Upstream carbon policies should balance emissions reduction with negative economic consequences
Following the Paris Agreement, consultancy Wood Mackenzie assessed how carbon emissions evolve over field life, the variables at play and the potential impact on the upstream sector.
The carbon emissions targets set by the Paris Agreement look to have far-reaching implications for long-term corporate strategies.
As the oil and gas industry is a large energy-intensive sector of the global economy, Wood Mackenzie expects investors and other stakeholders to increase scrutiny on corporate carbon footprints and value at risk.
The agreement has the potential to have a material impact on corporate asset valuations. However, with no standardised reporting methodology agreed, the availability of asset-level carbon emissions data is limited to a subset of established petroleum provinces, including Canada, the UK and Norway.
By combining emissions data from the Norwegian Environment Agency and Wood Mackenzie’s own production and reserves data, they can conduct a more comprehensive assessment of the variation of intensity across field life.
While all fields are unique, with production and emissions characteristics evolving over time, Wood Mackenzie’s analysis demonstrates a ‘typical’ relationship between emissions intensity and field maturity using Norwegian oil assets.
The general trend shows an elevated emissions intensity during production of the first 10 per cent of reserves. This reduces as production ramps up and is flat throughout mid-life (10-50 per cent).
From 50 per cent of production onwards, the intensity of field emissions rises steadily to an average five times our baseline in the final 5 per cent of production.
However, at the individual field level, there can be wide deviations from this trend. This is commonly due to delays in the ramp up of production, increased intensity in mid-life (with field re-development for example) or extreme intensity spikes when more than 95 per cent of reserves are produced when production can be particularly erratic, according to Wood Mackenzie.
Mature oil and gas fields pose a number of unique challenges for operators. One potential unintended consequence of the implementation of a carbon price on upstream operations is the risk of triggering early cessation of production on already marginal mature fields.
Consequently, any carbon policy implemented on the upstream sector by governments will need to carefully balance the desire to reduce carbon emissions while avoiding the negative economic consequence associated with early shut-ins of mature oil and gas infrastructure.