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In a previous post we discussed how the majority of an operator’s emissions are categorised as Scope 3 but are the hardest to quantify and are not yet commonly reported.
Data shows that Scope 3 emissions account for ~88% of total emissions for companies within the sector and often are excluded from commitments (IHS Markit).
These are emissions that occur along the reporting companies value chain. They cover emissions starting with the procurement of the raw materials, through manufacturing, distribution and finally the customer use of the end product.
There have been multiple calls for companies to start accounting for their Scope 3 emissions thorough the supply chain.
So why is this important, how far down the supply chain will companies need to go, who will be responsible for recording the data, and what will this data look like?
Why is this important?
Until a company has a good understanding and quantification of its Scope 3 emissions, it will be impossible to prioritise the most effective way to reduce its GHG impact.
Developing a detailed understanding of full value chain emissions allows a company to engage more effectively with suppliers and customers and to take account of emission-related risks and opportunities in its wider business strategy.
The reputational risk of not understanding this aspect of operations is becoming more significant as reporting requirements become more stringent and the expectation for transparency increases.
It cannot be ignored that the majority of an oil and gas operator’s GHG emissions sit in Scope 3 Category 11 “Use of Sold Products”, which includes the direct use of oil and gas as a fuel or feedstock.
CDP estimate that Scope 3 category 11 typically accounts for over 90% of an oil and gas operator’s total emissions based on their 2015 disclosures. Shell’s 2020 Sustainability report show Scope 3 Category 11 emissions were 85% of its total Scope 1,2,3 emissions.
For high emitting companies and industry areas, the focus with reporting and goals around Scope 3 should be on areas where emissions can be reduced, and for some companies these will be significant. Being able to show that a company is taking steps to reduce its Scope 3 emissions will become more and more important as the need to decarbonise increases.
For companies, such as oil and gas operators, who have large supply chains, there are massive opportunities to engage with a broad range of companies and encourage changes in the way those organisations operate to reduce their environmental impacts.
How far should we go?
The diagram below shows the complication and number of players involved in the supply chain portion of a drilling campaign for an operator. One glance at this highlights the sheer scale and complexity of even starting to try to figure out how the emissions data, and other ESG metrics, can be gathered from all of the various companies and departments.
Ultimately, how far down the chain will companies be required to go, and how much detail will be required? Do companies stop with the highest emitters such as shipping and material fabrication, or do they go right down to the caterer and laundry services?
Who will be responsible?
Regarding data gathering, calculations and reporting, who will be responsible for gathering and collating all the emissions data along a supply chain such as that shown in the drilling example?
Discussions with various operators suggests that there will be considerably more detailed requests for information during the tendering and contract stages, with far more stringent rules on what ESG credentials and emissions information a supplier company will need to provide.
How far down the chain top-level turn-key suppliers will report on is still to be determined for many companies.
For the smaller organisations forming part of these complex supply chains, the challenge will be on finding the skills and resources to calculate their emissions within their own supply chain.
What will be measured and reported at each level of the supply chain?
The GHG Protocol developed a Corporate Value Chain (Scope 3) Accounting and Reporting Standard in 2011 which provides an internationally accepted method for Scope 3 GHG quantification and management across all industries.
The API Climate-related Reporting Initiative published in June 2021 presents a core set of GHG emissions indicators that individual natural gas and oil companies could report publicly. Their intention in this publication was to:
“enhance comparability across company-by-company climate related reporting in the natural gas and oil industry, in order to provide decision useful information to the financial sector, policy makers, and industry customers and other stakeholders.”
However, regarding the Scope 3 emissions API acknowledge the difficulty with their reporting and note that their current templates do not include Scope 3 as they are:
“a category of GHG emissions that API member companies are still discussing in terms of suitability for this template. Estimating GHG emissions beyond a company’s control, i.e., beyond a company’s direct operations, involves an increased level of complexity, assumptions, and uncertainty, and should therefore be considered carefully.”
In the IPIECA “Estimating petroleum industry value chain (scope 3) greenhouse gas emissions” the Shell case study provides a high-level example of how Scope 3 emissions can be calculated; multiplying a company’s spend with each supplier as a share of the supplier’s revenue by an estimate of the total annual GHG emissions of that supplier.
This approach is quite simple, but the details then rely very much in accurately and fairly determining the GHG emissions of the suppliers. In the Shell example, they list the order in which data for this can be utilised:
1. Preference is given to primary data - Scope 1 and 2 emissions reported directly by the supplier in public references
2. Where supplier emissions data is not reported, emissions are estimated from reported energy consumption in conjunction with appropriate emissions factors.
3. Where the products and services supplied do not constitute the main business of the supplier, primary data should not be used.
4. Secondary data is used for suppliers where no direct data are available - preference may be given to use of industry averages based on data reported by companies to the Carbon Disclosure Project.
5. In other cases, a proxy method - the emissions of a similar company – can be used.
How can we help?
At sustain:able we are from oil and gas - we understand the complexities and the challenges around the supply chains. To see an example of how we work on Scope 3, take a look at our Scope 3 Emissions Reporting Review case study.