Net Zero, Scope 3 emissions and the energy industry

Discover the main findings from the study and report “Scope 3 emissions – A common knowledge basis for the energy industry”. The study was carried out by DNV on behalf of Offshore Norge.

Background for the study

The oil and gas industry is facing evolving requirements from external and internal stakeholders when it comes to managing and reporting the GHG emissions generated from its activities. For decades the operators have been reporting direct emissions from operations of the fields and assets on the Norwegian Continental Shelf (NCS). However, in recent years also indirect emissions occurring along the value chain upstream and downstream of the fields and assets (Scope 3 emissions) have been subject to increasing scrutiny from various stakeholders. Data from IHS Markit shows that Scope 3 emissions in 2019 accounted for an average of about 88% of the total value chain carbon footprint from the oil and gas sector (Clean Energy News, 2021). As part of the energy transition, the reporting of GHG emissions, including Scope 3 emissions, is therefore developing from being a voluntary reporting activity to becoming a vital part of securing the financial backbone for the industry through meeting stakeholder expectations.

Most of the companies operating fields and assets on the NCS are already reporting Scope 3 emissions, however this reporting incorporates various levels of detail and is undertaken through different approaches and methods. The result is a lack of Scope 3 reporting alignment. How the requirements for Scope 3 emission reporting will develop in the years to come, and how fast this development will go, is difficult to predict. Hence, to be prepared for what is coming, there is a need to get a better insight into the drivers and regulations that are set to dictate how requirements will evolve. Further, in order to enable the industry to efficiently address these evolving Scope 3 emissions reporting requirements, it is important to increase the understanding of what is already being done and to identify which standards, guidelines and tools that are already available. Secondly, it is key to create a common understanding of upcoming challenges that will need to be addressed jointly by the industry.

Against this backdrop, Offshore Norge (previously the Norwegian Oil and Gas Association - NOROG) engaged DNV to conduct a study to create a common knowledge base for its members with the objective of providing:

A better understanding of drivers and regulations behind current and future scope 3 emission reporting requirements
Insights into current industry practice when it comes to Scope 3 reporting
A common understanding of what Scope 3 reporting disclosures and methodologies that need to be in place to meet future requirement.

Executive summary

With COP26 and the rising urgency to meet international carbon budgets as the main backdrop, external pressures to disclose and report on Scope 3 emissions are expected to increase in the coming years. Hence, there is an evolving narrative that companies must document their carbon footprint throughout the entire value chain and take more responsibility for indirect emissions.

To mitigate transition risk, investors will push oil and gas companies to report on Category 11 – Use of sold products, which represents the biggest component of the value chain carbon footprint. Investors with oil and gas exposure will likely emphasize dialogue as the key lever and expect companies to report and formulate strategies on Scope 3 emissions categories that the companies can influence. Banks are also expected to increase the pressure on oil and gas companies to disclose Scope 3 emissions, given that the banks themselves must disclose their own scope 3 footprints.

In line with rising external pressures with regards to Scope 3 reporting, there are also opportunities embedded in disclosing Scope 3 emissions. Notably, greater value chain transparency will support more future-proof sustainability strategies that can better integrate key long-term environmental pressure points and enable oil and gas companies to contribute to reducing the emissions associated with the use of their products. This will also enable more robust communication on achievements within sustainability matters, particularly with regards to GHG emissions. Further, the broader business strategy can also benefit from being rooted in greater value chain transparency, as this in turn will facilitate deeper supply chain collaboration. Helping the supply chain to deliver on more stringent environmental procurement requirements will by extension also support its long-term competitiveness. Ultimately, the supply chain companies may also become important customers of low carbon fuels.

From the regulatory side the proposed Corporate Sustainability Reporting Directive will require companies to also address Scope 3 stating “Reported sustainability information should also take into account short, medium and long-term time horizons and contain information about the undertaking’s whole value chain”. Developing a fit for purpose Scope 3 reporting methodology will thus better equip a company to face what eventually will become regulatory value chain disclosure requirements.

With regards to current practice, a key trend is that companies are including Scope 3 emissions as part of their net-zero ambitions. This is in line with what we see of the stakeholders increasingly expect with regards to Scope 3 reporting and GHG target setting.

Standards and reporting frameworks are continuously under development and there are currently three activities that are particularly important to pay close attention to:

An update to the Ipieca guidelines on Scope 3 reporting is expected later in 2022
The science Based Target initiative (SBTi) are developing a new methodology for companies in the oil and gas sector to set science-based targets that is due later in 2022. The aim of this methodology would be to set guidelines for oil and gas companies that would end the current moratorium for the sector within the SBTi.
There is ongoing cooperation between the largest 5 reporting “frameworks” (GRI, SASB, CDP, CDSP and IIRC) with the aim of eventually creating one shared standard.

With respect to the challenges associated with the lack of common practice with regards to Scope 3 emission reporting, this report acknowledges that a common practice would not be in a position to define and harmonize all the details across the variety of oil and gas companies. Instead, the Scope 3 emission reporting approach must be flexible enough to accommodate for the differences in company strategies and business models. Having said that, some principles and methods should be agreed upon to avoid creating an inefficient and costly regime for Scope 3 emission reporting in the industry. A joint approach to the collection and validation of supply chain data would streamline data collection and reduce the reporting burden for suppliers, substantially improving efficiency and reducing costs associated with gathering validated data from the supply chain.

Secondly, further standardizing methodologies for calculating Category 11 emissions - which comprises 85-95% of the Scope 3 emissions from the oil and gas industry – would increase confidence in the veracity and comparability of the emissions calculated.

In general, moving towards a more common approach for Scope 3 emission calculation and reporting will create a broader support from stakeholders, ensure trust in the reported emissions and increase efficiency in data management.