15 Nov Digital and the Oil and Gas ESG Agenda
COP26 may be behind us, but the hard work is still in front of us. Digital innovations can help oil and gas companies exceed their ESG commitments.
What Exactly is ESG?
For clarity, E is for environmental, S is for social and G is for governance. These days ESG is short hand for altering decision making to take into account ESG factors.
COP26 has helped highlight the pressing environmental concern of rising levels of green house gases in the atmosphere. But E also includes the impacts of enterprise on water resources both fresh and tidal, the soil, land in general, the dependents such as plants, animals, and fish, including cumulative and absolute impacts, and the ability of natural systems to repair and rejuvenate, recover and renew.
Social considerations can include impacts on people, communities, indigenous populations, urban and rural settings, the disadvantaged and the developing. Governance can include how decisions are taken, and whose views are considered (labour, indigenous people, communities, political systems, regulators, capital).
E, S, and G are interrelated and sometimes at odds with each other. For example, a warming planet both extends the northern growing season (helping farming communities) while raising sea levels (harming island economies). Solutions, such as adopting green energy, pushes up the cost of energy for those least able to afford it.
COP26 discussions included many of these factors, although the bulk of the media reports in my feed (admittedly skewed) focused on the Big E—emissions.
ESG’s New Enforcer
Strangely, western capital markets now find themselves the reluctant ESG enforcer. Markets can exert real pressure on companies throughout industry to declare their goals and intentions regarding ESG. Without that clarity, construction projects can’t get insurance, and production can’t get funding. And financiers are now on the hook to find carbon offsets of quality and at scale to meet their own obligations and satisfy market demand for carbon management.
In response, businesses in the industry now have to make serious and binding commitments related to ESG to improve their performance, access capital, polish their brands, and lower their exposure to looming risks. And measure their progress too.
The Digital Sweet Spot
I believe that there is a digital sweet spot, an optimal use of new technology from digital transformation, that simultaneously helps the industry improve its ESG capacity and renders it more attractive to capital.
To find the digital sweet spot, you need to look for those dimensions of the oil and gas industry that have not substantively changed in 10+ years, feature large numbers of similar participants, and are not yet enabled by cloud computing. Fortunately, this is not a tall order.
A quick way to see if a business area may have a digital sweet spot starts with running a little thought experiment. Imagine you need to call on a long retired engineer, commercial professional, or operator (field worker) to help support your business because you are struggling to find staff.
This is no joke. Welcome to 2021 in the US nuclear sector, where the shortage of talent in the industry is fast becoming a crisis and the retired are being coaxed off the golf course and back to the control room.
Unfortunately oil and gas also has many stable older facilities that have long resisted change. They too have changed so little that someone retired from active work could actually return productively to the job site.
As for ‘large number of similar participants’, most of us quickly think of assets such as wells, batteries, pumps, compressors, trucks and gen sets. But depending on the process, a ‘participant’ could be a contract, an agreement, a purchase, a sale, or a delivery.
Put these two criteria together (numerous participants, stable processes) and many more possibilities come into range.
Oil and gas is now using some digital tools with enthusiasm. Thanks to the celebrity virus called COVID, oil and gas swiftly abandoned their downtown office towers and moved home. Paper processes were reconfigured in response. Digital projects were accelerated. But there is still plenty of opportunity in the industry.
Digital and ESG
With oil and gas facing capital constraints, but with high commodity prices pressuring the CFO to sanction production growth, funding a transformation of the business to align fully with all possible ESG dimensions is impractical. ESG will be about making hard choices and trade offs. Beyond the bare minimum of compliance with existing regulations, here are four candidate areas for digital investments to improve ESG performance.
The majority of oil and gas infrastructure, from wells to gas stations, predate ESG concerns and the digital era. These assets now serve as a drag on the ability of companies to achieve much progress on their ESG commitments because they are so resistant to change. On the other hand, they can be data rich assets because of their connections to SCADA and other monitoring systems.
Where digital can help is by boosting analytic possibilities through machine learning and artificial intelligence. These tools can help improve the quality of legacy data so that it yields better analytic outcomes, as well as by conducting better analytics. Better analytics leads to better operations decisions that include ESG targets. In time brownfield assets can be managed more tightly and in conformance with ESG goals.
Brown field assets will continue to be carbon sources for the foreseeable future, which means the industry will need to track carefully its carbon position so that it can make appropriate positive offsets. Today, carbon measurements tend to be from engineering principles, whereby a given asset, designed to run at a certain level with a fuel of known characteristics, has an estimated carbon output.
However, assets leak, and valves decalibrate. Because of scale effects, minor variances in carbon measurement accuracy can add up to huge absolute differences from engineering estimates.
Digital tools can help by providing better monitoring of actual asset carbon impacts, by detecting vapours and recording measurement data with low latency in easy to access cloud databases. Cameras are now very good at directly measuring vapour emissions, and new satellite technologies are bringing satellite imagery boosted by artificial intelligence to improve carbon measurement.
Supply Chain Transparency
The supply chain for oil and gas is long and complex. Tracing products throughout the supply chain to provide the assurance that the products were sourced from ethical suppliers with meaningful ESG practices is fast becoming a requirement by global brands. This is already very pronounced in consumer goods, pharmaceuticals, and many food products, and has now come to chemicals.
Digital innovations provide better tracking and tracing of fluids, gases, and commodities throughout the supply chain, given the chain’s high level of fragmentation, multiple hand offs, discrete services, frequent changes in control, and high regulatory burden. Tools like blockchain are now very handy in helping to deliver the transparency that supply chain participants need to assert to their ESG metrics.
Capital Asset Delivery
In a typical year, oil and gas invests half a trillion dollars in new capital to supply growth and to replace depleted resources. A portion will be spent in prospecting for new resources, securing underground assets, and maintaining production on existing assets. But a portion will also be invested in building new infrastructure, such as gas plants, refineries, LNG facilities, ports, tankers, and pipelines, to bring new greenfield oil and gas fields to market, creating a dependency on the construction sector.
Relative to other sectors, the construction sector is itself dramatically underserved by new technology. By 2018, the venture capital sector had injected only $1.5b in venture funding for technology-enabled transformation of this massive $12T sector.
Innovators are applying digital tools to transform the sector. For example, a company specializing in augmented reality applications for design reviews in oil and gas, estimates that 30% of capital spent on physical assets requires field rework, typically because of errors that pass all the way through from design engineering to the field, even though the vast majority of the errors are detectable early.
Field remediation is enormously costly because of the incremental costs of mobilizing workers, tools and equipment to site. Schedules are impacted. Asset quality suffers. Such rework drives unnecessary emissions. And some suppliers feast on the systemic inefficiency.
To improve and accelerate capital projects, asset owners are rapidly embracing modular design and build techniques, and with it the opportunity to globalize the construction sector. Building modules in manufacturing facilities brings the efficiencies from assembly line thinking into construction. Faster builds pull asset value forward in time, reducing capital risk, minimizing emissions, and improving returns. Distributing fabrication globally also shares risk and helps nurture competitive supply chains. To do so requires advanced digital twin technology enabled by cloud computing that spans geographies.
We’re only getting started. ESG considerations help us make better long run choices about our enterprises, and digital tools can help energy companies exceed their ESG commitments.
Check out my book, ‘Bits, Bytes, and Barrels: The Digital Transformation of Oil and Gas’, coming soon in Russian, and available on Amazon and other on-line bookshops.
Sign up for my next book, ‘Carbon, Capital, and the Cloud: A Playbook for Digital Oil and Gas’, coming next year.
Take Digital Oil and Gas, the one-day on-line digital oil and gas awareness course.