What CFOs Should Do About Carbon

Board meeting with Death attending

What CFOs Should Do About Carbon

With carbon increasingly on the corporate agenda, how can CFOs turn what looks like a huge liability into a fantastic opportunity.


This is the conclusion to a two-part series on the impact that society’s new emphasis on carbon emissions will have on the corporate Chief Financial Officer (CFO).

Just to Recap

In Part 1 of this series, I highlighted the many ways that carbon-related issues will have in disrupting the usual nighttime slumber of the oil and gas CFO.

  • Carbon reduction targets and prices that are constantly rising.
  • Capital market skepticism about carbon accounting accuracy.
  • Capital markets avoiding investments in companies contributing to climate change.
  • Rising interest rates to compensate for carbon risks.
  • Risk of investing in poor quality carbon credits to offset carbon footprints.
  • Rising costs of insurance for energy infrastructure particularly on coastal areas.
  • Risks of stranded or grossly revalued oil and gas assets on the balance sheet.
  • Capital allocation methods that fail to account for carbon properly.
  • Company financial performance management that fails to account for carbon consistently.
  • Inadequate practices for measuring carbon.
  • Incorrectly priced acquisitions that carry hidden carbon liabilities.
  • Limited market for carbon-producing assets, and related pricing risk.
  • Rising number of lawsuits related to carbon and risks of criminal prosecution.

 

Suffice to say, it’s one hot mess. There’s not one aspect of the job of the CFO that is untouched by carbon, which isn’t really a surprise when a new and costly commodity suddenly shows up at the party.

CFOs are being asked to do something they never planned to do, their organizations don’t have the skills to handle the problem, and they’re being asked to deal with it everywhere and immediately.

Of course, one company’s problem is often another company’s treasure. How can the CFO turn this huge liability and risk into a growth opportunity?

Lessons from the Autobahn

The overriding challenge here is the narrative about carbon—the climate, carbon and emissions story that internal management tells the Board, itself and the company. Many companies, not just in energy, have for some time promulgated narratives that either dismissed carbon as a problem, or cast doubt on climate change, or stretched the timeline, or deflected responsibility to regulators, or pointed at some other woeful party (for example, China’s coal consumption) as the real culprit.

The automotive industry giants have also clung too long and too tightly to their outdated narrative, and it has cost them dearly. For 10 years, they dismissed battery technologies and electric drive trains with a message of range anxiety, towing constraints, and few charge points. They cast Tesla as a poorly run shadow of a true car company. Meanwhile, Tesla reinvented the car as software, shifted the center of automotive design to Silicon Valley, and perfected battery manufacturing.

At US$846b, Tesla is now worth well more than the next six auto companies combined. Toyota, no slouch in car making, reckons Tesla has a half-decade lead in vehicle electronics. Germany’s auto industry has some 210,000 factory jobs at risk  of disruption because battery electric cars have far fewer parts, and assembly is faster and easier. And the absence of a flourishing domestic digital economy (all the gigantic digital companies are based in the US, and none in Europe) puts the vaunted German auto sector at a huge disadvantage in finding the talent needed to build software cars.

The Narrative Pivot

Energy companies need a new narrative in the face of climate pressures, but they all seemingly hired the same PR agency and now have largely the same new narrative. Take in any energy company video and you’ll see the storyline.

  • ‘We’re combatting carbon’.
  • ‘We’re reducing our carbon footprint’.
  • ‘We’re investing in forests’.
  • ’We’re getting into renewables’.

 

The problem with a common narrative is that there’s nothing distinctive between companies in the industry, and when there is but one narrative, all market participants are treated identically by the capital markets—same valuations, same peer groups, same risks.

And this narrative will inevitably engender the same long run problems that now plague the auto sector. Young people will not pursue careers in industries that companies are transitioning from, where carbon is viewed as the negative. Career counsellors will direct talent to other sectors. Universities will curtail their education programming in energy due to the lack of demand. Other sectors, notably those that are cleaner, more environmentally sensitive and frankly, more digital, will suck in all the available talent.

In just a few short years, energy companies will be wringing their hands at the paucity of engineering talent to recruit.

Here’s a different narrative.

  • ‘Carbon is a highly valued commodity’.
  • ‘We’re a responsible carbon company.’
  • ‘We produce carbon either as a product or as feedstock to other important products’.
  • ‘We invest in carbon assets wherever we can.’
  • ‘We love carbon’.

 

Note the shift. Carbon is no longer the villain, but is the product, and when companies start to view their waste as the product, then they get very serious about its value.

I’m reminded of a visit I once took to the Perth Gold Mint to take in a gold smelting demonstration. During the refining process of melting down a gold ingot, some gold particles are carried aloft with the heat waves from the fire under the smelting pot. Gold then clings to the walls and ceiling of the smelting room intermixed with the smoke particles and ash. Every few months, the entire room is scraped from top to bottom, and the detritus is itself melted down to recover its gold particles.

At one time, surely, the dirt and filth of the smelting room was seen as just the waste of the true purpose of the refinery. No longer.

Carbon as Transformation Catalyst

Armed with a new narrative, the CFO can then set out to leverage carbon for what it could really be—a transformation catalyst that both corrects the legacy business model and invents its replacement.

Much of the opportunity to be captured lies in the industry’s brownfield assets, because brownfield assets were never designed to treat carbon emissions as the product. Many, including plenty of oil and gas well operators, still view vented or flared methane as a reasonable cost of business, or as a source of energy for actuating valves.

And the only new tool in the arsenal that CFOs can exploit in their transformation journey is digital innovation, which is what has transformed the auto industry. Similar tools will be required:

  • Cloud computing to create the single source of truth, networks of assets, and the computing horsepower for machine learning.
  • High capacity network access everywhere, with fixed fibre links between big centers and wireless everywhere else.
  • Smart equipment that self monitors, operates independently and requires only occasional human intervention.
  • Data science skills to help with interpreting the data riches thrown off by the smart equipment.

 

The CFO Action Plan

For this to work, CFOs have to be deadly serious about embracing a sweeping program of industrial transformation. Here are a few key steps they can take.

New Board Committee

Encourage the Board to create a subcommittee focused on carbon. That which interests the Board fascinates management. There’s nothing quite motivating like an asset manager being summoned for an audience with the Board to discuss why they are wasting the company’s most precious asset, carbon.

Carbon Pricing

Put an aggressive price on carbon (that is, higher than it needs to be) so that it incentivizes asset owners and workers similar to the bullion mint—it provokes the workforce to scrape the walls and ceiling for invisible gold particles. That way, any approved projects stand a fighting chance of being in the carbon money over time.

Place a realistic multi-year price schedule on carbon from existing assets (or a carbon tariff) for Scope 1-3 emissions to help asset managers creatively tackle carbon from all angles.

Performance Metrics

Instead of using ‘compliance’ as the stick to get managers to focus on carbon, use carbon credits as the reward, so that money flows to those who are creating the most value, not the least compliance risk.

Capital Allocation Overhaul

Correct the capital allocation process so that new projects coming forward are focused on carbon the product.

Carbon Measurement

Move to actual carbon measurement, not synthetic engineering measurement. Digital can be a big help here, through site cameras, satellite imagery, visual analytics, soft sensors, and cloud computing.

New Capital

Set aside specific capital for carbon projects. This might seem obvious, but when the price of oil is very strong, as it is now, very few projects can compete with the drill bit or new infrastructure in support of the drill bit.

New Investment Areas

Invest or partner in the many new areas where carbon is becoming a feedstock—cement making, battery technology, new materials and packaging, and consumer goods.

Carbon Markets

Get serious about carbon markets and carbon credits, as that is where the money is. This field is also heavily dependent on digital technologies for decision making, portfolio management, and data registries.

An Early Prototype

If you wanted to see what an early version of this new narrative might be, take a look at Oxy. Even Warren Buffet and crew have taken an interest.

Conclusion

There is a gap in the energy market for companies to carve out for themselves a carbon-as-positive positioning that is counter to the predominant market narrative of carbon-as-negative. Rather than being scared shirtless, CFOs should view carbon as a transformation catalyst.


Check out my latest book, ‘Carbon, Capital, and the Cloud: A Playbook for Digital Oil and Gas’, available on Amazon and other on-line bookshops.

You might also like my first book, Bits, Bytes, and Barrels: The Digital Transformation of Oil and Gas’, also available on Amazon.

Take Digital Oil and Gas, the one-day on-line digital oil and gas awareness course on Udemy.

Take the one-hour Digital for the Front Line Worker in Oil and Gas, on Udemy.

Biz card: 🪪 Geoffrey Cann on OVOU
Mobile: ☎️ +1(587)830-6900
email: 📧 geoff@geoffreycann.com
website: 🖥 geoffreycann.com
LinkedIn: 🔵 www.linkedin.com/in/training-digital-oil-gas

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