What do Scope 1, 2 and 3 emissions mean for the oil and gas industry?
Updated: Oct 26, 2021
Scopes 1, 2 and 3 are used to differentiate the types and amounts of carbon emissions a company creates through both its upstream and downstream activities. They were first introduced through the 2001 Greenhouse Gas Protocol and form the basis for all mandatory greenhouse gas emissions reporting in the UK.
Since April 2019 Scope 1 & 2 emission reporting has been mandatory for quoted companies and large companies. Scope 3 reporting remains voluntary but is “strongly recommended for material emission sources” (UK joint regulator and government TCFD Taskforce: Interim Report and Roadmap, 2020).
In November 2020 the UK government announced its intention to make TCFD-aligned disclosures mandatory across the economy by 2025, with a significant portion of mandatory requirements in place by 2023. The OGA convened an ESG Taskforce during the latter half of 2020 and in January 2021 published recommendations on what constitutes optimal UKCS ESG disclosure and reporting.
The OGA ESG Taskforce recommended that oil and gas companies should be reporting relevant scope 3 emissions by end of 2022.
When reporting its Greenhouse Gas (GHG) inventory, a company must set operational boundaries and chose a control or equity approach which is consistent with any partners.
A company’s GHG inventory should include all identified sources (emissions) and sinks (removals) associated with its operations. Unless a company has implemented removal projects (technological removal such as CCS or DACs or biogenic removal such as afforestation) then their inventory reporting will be focused on emissions only.
What makes up Scope 1, 2 and 3 emissions?
Scope 1: emissions a company produces directly through its activities. These are usually controlled by the company through its own operations (unless it is reporting emissions on an equity basis).
These are often subdivided into four categories:
1. Stationary combustion: includes fuels used in buildings (e.g. heating).
2. Mobile combustion: accounts for fuels burned by company vehicles.
3. Fugitive emissions: those that occur from leaks e.g. from refrigeration units.
4. Process emissions: greenhouse gases produced through on-site manufacturing and industrial processes.
Scope 2: emissions produced in the generation of imported energy, usually electricity that the company has purchased through a utilities provider e.g. to run pumps or charge electric vehicles.
The important differentiator between Scope 1 (direct) and Scope 2 (indirect) is who is controlling the process. For example, if a company produces its own electricity on site this would be Scope 1.
Scope 3: indirect emissions not accounted for in Scope 2.
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. They include emissions associated with employee business travel and any outsourced activities that are not controlled by the company.
Scope 3 is where the largest percentage of emissions for a company lie and typically are the hardest for a company to accurately quantify and track.
What does this mean for the Oil and Gas industry?
Scope 1 and 2 emissions are mandatory to report for quoted companies and large companies while Scope 3 emissions are voluntary. Until recently most companies in the Oil and Gas sector have not released their Scope 3 reports publicly.
IHS Markit data shows that Scope 3 emissions account for ~88% of total emissions for companies within the sector and often these emissions are excluded from reduction targets and commitments.
Recently, shareholders and court rulings have applied pressure to companies to publicly record and report their Scope 3 emissions.
In May 2021 a Dutch court ruled that Shell had to increase its target for emissions reductions to a net reduction of 45% below 2019 levels by 2030 across the companies “entire energy portfolio”. The court stated that those in the oil and gas sector need to take responsibility for Scope 3 emissions, especially when they account for the vast majority of their total emissions.
The UK Government Net Zero Strategy published 19th October 2021 re-stated the North Sea Transition Deal commitment to halve the oil and gas industry’s operational emissions by 2030 (based on 2018 levels). This aligns with the OGA’s updated 2021 strategy to:
“take appropriate steps to assist the Secretary of State in meeting the net zero target, including by reducing as far as reasonable in the circumstances greenhouse gas emissions from sources such as flaring and venting and power generation, and supporting carbon capture and storage projects”.
The Government’s Net Zero Strategy also introduces the concept of a new “climate change compatibility checkpoint for future licensing on the UK Continental Shelf”. This checkpoint will be designed by end 2021 following a consultation.
It is worth noting that in several situations, an oil major divesting its portfolio to reduce its own emissions often ends up with an increase in emissions from production of the same amount of oil or gas. Whilst oil majors are required to disclose their emissions, small private operators do not; when emissions are not tracked, the incentive to reduce emissions is lost.
The reporting of Scope 3 emissions
Scope 3 emissions are not easy to record as companies have far less control over these emissions than those covered in Scope 1 and 2. While some companies are trialling different technologies to try and quantify the emissions from consumer sources, issues remain due to different methodologies and recording practices across companies and industries.
While recording and reporting Scope 3 emissions can be hard enough in Europe, where clear protocols and targets are in place for monitoring emissions, it can be even harder in other regions where varying methodologies exist, and a lack of transparency and uniformity can reduce the ability to compare statistics.
In 2021 the American Petroleum Institute released guidance for reporting company emissions. However, this was focused almost solely on Scope 1 and 2 emissions with Scope 3 emissions barely mentioned.
Carbon Emission Intensity vs Absolute Carbon Emissions
Some operators have committed to reducing their carbon emission intensity by including renewables or low carbon energy into their portfolios.
Exxon have claimed that focusing on carbon emission intensity allows for coal energy sources to be replaced with lower polluting gas without unfairly increasing their Scope 3 emissions. However, a reduction in carbon emission intensity doesn’t mean a reduction in absolute CO2 emissions and so there are calls for companies to declare reductions on an absolute basis rather than intensity basis.
There is no doubt that tracking and reporting Scope 3 emissions is going to be a big challenge for the Oil and Gas sector, but it is also a great opportunity for companies to show stakeholders and consumers that they are serious about reducing emissions and developing a more sustainable business.