From voluntary to mandatory

We’ve talked about the complexity of ESG reporting and the numerous standards that apply today. Although there has been some consolidation of these standards, we still have several different standards, allowing for companies to pick and choose which standards they want to report.

But we are moving from what has been a voluntary reporting process to a mandatory one, with the Securities and Exchange Commission (SEC) working to finalize their rules. This has caused a bit of consternation, as we see some significant pushback from industry, and frankly there should be. We are beginning to see in this transition from voluntary to mandatory a rather uncertain path—what do I report, how do I collect these data?

Data collection and reporting. Uncertainty also can be the breeding ground for opportunity. The number of data collection and reporting programs has grown tremendously, with even IBM reporting that they are getting into the data collection and reporting business for ESG. This gets even more complex for multinationals, where we see different reporting standards in the EU and non-EU countries. Ultimately, this will all work out with a more uniform reporting standard and hopefully some clarity, but before then, expect this topic to become even murkier.

Eventually, you have a push for all emissions, scopes 1,2 and 3. As a refresher, scope 1 is a company’s emissions, scope 2 is emissions from the power they consume, and scope 3 is defined as vendors’ or subcontractors’ emissions or all others, as some like to say.

When we get to reporting all scopes, there becomes a tremendous overlap and a new issue. How do I force a private company to report emissions when it is required to by the SEC? Then add the disparity between the data, themselves.

Take something as simple as truck emissions. Manufacturers have data, based on new engines, but data from trucks in the field can be much higher and there are several different ways to calculate these emissions, all resulting in different emission levels that can vary widely. This is a rather complex problem, and until we develop some level of standardization, this will continue to be a contentious topic.

The EU, for example, is taking on “greenwashing.” That is the making of ESG claims that are unsupported or unverifiable. With ESG gaining traction globally, you have companies proudly reporting their environmental records. Examples of greenwashing can be, for example, trash bags being called recyclable, yet they are never separated from trash and never end up being recycled or reporting a 50% increase in recycling, while your product increased its recycled content from 1% to 1.5%.

This is exactly what should be expected from a program that is going from voluntary to mandatory. But we should also expect some clarity, and it will take some time.

Is there a credibility problem? Traditionally, environmental groups have been the champions of the many environmental standards and programs. That has not changed with ESG, but as the oil and gas industry embraces ESG, these same groups haven’t welcomed this change.

Explain to me, how Microsoft or Apple can offset their emissions with carbon credits, but when oil and gas does, it’s called greenwashing. The goal should be reducing emissions period. Even oil and gas investments in wind and solar have been called greenwashing. The environmental groups, or more specifically, the anti-oil advocates, will argue that oil and gas have a reputation and credibility problem. But why, then, is embracing emission reductions or ESG principles, in general, not welcomed and thus labeled greenwashing? I would ask, who has the credibility problem, when emissions reductions are applauded for one industry but condemned for another?

I know I will get in trouble for this statement, but it’s easier to raise money to fight “demons,” and the last thing you want is these “demons” to stop being “demons.” You see, if oil and gas offset their emissions, you have a carbon zero industry, and you’ve slain the demon. The type of comments coming from the anti-oil advocates is that decarbonization of oil and gas is not allowed or is greenwashing. Yet, decarbonization in any other industry is celebrated. So, who exactly has the credibility problem?

A decarbonization story. Oxy’s 1Point5 recently announced an agreement with AT&T to purchase carbon removal credits from 1Point5’s STRATOS facility. STRATOS is a Direct Air Capture (DAC) facility. It takes carbon dioxide (CO₂) directly from the surrounding air. This facility is designed to capture up to 500,000 tons of CO₂ annually. It is located in the Permian basin of Texas, in Ector County, and is projected to be the world’s largest DAC facility. Others, including Amazon, Shopify, Airbus and even the Houston Texans, have entered into carbon removal credits with STRATOS. BlackRock is a major investor.

Decarbonization is not new to Oxy, and they have been in the decarbonization business for years as part of their enhanced oil recovery (EOR) program. In 2010, while the 45Q Tax Credit program was in its infancy, Oxy was starting the Century project. The idea here was to enter into a JV with another oil and gas company, to expand their capacity for natural gas processing and, in exchange, have access to the CO₂ for their EOR program. On paper, this was a great idea, but as the project progressed, gas prices dropped, and the JV partner slowed down its drilling program. The facility never came close to achieving its designed capacity, with reports of as little as 10% to 30% of capacity being realized. Oxy sold off it’s interest and came back stronger.

Or, if you listen to the anti-oil lobby, this major failure is why oil and gas should not be in decarbonization. Oxy shifted. Although CO₂ from gas processing plants is plentiful and easily accessible, it is also highly variable and heavily influenced by gas prices and drilling programs. They needed a reliable source of continuous CO₂, and DAC provided exactly that. However, it is much more expensive. Thus, with some changes to the 45Q under the Inflation Reduction Act (IRA), we have a DAC category and a new $180/ton tax credit.

There is beauty in the 45Q program. But as the largest carbon capture facility is under construction, there is no fanfare from the anti-oil lobby. They have doubled down on their disapproval of oil and gas being in the carbon capture business. I chose to see the beauty in this program, between 45Q tax credits and carbon offset credits—decarbonization can be profitable, and while you develop this new profit center, you also decarbonize your oil and gas. Carbon zero energy is carbon zero, regardless of where it comes from.

More importantly, the largest decarbonization efforts are going to come from oil and gas, so we will see not just oil and gas, but other industries go carbon zero, because of oil and gas. Now, that’s a success story, no matter how you try to spin it. WO

MPATTON@HYDROZONIX.COM / MARK PATTON is president of Hydrozonix, an oil and gas-focused water management company. 
He is a chemical engineer with more than 25 years of experience developing new technologies for wastewaters and process residuals.