gas handling between different platforms) to arrive at closely matching GHG emissions estimates. This further underscores the value of corporate data transparency.

It turns out that Equinor is not the average oil company. They are a small player in the crude market but a major global gas exporter.⁵⁷ Their production is more painstaking than most: platforms operate as integrated units, gas is routinely reinjected, renewable (hydro) electricity can be supplied from onshore, offshore wind energy development is on the rise, and flaring is closely monitored. Looking ahead, Equinor could play a leadership role in reconciling all of its global assets with the OCI+ model to further reduce the company’s GHG emissions.

Going Public

In December 2019, Saudi Aramco became the most valuable publicly traded company in history, then valued at nearly $2 trillion in its initial public offering (IPO).⁵⁸ Supplying 10 percent of the globe’s oil, Saudi Aramco is the most profitable company in the world and the country’s main revenue source.⁵⁹ If Saudi Aramco’s IPO is aimed at diversifying the Saudi economy away from oil instead of leveraging oil to grow its economy, this could put the company in a global leadership position.

A recent ad campaign seems to support this move. Full-page, color ads festooned the pages of media outlets worldwide in 2019 and 2020 to promote Saudi Aramco’s “real sustainability,” “real innovation,” and “real progress.”⁶⁰ According to the OCI+, the average oil produced in Saudi Arabia is some of the world’s lowest-emitting varieties, and with such affordable and large volumes, it is also the marginal barrel produced, which means that it pumps the extra barrel when the market signals it wants more.⁶¹

The relative ease and speed at which it can turn on or off its oil spigot compared to any other nation puts Saudi Aramco in a powerful position to influence which oil and gas assets to strand first as the world warms.⁶² While other IOCs and NOCs need to work to reduce their GHG emissions, Saudi resources flow readily and take fewer energy and hydrocarbon inputs to refine. Challenges lie ahead for Saudi Aramco to further cut the GHG emissions from its oil, challenges that will require the use of CCS and other novel techniques. Instead of sparring with Russia over current oil prices, Saudi Aramco would be better served investing in climate mitigation measures that set it apart from laggards like Rosneft, Lukoil, and Gazprom, discussed later.⁶³

Rebranding Beyond Petroleum

In 2000, after a merger with Amoco, BP adopted the moniker “Beyond Petroleum” and reintroduced itself as a socially conscious company. At first this move paid off, earning BP awards, accolades in the press, rising brand awareness, and even growth in sales. Then-CEO Lord John Browne cleaned up gasoline (by buying ARCO), invested heavily in hydrogen, and recognized global warming. Today, Lord Browne thinks the real difference at the time was changing the company’s mindset.⁶⁴

Unfortunately, this change was not permanent, and durable corporate action has not prevailed over clever ad talk.⁶⁵ As of the spring of 2020, BP’s climate ambitions lag behind those of its EU competitors.⁶⁶ For example, BP’s climate target covers fewer than half of its downstream activities, despite the fact that BP operates some of the largest and highest-GHG-emitting refineries in the world.⁶⁷ BlackRock and other investors are calling on BP to do more.⁶⁸ In response, BP is one of the first IOCs to consider voluntarily differentiating gas based its methane intensity, improved company practices, and stringent emissions monitoring.⁶⁹

Making Empty Promises

In 2020, Chevron distributed its first brochure stating its support for the Paris Agreement and promoting climate action.⁷⁰ What preceded this move, however, is a lesson in how not to do business better. For example, in Chevron’s major Gorgon project in Western Australia, the company agreed to install carbon sequestration and storage (CCS) equipment⁷¹ because the gas there is naturally high in carbon dioxide (CO₂) (some twenty-five times more concentrated than the CO₂ levels of Pennsylvania’s Marcellus gas).⁷² This venture was anticipated to be one of the industry’s largest GHG mitigation projects that could reduce Gorgon’s emissions intensity from production by an estimated 60 percent.⁷³

But when Gorgon commenced production in March 2016, a series of technical problems prevented the simultaneous start-up of its CCS equipment until August 2019.⁷⁴ As a result, over three and a half years the company was unable to sequester a requisite one-half of the 30 million tonnes of GHGs emitted at their Gorgon facility.⁷⁵ And, in January 2021, Chevron’s CCS was reportedly not working properly again.⁷⁶ Chevron used millions in taxpayer funds to build its CCS equipment, while the equipment remained shuttered even as the firm profited from gas extraction and sales. Whether this empty promise was intentional or not, Chevron skirted its permit conditions, which stated Gorgon would inject 40 percent of its emissions a year, or up to 4 million tonnes of CO₂.⁷⁷ With oil and gas markets in turmoil, time will tell whether Chevron will restructure its business models around climate change or maintain the status quo.⁷⁸

Playing Catch Up

For decades, the largest US oil company has lagged behind on climate action. This may have been a political calculation: ExxonMobil has long been considered one of the “most powerful businesses ever produced by American capitalism,” and the US government has not consistently made climate policy a priority.⁷⁹

The ground is now shifting beneath ExxonMobil. In August 2020, ExxonMobil was removed from the Dow Jones Industrial Average, the group of blue-chip stocks that it first joined in 1928.⁸⁰ Then, in 2021, an activist investor forced new directors on the board with the express goal of reducing ExxonMobil’s carbon footprint.⁸¹

Thankfully, ExxonMobil no longer boldly denies that climate change is real and the company is beginning to acknowledge it can play a leading role in stopping the earth from warming. Yet many argue that ExxonMobil has squandered its social license to operate over years of miscalculations as the company plowed ahead, keeping its balance sheets healthy and share prices up rather than addressing its climate risks.⁸² Despite beating back a 2019 lawsuit that it intentionally misled investors about climate risks, ExxonMobil may be unable to revive public trust.⁸³ As ExxonMobil (along with other IOCs) exits its long cycle of expensive projects, continues to confront thin margins, and prioritizes flexible capital, all eyes are on the largest IOC to see if it can reassert itself as a low-carbon energy provider.

Too Big to Fail

China’s oil and gas resources are considered strategic national assets that are controlled by its SOEs, including China National Petroleum Corporation (CNPC), China National Offshore Oil Corporation, China Petroleum and Chemical Corporation Petrochemical (SINOPEC), and Yanchang Petroleum Group.⁸⁴ While NOCs have traditionally been viewed as the custodians of their country’s natural resources, China is not an oil- and gas-rich nation. But it is the world’s second-largest consumer of petroleum products,⁸⁵ and China imports more oil and gas than any other nation in the world. Rather than grow increasingly dependent on petroleum product imports like gasoline and natural gas liquids (NGLs), China has been on a recent refinery- and petrochemical-building frenzy, which means the country only needs to secure crude oil from other nations and not rely as heavily on others to supply them a vast array of finished petroleum products.⁸⁶ To the extent that China can manage to consume fewer barrels of products than its refineries manufacture, it can sell these to other countries.

In 2019 alone, China’s oil and gas state-owned enterprises (SEOs) increased petroleum product exports by 20 percent.⁸⁷ Between meeting domestic demand and supplying regional exports, China’s SEOs are too big to fail. The economic pressures borne by China’s oil and gas companies that are increasingly focused on profits from refinery expansion—a business with notoriously tight margins—could make them climate laggards. The less expensive and, therefore, more degraded the crude oils Chinese refiners procure, the more GHG intensive their operations will become and the more high-carbon byproducts like petcoke that they will manufacture and likely dump on poorer nations.⁸⁸

Selective GHG Accounting

As with petcoke, companies can hide GHG emissions in plain sight by selectively accounting for emissions. In 2016, Southwestern (an independent US energy company) undertook an analysis of the climate impacts of its energy assets.⁸⁹ Company representatives reached out to me because they were using the OCI+ to conduct their assessment. They shared their 131-page final report (which cannot be reproduced or distributed in any form without express permission). The company was intent on understanding the budgeted resources and carbon constraints in its operations. They used a lifecycle approach to assess global oil and gas climate impacts.

Upon further inspection, however, I noticed a glaring omission. The analysis only considered CO₂. Methane was entirely omitted. For a company with mostly gas and NGL assets, this oversight raised red flags. Given the high potency of the company’s main product—methane, which has a twenty-year warming potential that is at least eighty-six times greater than CO₂—their analysis did not uncover the company’s primary climate risks.⁹⁰ When I told their representatives that such selective GHG accounting was extremely problematic, it was not entirely clear to me whether this was an oversight or an intentional omission. Either way, companies cannot be permitted to hide any of their GHG emissions.

Closing a Can of Worms

As increasingly different kinds of unconventional hydrocarbons and breakthroughs to access them enter the market, companies have specialized, focusing on certain resources and particular techniques. Occidental Petroleum (Oxy for short) is an American oil production company that operates internationally. Its forte is in CO₂ management, and the firm is the global leader in enhanced oil recovery (EOR) projects using CO₂.⁹¹ While Oxy publicly extols the need for a lower-carbon future, its reputation to date rests on removing naturally stored CO₂ to enhance oil recovery. But there are two radically different faces of EOR using CO₂. Not all EOR projects using CO₂ have the same climate risks. Projects that exploit naturally occurring CO₂ tend to have much greater climate impacts than those that leverage manmade CO₂ that has already been gathered or captured.⁹² The challenge facing Oxy now is whether it can successfully convert its operations to use only manmade CO₂. Oxy and other companies that engage in EOR using CO₂ need to double down on CCS and collect and use only manmade CO₂ for EOR to be real climate leaders.

Industry Actors in the Wings

Oil and gas companies, for all their wealth and power, cannot supply petroleum to the market alone. They are supported by investors, advisers, traders, certifiers, and industry associations. Transparency is often lacking about who these ancillary actors are and how they influence corporate climate action. Still, it is important to understand the influence wielded by these supporting actors of the oil and gas supply chain, even those who may never come into contact with hydrocarbons themselves.

Underwriting Oil and Gas

Investors come in all shapes and sizes. Institutional investors—commercial banks, insurance companies, pensions, hedge funds, endowments, mutual funds, family offices that handle ultra-high-net-worth investors, and sovereign wealth funds—pool their funds to purchase assets. Individual retail investors purchase stock shares of publicly and privately traded companies, whereas investment partnerships form holding companies that acquire other businesses.

Countless individuals and institutions have an investment stake in oil and gas, unless they have painstakingly divested from petroleum. Since all global enterprises rely on oil and gas, every investment has some degree of petroleum climate risk reflected in its bottom line.

Sampling Investors

While financial vehicles exist for anyone to invest in the oil and gas supply chain, institutional investors are the major force behind the petroleum sector. Table 5.5 summarizes the relative monetary value of the stakes owned by different investors and their stated climate commitment and fossil fuel divestment status. Institutions in North America and Europe control the vast majority of assets. While some investors have stated climate change is a priority and are engaged in climate initiatives, none have divested entirely from oil and gas.⁹³ Notably, investment managers rank risks from regulatory compliance second only to cybersecurity as their greatest near-term business challenge.⁹⁴

Table 5.5 Sample of Investors’ Estimated Assets, Climate Commitments, and Fossil Fuel Divestments

Investor Type	Corporate Examples	2018 Assets Under Management (trillions of USD)	Signatory on Climate Action 100+a	Divested from Oil and Gas?
Investment Managers	Fidelity BlackRock Vanguard State Street Allianz/PIMCO	$67 $6.9 $6.8 $5.1 $2.5 $2.3	Yes Yes No No Yes	No No No No Partiallyb
Pensions	Japan Pension Fund CalSTRS New York City	$36 $1.4 $0.2 $0.2	Yes Yes Yes	No Partiallyb Yes
Insurance Companies	AXA Zurich Insurance MetLife	$25 $0.9 $0.4 $0.1	Yes No No	Partiallyb Partiallyb No
Commercial Banks	Bank of Chinad JP Morgan Chase BNP Paribas	$35 $7.0 $2.2 $2.2	No Yes Yes	No No Partiallyb
Hedge Funds	Bridgewater Man Group	$3 $0.1 $0.06	No Yes	No
Endowment Funds	Harvard University University of Texas	$2 $0.04 $0.03	Yes No	c No

^a Climate Action 100+, “Investors,” https://climateaction100.wordpress.com/investors/.

^b Divestment in progress from coal, oil sands, and/or Arctic drilling, but not petroleum broadly.

^c Planning in progress.

^d Includes Industrial and Commercial Bank of China and Bank of China (Statista.com).

Sources: Wall Street Prep, “Largest Institutional Investors,” https://www.wallstreetprep.com/knowledge/largest-institutional-investors/; Investopedia, “Top 5 Asset Management Firms in 2019,” https://www.investopedia.com/articles/professionals/080615/5-biggest-financial-advisory-firms-us.asp; Sam Bourgi, “Who Are Institutional Investors?,” ETF Investing, December 25, 2018, https://etfdb.com/etf-education/who-are-institutional-investors/; Charles McGrath, “Global Foundation Assets Reach $1.5 Trillion,” Pensions and Investments, May 8, 2018, https://www.pionline.com/assets/docs/CO119162327.PDF; “Largest Banks as of December 2018, by Assets,” Statista.com, https://www.statista.com/statistics/269845/largest-banks-in-the-world-by-total-assets/.

Investor-Backed Climate Initiatives

In 2017, two major investment firms, Blackrock and Vanguard, led a shareholder charge against ExxonMobil to demand transparency and disclosure on the company’s climate mitigation measures to meet the benchmarks of the Paris Agreement.⁹⁵ This move was meant to force ExxonMobil to join other oil supermajors—BP, Total, and Shell—in releasing its detailed plan to attain the 2 degrees Celsius goal under the Paris Agreement. While their move excited climate actors, in 2018 and 2019, BlackRock and Vanguard took a back seat among investment firms, voting in support of climate-related proposals only 10 percent of the time at various companies’ annual shareholder meetings.⁹⁶ Just because investment firms state that climate change is a top priority, even if they are major investment shareholders, they are reluctant to strongarm corporate management to release a climate plan. Such investor initiatives, while useful, have not proven to be a silver bullet for markedly changing corporate decision-making.

A different approach is instead for investors to join forces and advocate for corporations writ large to tangibly show how they plan to curb GHG emissions rather than pressuring individual firms. As of 2019, only 38 percent of oil and gas companies performed and disclosed a climate scenario analysis.⁹⁷ The Task Force on Climate-Related Financial Disclosures (TCFD) was formed in 2015 to fill this void in the oil and gas sector and other parts of the economy.⁹⁸ The TCFD encourages firms to align their climate disclosures with investors’ needs and incorporate climate preparedness into their balance sheets. The focus is on financial risks to firms—an estimated $43 trillion in assets that, by 2100, are at risk from climate change.⁹⁹ The TCFD urges financial decision makers to take climate change into account, but it does not force companies to act like corporate shareholder resolutions, government regulations, or other direct measures do.

Additionally, investors must wrestle with the climate risk imposed on society by oil and gas (and other carbon-intensive) companies. Climate Action 100+, a five-year investor-led initiative launched in 2017, complements the TCFD by assessing and tracking corporate progress on climate governance and policy matters. Over 450 investors that collectively manage upward of $40 trillion in assets have joined this effort.¹⁰⁰ As of 2019, 85 percent of oil and gas companies have made climate change a board-level priority, while only 62 percent have set long-term quantitative GHG targets. Companies will need to up their game to shrink their climate footprints.¹⁰¹

Divestment, removing funds from select companies, is another investor approach. As of 2018, institutional investors pledged to divest over $6 trillion from fossil fuel companies.¹⁰² The insurance industry has led this effort, and banks are also taking part. For example, the European Investment Bank announced it will stop financing new oil, gas, and coal projects after 2021—although its portfolio contains plenty of legacy fossil fuel investments.¹⁰³ Each of these investor approaches—voting for shareholder proxy measures, assessing climate risk in balance sheets, tracking progress on corporate climate action, and divesting institutional investments—can help spur the investment community to action on climate change.¹⁰⁴

Advising Investors

When the OCI+ was first released in 2015, its findings were picked up and published (unbeknownst to me) in a widely read investment newsletter.¹⁰⁵ GMO, a privately owned independent firm, manages billions in assets for its clients seeking long-term market returns.¹⁰⁶ The firm’s cofounder, Jeremy Grantham, believes climate change is the “race of our lives and subscribes to responsible investing that considers each company’s environmental, social, and corporate governance (ESG).”¹⁰⁷ In his GMO newsletter, Grantham underscored the importance of using the OCI+ to assess lifecycle GHG emissions in each barrel of oil. To do otherwise, he wrote, leaves emissions from “colossal operations which look like they chew energy relentlessly” uncounted.¹⁰⁸ Grantham was spot on: the economy is going to need as much oil as it can safely use during the low-carbon energy transition. More investors need to realize, as Grantham does, that unnecessarily choosing GHG-intensive resources that emit more climate-forcing gases for the same barrel consumed is just flat out bad for the economy, is needlessly risky for the environment, and benefits only select industry actors.

Getting Advice

Oil and gas companies both generate and consume data on a massive scale. Industry advisers compile data, design strategies, perform services, and do analysis.¹⁰⁹ More recently, tech firms—such as Microsoft and Amazon—are supplying oil and gas companies with artificial intelligence, automation, and machine learning tools to accelerate fossil fuel exploration and extraction.¹¹⁰ Industry advisers often control more data than most governments and structure big data better than many oil and gas companies; as such, they are playing an outsized role in petroleum markets, climate action, and the energy transition. The surfeit of disorganized, backlogged data collected by oil and gas companies over decades, once digitized and made readily accessible, can be used to improve operations and grow profits. These data can also be used to update GHG inventories and automate the OCI+ to conduct ongoing analyses over time.

But not all industry advisers are willing to share data and conduct joint research. This is unfortunate because the value added by academia (discussed in chapter 7) contributes to knowledge in different ways than the services provided by paid industry advisers. While many oil and gas advisers acknowledge climate change, their “laser focus” is on maximizing petroleum’s economic value and maintaining the supply chain.¹¹¹ Their sharp focus on the bottom line encourages corporate consolidation during downturns, which can postpone maintenance, disproportionately cut environmental experts on the oil and gas sector’s payroll, and reassign climate responsibilities to corporate nonexperts.¹¹²

Trading Oil and Gas

While IOCs and NOCs operate their own global operations for crude trading and petroleum product marketing, there are companies (mostly privately held ones) that specialize in brokering oil, gas, and petroleum products at a global scale. These petroleum traders handle the majority of petroleum volumes traded on the global marketplace, and they finance producers in return for barrels sold.¹¹³ While traders have not historically controlled significant volumes of oil and gas production, they are increasingly operating refineries and terminals. Their strategy is to maximize profits through arbitrage: taking advantage of differing prices for the same energy asset by simultaneously buying and selling energy commodities.

Global oil and gas commodity traders are some of the most mysterious corporations in the world. Traders are not household names—Vitol, Trafigura, Glencore, Mercuria, Gunvor, and Koch.¹¹⁴ They are risk-taking operations that continually juggle billions of dollars in assets.¹¹⁵ Addressing climate change is not their stated priority, although a couple acknowledge the importance of the issue.

Certifying Agents

Look at the fine print in a given company’s GHG inventory report, and you will find an assurance agent named.¹¹⁶ Third parties—like Lloyd’s of London, EY, and others—offer limited assurance on GHG inventories and ESG reports. Most assurance agents are careful to disclose that they are not involved in a company’s GHG calculations and that they have no responsibility for the reported emissions data. Verification rests on knowledge that procedures were followed.

GHG accounting procedures date back to the 1996 Kyoto Protocol. They are viewed as a work in progress.¹¹⁷ Intergovernmental Panel on Climate Change (IPCC) guidelines are established for countries, not companies. GHG protocols are not tailored to the corporate intricacies of oil and gas operations, with opaque, convoluted, internal exchanges between producers, refiners, shippers, and traders. For example, just because a gas station bears a given company’s logo does not assign responsibility for all GHGs in the supply chain on the holding company.

Apportioning emissions to the responsible petroleum actor each step of the way is a complex undertaking. The goal is to fully account for all GHGs that are emitted into the atmosphere and not miss anything. Equally critical, it is important not to double-count emissions. But assurance agents do not verify GHGs emissions data at the facility level, the critical source of information in the oil and gas sector. Verification also contains fine print. Mentions of uncertainty typically appear alongside an acknowledgment that there are different measurement techniques that result in “materially different” tabulated GHG results.¹¹⁸

There are cases where verification is required for regulatory disclosure or emissions trading. For example, in California,¹¹⁹ third-party emissions verification is required for sources over 25,000 tonnes a year.¹²⁰ For example, verification applied to only 60 out of 173 oil- and gas-related companies in California in 2018.¹²¹ But in most cases, third-party verification remains voluntary. While it may reassure investors that corporate emissions claims have been independently reviewed, tools like the OCI+ can aid in double checking GHG accounting results.

Banding Together

Oil and gas companies hold paid memberships in industry associations to protect their proprietary interests while forging joint positions on public policy issues, pooling their funds, and amassing political clout.¹²² This “all for one, one for all” Three Musketeers approach is especially common when confronting environmental and other societal costs because the economic justification of the industry’s preferred policies is more compelling when the benefits are amassed across the industry.

As of 2020, however, all IOCs and many other oil and gas actors are members of the American Petroleum Institute (API), the industry’s most powerful collective voice. With some 600 members,¹²³ the API continues to promote petroleum consumption despite voicing climate concerns as early as in 1965.¹²⁴ While the API now acknowledges that climate change is a “serious issue,” its core recommendation is to conduct “more research.”¹²⁵ If the petroleum industry is going to be held accountable for mitigating climate change, the API will surely be central in developing concrete strategies to do so.

Keeping Good Company

Beyond joining narrowly focused oil and gas interest groups, there are a handful of climate-concerned petroleum industry associations. For example, the Oil and Gas Climate Initiative (OGCI) was formed in 2014 to accelerate the industry’s response to global warming. Its twelve member companies (those listed in Table 5.2 plus Saudi Aramco and Oxy) support the Paris Agreement and are investing in low-carbon technologies and R&D to back up their climate commitments. The OGCI concentrates on four ways to mitigate climate change: improving energy efficiency and balancing GHG emissions through natural mechanisms and new engineering techniques like CCS.¹²⁶ The OGCI also aggregates corporate funds to invest in climate solutions for the oil and gas sector and has collected over $1 billion to implement and scale low-carbon oil and gas solutions.¹²⁷ Perhaps most important, the OGCI aims to build consensus among its members on climate action to accelerate a low-carbon energy transition.¹²⁸

Parting Bad Company

Industry coalitions can hinder an individual company’s social license to operate, especially if the coalition opts for less climate action than the company itself. While some firms appear to be more out in front on climate change than their industry associations, only 8 percent of those companies surveyed ensure consistency between their climate positions and those taken by the associations they join.¹²⁹ Inconsistencies in policy positions between an individual company and an association they hold membership in may not even come to light. But, when it comes to climate change, inconsistent positions can create reputational problems.

Rather than compromise their positions, individual companies have started to drop out of industry groups because of their differences on climate change. In 2015, BP and Shell left the American Legislative Exchange Council (ALEC) specifically over its denial of climate science.¹³⁰ ExxonMobil, Dow Chemical, Occidental, and ConocoPhillips have also dropped out of ALEC. Others have indicated that they will follow suit. In 2019, Shell pulled out of another influential group called the American Fuel and Petrochemical Manufacturers (AFPM).¹³¹ And in 2020, BP announced that it is withdrawing from the AFPM and two other trade groups, the Western Energy Alliance and the Western States Petroleum Association, over climate policy.

But parting coalitions cuts both ways. For example, in 2010, BP and ConocoPhillips left the US Climate Action Partnership because the coalition was lobbying Congress to pass GHG cap-and-trade legislation. At the time, these companies reasserted their support of their other trade groups—the API and National Association of Manufacturers—to shape climate and energy policy. Given this tug and pull, companies need to be mindful about changing public attitudes on issues like climate change when joining industry groups. Once a company decides to be a climate leader, it is worthwhile to either try to shift the coalition’s stance or exit altogether if the group’s positions detract from a company’s efforts.

Establishing Industry Benchmarks

The oil and gas industry has endured and prospered for over a century, sometimes weathering turbulent market swings. Those in charge adhere to internally derived corporate visions and strategies to guide them through these disruptive boom-and-bust cycles. But their job is likely to get visibly harder as tomorrow’s oils and gases increasingly compete with one another for market share in a warming world. New benchmarks are needed to gauge how the oil and gas industry is faring.

Assessing which assets carry lower or higher climate risks is possible using the OCI+. And increased data disclosure and benchmarks by industry players will improve OCI+ estimates over time by helping fill information gaps. Companies must begin by taking steps to publicly release and routinely update credible climate plans, bolster internal climate governance, offer external support for the Paris Agreement, and join forces to back a clean energy transition.

Publicly Release and Routinely Update Credible Corporate Climate Plans

Unlike nations that submit climate plans through their nationally determined contributions (NDCs), oil and gas companies do not routinely submit climate plans. Given their large GHG footprints (which can be bigger than those of individual nations), the single most critical benchmark is that companies have climate plans that are credible.¹³² Such plans would enable governments to incorporate realistic projections of reductions in oil and gas emissions into the NDCs they have submitted to the UN. At a minimum, firms need to use open-source lifecycle GHG assessments, accounting transparency, and auditable data for all climate pollutants.

Use Open-Source Lifecycle Assessments to Evaluate GHG Levels

Because industry players expend so much energy on making and marketing oil and gas products, hydrocarbon resources with the greatest energy inputs result in elevated GHG emissions compared to those of otherwise equivalent assets. Few ordinary people are aware of this reality, which may even elude oil and gas workers. To make comparisons between different petroleum products easier and more accurate, the OCI+ applies lifecycle assessment (LCA) tools to count all of the GHG emissions across the entire lifecycle of a barrel of oil (or cubic foot of gas). Companies that adopt this approach, using open-source tools like the OCI+, are better positioned to fully account for, better manage, and honestly inform the public about their climate risks.

Increase Climate Transparency to Assess Progress on GHG Accounting

The dearth of data makes it difficult to assess climate progress. Companies need to gather and use valid, updated data to calculate their GHG emissions on both an operational and equity basis. They also should specify their total absolute GHG levels and emission intensities (per unit of oil and gas volume) by business unit. Companies need to take extra care not to play shell games, whereby they claim credit for emissions reductions that they merely shift to another party. Companies also need to provide sufficient information for assessing their energy and nonenergy projects, including current operations, start-ups, assets in the pipeline, and planned retirements of equipment and assets that they take offline and decommission.

Use Actual, Measured, Auditable Data for All Climate Pollutants

In addition to CO₂, a company must report on how much methane, black carbon, and any other discernable GHG they produce from unintentional leakage (such as fugitive emissions), accidental releases (such as upsets), and regular operations (such as venting and inefficient equipment). Auditable data needs to be sufficiently detailed and disaggregated, so third-party agents can actually verify the amounts of GHGs emitted and not just that reporting procedures were followed.

Bolster Internal Corporate Climate Governance

Climate change needs to be part of oil and gas companies’ risk management frameworks for assessing financial performance and process safety. Employees need to be rewarded for their roles in adhering to climate targets. And companies should only associate with and be members of groups that make climate change as high a priority as they do.

Adopt a Process Safety Approach to Reduce Every Project’s GHG Emissions

A core mission of oil and gas companies known as process safety entails minimizing hazards impacting safety and business losses. While preventing such losses technically extends to environmental damage, companies must expressly develop plant systems and procedures to prevent unwanted releases of oil and gas that harm the climate. Doing so requires companies to acknowledge that climate risks are on par with safety risks, such as toxic releases, local fires, and explosions. The more knowledgeable and better prepared an operator is, the better it can manage and mitigate its GHG emissions. Moreover, during industry downturns, companies must retain their seasoned environmental specialists because it is difficult to carry out these safety functions without them and even more challenging to replace them.

Include GHG Performance in Corporate Incentive Plans

Many oil and gas companies offer incentives to induce workers to perform better and reward those that keep operations running smoothly while maintaining the well-being of their employees. When industry players downsize, as many have during the 2020 pandemic, it is even more important for companies to reward strong performance amid layoffs and corporate restructurings. Already, some companies are linking CEO compensation to GHG emissions.¹³³ This benchmark should apply to all executives of oil and gas companies and should extend to individual employees within companies that are responsible for emission reductions, including methane leakages.

Leave Industry Associations That Challenge Climate Science

Oil and gas companies, large and small, must contend with industry association policies that do not always mirror their own stated climate priorities. Rarely are industry associations’ climate positions stronger than those of their weakest members. Moreover, smaller, less integrated companies by their sheer numbers can band together and outweigh supermajors in terms of voting power, a dynamic that also can weaken associations’ climate positions. Yet when coalitions do not advance strong climate priorities, or when they even deny climate science altogether, they undercut a corporation’s public efforts to reduce their GHG emissions. Such policy discordance not only sends mixed signals to the market but also leaves firms and industry associations sometimes working at cross-purposes on climate change.

Companies that are proactive on climate governance should not fund business groups, work with lobbyists, or participate in coalitions that are at odds with their stances. Moreover, every company needs to leave associations that challenge, peddle misinformation on, or deny climate science.

Offer External Support for the Paris Agreement

Climate agreements only succeed if all actors support their aims and contribute tangibly to their mission. While there are numerous external actions oil and gas companies need to take, they can start with establishing governance protocols like science-based targets that align corporate climate plans with the Paris Agreement. Companies also need to advocate for a price on all GHG emissions, not just carbon, including their own lifecycle emissions.

Establish Corporate Governance Protocols That Are Supported by Science-Based Targets

Each company needs to specify how much and how quickly it must reduce its GHG emissions to meet the goals of the Paris Agreement. Embracing science-based targets entails assessing whether corporate action is aligned with current climate science to limit global warming to 1.5 degrees Celsius higher than preindustrial levels or well below the targeted ceiling of 2 degrees Celsius in temperature rises.¹³⁴ Companies need to commit to, develop, set, announce, and periodically update new corporate governance protocols to fulfill science-based climate targets.

Advocate a Price on Lifecycle GHG Emissions, Including Firms’ Own Operations

Oil and gas companies have been slow to forcefully advocate for the adoption of a price on GHG emissions. Internally, however, many companies assume a shadow price for carbon, which they factor into the economics of new projects. The situation shifted in June 2019, when several major oil companies pledged “to support ‘economically meaningful’ carbon pricing regimes.”¹³⁵ This corporate announcement followed a personal appeal from Pope Francis for oil and gas companies to help the world deal with the climate emergency at hand.

The details matter. The benchmark for this corporate commitment should specify that the price be placed on a company’s Scope 1, 2, and 3 GHG emissions and should expressly include methane and black carbon. Pricing GHG emissions fairly involves verifiable corporate GHG levels that prevent leakages and omissions. A tax applied only to end-use petroleum products or CO₂ alone is not sufficient. And the use of 100-year global warming potential (GWP) scaling factors for methane and other short-lived climate pollutants is not appropriate. Companies need to properly reflect and pay for emissions from their own production, processing, refining, and shipping operations.

Join Forces to Jumpstart a Clean Energy Transition

No company can go it entirely alone to address climate change because oil and gas are versatile commodities that wind their way through complex supply chains as they readily change hands between many industrial actors. While pulling off a clean energy transition requires the participation of all actors, the oil and gas industry must play a leading role in forming partnerships to successfully research, develop, demonstrate, and deploy new technologies.

Pursue Research and Development to Demonstrate Low-Carbon Technologies

Historically, oil and gas companies have maintained active research agendas. While many of their R&D efforts have been scaled back in recent years, research is a critical benchmark for gauging whether a company is planning to operate in a low-carbon economy. A key goal is to eventually provide low-GHG substitutes for consumers’ many petroleum needs. Beyond an individual company’s R&D, meaningful interactions must take place in collaboration with industry, government, academic, and nongovernmental organization (NGO) partners. This includes funding novel low-carbon energy pathways as well as demonstrating and deploying new operations, products, and markets with an eye toward a long-term clean energy transition.

Convert the Industry’s Biggest Challenges into Climate Opportunities

The oil and gas industry faces technical challenges that could potentially be converted into opportunities. Overcoming these hurdles requires collaborative innovation backed by ample funds for further study to produce breakthroughs. In situ molecular manipulation, for example, involves modifying the contents of a reservoir at its source to avoid removing its carbon altogether.¹³⁶ And discovering a way to convert heavy oil to hydrogen underground could eliminate the need for thermal recovery. Likewise, stripping CO₂ off acid gas below the surface could eliminate the need for posterior CCS processes. Another opportunity rests with a circular economy that keeps petroleum products in use as long as possible, decreasing the use of raw materials by reducing, recycling, reusing, and removing.¹³⁷ Companies are working to ensure that plastics, for example, are always reused, minimizing waste and reducing energy use and GHG levels.¹³⁸

Play a Leadership Role among Industry Partners

Oil and gas industry actors tend to be fast followers that resist being the first to renovate their operations and alter their policy positions but quickly follow the leader once their competitors act, resulting in a wholesale sectoral shift. The tide appears to be turning among the European IOCs that are playing a leadership role on climate change, promoting industry best practices for GHG reductions, expanding their climate disclosure, and sharing cross-cutting knowledge to reduce emissions. There is more to be done, however. Leading companies can seek joint climate-related ventures with partners outside the oil industry (like automakers, airlines, and utilities) and work with suppliers to specify emissions reductions in energy procurement contracts and equipment specifications. Time will tell if the other IOCs, NOCs, and INOCs follow suit.

Partner with Other Researchers on Low-GHG Solutions

The OCI+ team has demonstrated that, by partnering with peer, academic, and government researchers, the oil and gas industry can gain access to vast troves of data, talented scholars, and integrated problem-solving skills. Companies cannot afford to scale back their efforts and instead must boost them, especially when oil prices are low. Innovation is the lifeblood of industry, even in mature sectors like oil and gas. The companies that successfully reinvent themselves in the most socially responsible ways are the most likely to thrive in the future.

Rethinking Self-Regulation

In August 2019, the Business Roundtable shook up Wall Street. Corporate CEOs committed to “protect the environment by embracing sustainable practices.”¹³⁹ Of the nearly 200 industry leaders from Amazon to Xerox who signed on, only 1 in 20 has a direct stake in oil and gas.¹⁴⁰

This pledge is noteworthy because it breaks with fifty-year-old accepted doctrine that businesses’ sole social responsibility is to use their resources to “increase their profits.”¹⁴¹ There is an important caveat, however. Companies must engage in open and free competition without deception or fraud.

Oil industry actors have had a long history of blurring the lines when it comes to deceptive and fraudulent behavior. Robber barons like Rockefeller were not known for their scrupulous business practices. He fundamentally distrusted the free market and openly sought to suppress competition altogether.¹⁴² Secret agreements were his signature move.¹⁴³

Even today, the oil and gas industry is neither fully open nor freely competitive. Much of the world’s oil and gas resources are nationalized, and oligopolistic forces influence global prices. For example, in 2020, oil price futures were driven below zero (in other words, sellers would pay buyers to take their oil) because the Russians and Saudis refused to stop pumping crude when the coronavirus pandemic decimated demand. Moreover, negative externalities, like climate change, continue to go unattended. Information asymmetries and data opacity distort every link in the supply chain. Charges have been made that, over the past half century (or longer), ExxonMobil (and other oil companies and their industry coalitions) not only knew their operations clearly contributed to climate change but also funded misinformation to avoid solving the problem.¹⁴⁴

Perhaps it is unfair to expect the oil and gas industry to regulate itself when it comes to climate change. ARCO’s reformulated gas signature move would not have made its mark on the industry without an external regulatory force. Given the climate realities of the twenty-first century, it is time to seriously rethink the carbon part of the hydrocarbon equation. Remaking the oil and gas industry is too big an undertaking for the industry alone to rise to the occasion.

Defeating versus Partnering

Prevailing wisdom is that the oil and gas industry cannot effectively and durably regulate itself. Most companies are waiting on the sidelines for clear government action. Even companies that admit climate change is a problem place a higher priority on meeting global demand for petroleum products. Policymakers are needed to break this industry-stymied logjam.

A recent Twitter poll posted that two-thirds of participants responded that “defeating” oil and gas companies poses a more successful decarbonization pathway than “partnering” with them.¹⁴⁵ But what does defeating the oil and gas industry mean? Supplying petroleum, which all people consume, is a complex undertaking. Calls for a public takeover of Big Oil is no way to guarantee zero climate risk.¹⁴⁶ To be sure, today’s NOCs do not perform better than IOCs.

By partnering with the oil industry instead, governments may be able to better align private interests with the public good. Just as fracking was first developed in a government laboratory before it was commercialized by industry, clean energy innovations that pertain to the oil and gas sector must also be incubated in the public sector. Good coordination and communication between industry and governments has never been more important. As chapter 6 shows, such collaboration underpins a balancing act that has been ongoing since the industry’s founding. Now, however, the well-being of the planet is at stake.