Four steps to decarbonise global oil and gas supply chains
The speed at which the net-zero transition can happen in many industrial sectors is dependent on multiple factors. Against the backdrop of the ongoing conflict in Ukraine, countries around the world are now striving for energy independence. For some investors, the narrative which previously underpinned environmental, social and governance (ESG) investing has undoubtedly changed. The need for energy security and poverty reduction has become as essential as the green transition.
Understanding where procurement sits within your decarbonisation strategy
For the oil and gas sector, energy security must be delivered alongside companies’ clear corporate commitments to net zero. The sector must continue its roadmap to decarbonisation. Business strategies for many majors are predicated on them becoming clean energy companies, tackling Scope 1, 2 and in some cases Scope 3 emissions reduction.
Decarbonisation stretches across every aspect of oil and gas companies operations and value chains. It involves a fundamental shift in how energy is generated. Embracing renewable energy developments, investing in operational efficiencies, utilising innovative clean energy technologies, and procuring low-carbon inputs into supply chains are key strategies underway for the majors.
The immediate challenge for procurement teams is how they decarbonise complex and often long global supply chains which have differing capabilities and maturities. Delivering the projects that will enable the energy transition will require a significant supply of equipment, fabrication, logistics and workforce capabilities, providing substantial opportunity for sustainability goals including efficient use of natural resources and decarbonisation, as well as other ESG focus areas.
A programmatic approach is key, and procurement remains central to helping oil and gas clients achieve their short and long-term decarbonisation objectives.
To seize this opportunity and deliver rapid decarbonisation will require a step-change in procurement strategy and execution, and in management of supply chains and contracts. The current approach from some companies has been to ask the supply chain to navigate the additional complexity and this raises concerns about excessive demands and allocation of risk.
The aim now in a society transitioning to net zero should be to look at how decarbonisation cost and risk are assessed, priced, shared and allocated between the supply chain, developer and operator. Put simply, there is a need to elevate the prominence of sustainability in procurement, to harness the very best in collaboration and supply chain knowledge to deliver decarbonisation outcomes. Here are four steps to consider when shaping net-zero procurement programmes:
1. Assess the maturity and capability for carbon reduction across the supply chain
The starting point should be to understand the existing baseline for carbon reduction across your supply chain. This will mean assessing the capability of primary, secondary or tertiary suppliers, which will in turn inform the future strategy.
A key question that clients must consider as part of this exercise is whether to centralise or de-centralise net-zero buying decisions to get the best access to supply – either by using global suppliers or developing suppliers on a regional basis.
This requires collaborative working with supply chains to understand what is achievable, and realistic and whether it is the same in each jurisdiction. A global tier-one supplier’s understanding and ability to reduce emissions across multiple regions is likely to be very different to a tertiary supplier in a regional market.
Being cognisant of the opportunities and challenges is key, and the results of this baseline should be used to develop strategies that may shape the market in a way that will maximise value for the client.
2. Target net-zero delivery in mature markets first
The priority for the oil and gas majors should be to initially embark on exemplar net-zero projects within the geographic locations where they can be most effective. In the first instance, the reality is that this is likely to be in mature markets with a supportive regulatory environment and the necessary political will to drive net zero.
- Shell’s Holland Hydrogen 1 renewable hydrogen plant, in the Netherlands, which has successfully achieved a final investment decision, will support decarbonisation of existing facilities and enable cleaner energy transport options. It also has a zero-carbon footprint as a main goal.
- Progress on Net Zero Teesside Power, the world’s first commercial scale gas-fired power station equipped with carbon capture technology, led by BP, is also well advanced. In addition to providing dispatchable low carbon electricity generation to back up intermittent renewables, it will help decarbonise a group of industries on Teesside by sharing carbon dioxide transportation and storage infrastructure.
With these testbeds, the aim should be to upskill and develop suppliers in all regions to support a just transition to net zero. This is about ensuring that people and businesses in emerging markets who initially stand to lose economically from net zero are trained and fully supported to take advantage of the social, economic and environmental benefits.
These projects represent excellent progress in decarbonisation of the energy system as well as the procurement of low-carbon inputs into the supply chain. It’s likely that these companies will use exemplar projects such as these as global testbeds to refine supply chain delivery models and take the learnings to other parts of the world.
The aim should be to upskill and develop suppliers in all regions to support a just transition to net zero. This is about ensuring that people and businesses in emerging markets who initially stand to lose economically from net zero are trained and fully supported to take advantage of the social, economic and environmental benefits.
3. Make carbon the fourth pillar of project performance
Clients should ensure that carbon becomes the fourth pillar of project performance alongside time, cost and quality in their assessment criteria.
Carbon performance must become embedded as part of all decision-making and it’s vital that this is communicated consistently across supply chains. It must become synonymous and pervasive in the way that behavioural health and safety has become second nature to the oil and gas industry.
Aligned with this is a need to measure carbon across the supply chain. This will evolve because there currently is no internationally agreed mechanism for supply chain measurement. Clients should be prepared for future policy changes. They now need to consider how they measure, and some will need to account for Scope 3 emissions from the wider value chain.
4. Collaborate to set up supply chains for decarbonisation success
Once clients have assessed capability, how should they incentivise suppliers to invest and drive emissions reduction? The supply chain remains hesitant in some instances to make the investments to decarbonise. If there is no incentive to do that then it will take longer.
One option could be to financially reward companies if carbon performance is consistently achieved against key targets. While that might appeal to guarantee delivery, a more effective approach would be for clients to be clear that they will work collaboratively with suppliers in a peer to peer relationship. As net-zero capabilities are developed the value of the supplier’s business will significantly increase in turn.
Meeting the need for energy security
Heading towards COP27 in Egypt following a summer of droughts and record-high temperatures, the climate emergency continues to be at the forefront of minds even amidst such significant economic headwinds. To meet the need for clean energy security in many countries, oil and gas procurement strategies must evolve quickly to set up major projects for long-term net-zero success.
Assessment of the carbon baseline, targeting projects in mature markets, embedding carbon as an essential pillar of sustainable procurement and working collaboratively with suppliers to share risk and knowledge and to drive decarbonisation collectively – these are the very foundations of world-class net-zero delivery.
As the world’s energy transition unfolds, the role of procurement will be essential in driving an accelerated net-zero pathway.
Putting in place strategies that help the supply chain align capability and capacity, based on an understanding of market drivers and sustainability goals will be key. We need to embrace the opportunity to do things differently. Following these four steps will make a difference in driving global supply chain decarbonisation in the oil and gas sector.