Managing emissions and making profits: The opportunity for carbon-intensive sectors in the Middle East
National oil companies and companies in other carbon-intensive industries, such as chemicals and utilities, can not only profit from returns on investments in energy efficiency; they can also improve their image, access carbon finance, and contribute to the long-term competitiveness of fossil fuel resources and hydrocarbon-based products and services.
Managing emissions and making profits The opportunity for carbon-intensive sectors in the Middle East
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About the authors
Beirut Georges Chehade Partner +961-1-985-655 georges.chehade @strategyand.pwc.com George Sarraf Partner +961-1-985-655 george.sarraf @strategyand.pwc.com Dubai Tarek Elsayed Partner +971-4-390-0260 tarek.elsayed @strategyand.pwc.com Simon-Pierre Monette Senior Associate +971-4-390-0260 simon-pierre.monette @strategyand.pwc.com
Düsseldorf Joachim Rotering Partner +49-211-3890-250 joachim.rotering @strategyand.pwc.com New Delhi Suvojoy Sengupta Partner +91-124-499-8700 suvojoy.sengupta @strategyand.pwc.com São Paulo Arthur Ramos Partner +55-11-5501-6229 arthur.ramos @strategyand.pwc.com
Tarek Elsayed is a partner with Strategy& in Dubai. An expert in corporate and agency strategy, he has assisted a range of private- and publicsector clients across the Middle East and Europe to address energy, emissions, environment, and water issues. Dr. Walid Fayad was a partner with Strategy&. Dr. Greg Lavery was a principal with Strategy&. Simon-Pierre Monette is a senior associate with Strategy& in Dubai. He specializes in developing growth, investment, and low-carbon strategies in the energy and utility sectors.
Tom Hinds, Georgie Saad, and Saed Shonnar also contributed to this report.
This report was originally published by Booz & Company in 2011.
Increasing awareness of mankind’s contributions to climate change is creating new pressure for carbon-intensive sectors such as oil and gas to address their greenhouse gas (GHG) emissions. Many companies are reluctant to embark on emissions reductions programs, due to the common misconception that such programs are inherently unprofitable. But recent experience in the oil and gas industry in the Middle East proves otherwise. One national oil company (NOC), for example, identified the potential for a 43 percent reduction in emissions with a net present value of several billion U.S. dollars using a systematic and programmatic approach. Not only can NOCs and companies in other carbon-intensive industries, such as chemicals and utilities, profit from returns on investments in energy efficiency; they can also improve their image, access carbon finance, and contribute to the long-term competitiveness of fossil fuel resources and hydrocarbon-based products and services. In addition, these companies can collaborate with other energy stakeholders at the national level on GHG emissions reduction measures; doing so will generate significant cost savings by reducing fuel consumption while freeing up additional fuel for export. Managing a company’s GHG footprint requires a systematic and methodical approach to its emissions reduction strategy. This approach will involve three key steps: choosing a strategic course; developing a GHG reduction program, including measures such as investments in energy efficiency projects; and establishing core processes and other infrastructure required to successfully implement the program. It should be coupled with an initial focus on quick wins that can generate savings to help fund long-term, more capital-intensive abatement projects. Taking such a carefully considered approach can help companies convert pressure from climate change issues into an opportunity to generate profits.
The case for GHG management
• Energy efficiency measures can generate direct cost savings by reducing fuel consumption, which can free up fuel for export; they are in most cases profitable, with payback periods of potentially fewer than three years. • Companies can achieve emissions reductions of up to 40 percent through improvements in operations and maintenance, reductions in flaring and venting, and investments in energy efficiency measures at the equipment and process levels. • Carbon capture and storage (CCS) offers NOCs further opportunities for GHG reductions; leading oil companies should assume an important role in the development of CCS, as they are in a unique position to leverage their upstream capabilities for the storage of carbon dioxide in oil and gas reservoirs and other geological formations. • Companies will need to add a number of capabilities to conduct GHG emissions management programs, take advantage of carbon finance mechanisms, and take a leading position in emissions reduction technologies.
In recent years, climate scientists have unearthed new evidence linking increases in carbon dioxide and other GHG emissions to rising global temperatures. The potential for irreversible consequences has prompted national governments around the world to devise ambitious plans to address global warming and its possible damage to ecosystems and the global environment. The most extensive of these efforts is the United Nations-sanctioned pursuit of an international agreement on climate change to succeed the Kyoto Protocol, which covers six GHGs and expires in 2012. Although Middle East countries are relatively moderate emitters of GHGs and not currently bound to GHG emissions reductions by the Kyoto
Protocol, the region may be prone to significant impacts from rising global temperatures, including intensified desertification, increased water scarcity, ocean acidification, loss of biodiversity, extinction of species, and even human deaths caused by heat waves. As a result, governments and carbon-intensive industries across the region are exploring ways to reduce their emissions footprint, thereby participating in the global drive to address CO2 emissions. Contrary to popular belief, addressing GHG emissions can be profitable. One NOC, for example, identified the potential for a 43 percent reduction in emissions with a net present value of several billion U.S. dollars. What’s more, for regional governments and carbon-intensive industries, such as oil and gas, chemicals, and utilities, that take a proactive approach to GHG management, the benefits can extend beyond profit. Long-term competitiveness of hydrocarbons: GHG abatement measures in oil and gas operations reduce the carbon footprint of these fossil fuels. Accordingly, the implementation of a GHG management strategy contributes to the long-term competitiveness of oil and gas as the world transitions to low-carbon energy sources. Energy efficiency returns: Energy efficiency measures, central to many GHG emissions management initiatives, generate direct cost savings by reducing fuel consumption. In many cases, energy efficiency measures pay for themselves and some are very profitable, with payback periods of fewer than three years. NOCs specifically have an additional opportunity at the broader national level: they have much to gain from reductions of GHG emissions in their respective economies as this implies lower capital investments to meet local energy requirements and increased fuel available for export. Accordingly, NOCs of the region should drive the implementation of energy efficiency measures not only for their own operations, but also in the power and transport sectors of their countries. Access to carbon finance and technical support: The clean development mechanism (CDM) under the Kyoto Protocol allows qualifying emissions reduction projects in developing nations to benefit from financial and technical support. To date, the CDM has remained relatively unexploited in the Middle East (see Exhibit 1, page 6). With a large number of CDM methodologies already in place for energy efficiency and alternative energy applications in the oil and gas, petrochemicals, and utilities sectors, there is great potential for companies to take advantage of carbon finance support (see “International carbon finance and clean development mechanisms”, page 7). Improved image: With GHG management programs, companies in carbon-intensive sectors will demonstrate their commitment to reducing emissions and help deflect increasing public scrutiny about their contributions to climate change.
Although it may be tempting for companies to view GHG management initiatives strictly as part of the corporate social responsibility agenda, these wide-ranging benefits point to an economic imperative as well, and one that should not be overlooked or underestimated. To capture these benefits, Middle East companies should adopt a systematic and methodical approach to reining in their emissions, articulated in three key steps: 1. Choose a strategic course 2. Develop a GHG reduction program 3. Establish core processes and other infrastructure required to successfully implement the program The following sections describe how this structured approach applies to regional companies.
Exhibit 1 An untapped market for carbon financing
Number of CDM Projects Registered and at Validation Stage (by Host Region, Cumulative up to 12/2009) 1,895 1,850
90 China Asia & Paciﬁc1 Latin America Africa
Data excludes China
Source: UNEP Risoe Centre (December 2009); UNFCCC CDM statistics
International carbon finance and clean development mechanisms
The international carbon finance market has grown rather quickly, surging to US$114 billion in 2009 from just $10 billion in 2005. Among the mechanisms introduced to lower the overall costs of achieving the Kyoto Protocol’s emissions targets, the clean development mechanism (CDM) is the most pervasive tool for collaboration between industrialized, developed countries and developing or emerging nations. The objective of the CDM is to provide funding, expertise, and technological support for the development of emissions reduction projects in developing countries. The underlying principle of CDM is “additionality,” which means that a project is deemed eligible for certified emissions reductions (CERs) only if it can be demonstrated that it wouldn’t have been possible to realize the project without such support. Companies can demonstrate additionality through investment analyses showing a project would otherwise be economically unattractive, or by illustrating that CDM collaboration and financing would help overcome financial, technological, or capability barriers preventing pursuit of the project. Although new carbon finance mechanisms such as green funds and nationally appropriate mitigation actions (NAMAs) could supplement CDM as of 2012, demonstrating additionality will most likely remain a requirement for any support under those schemes.
Although companies may view GHG management strictly as part of the corporate social responsibility agenda, there is an economic imperative as well.
Choosing a strategic course
Defining a strategic positioning should be a company’s first major step in tackling GHG emissions because that will guide its course of action, as well as its level of involvement in driving the low-carbon agenda at the national level. Setting the right course, though, takes an understanding of the company’s baseline emissions, which will help identify the biggest contributors and compare emission levels to international benchmarks (see “The first challenge: Establishing a baseline”, page 9). Once the company has established its emissions baseline, its leadership should articulate a vision for dealing with its GHG footprint. Through this process, companies are likely to settle on one of four broad positioning options for aligning their strategic vision with the right set of emissions reduction initiatives: Compliant: Companies that fit under this category would implement GHG reduction measures solely as a means to meet the requirements of national and international regulations. Initiatives designed for this purpose are not governed by a programmatic approach and represent the bare minimum of what is required. Efficient: This positioning would account for companies seeking to go a step further than basic compliance by improving the efficiency of their operations and attempting to benefit from carbon finance support. They would target investments in readily available and robust technologies, typically at the equipment level, with short payback periods. Enlightened: This category applies to companies aspiring to be leaders in their region in emissions control. It involves complex but tested technologies, typically at the process and plant levels. Understanding and implementing these activities requires significant capabilities and knowledge. Under this positioning, companies would collaborate with other energy stakeholders at the national level on select GHG emissions reduction initiatives with the aim of reducing national fossil fuel consumption. Examples of such initiatives might include an NOC supplying the utility sector with low-emissions fuels or collaborating with utility sector stakeholders to implement alternative energy projects.
Differentiated leader: The greatest benefits in terms of emissions reductions would go to those companies that seek to establish best-inclass GHG emissions performance and innovation on a global scale. Many of the emissions reduction solutions in this category would be considered cutting-edge technologies, offering companies the opportunity to take a competitive position in generating intellectual property in this area. Additionally, companies that are ready to assume a leadership role in their country’s emissions reduction efforts can establish themselves as national champions by working with the country’s environmental agencies to develop a detailed national carbon inventory and low-carbon development plan. In this role, companies would support national initiatives to establish the institutional setting for accessing international carbon finance support and contribute to setting energy efficiency standards and developing initiatives in other carbon-intensive sectors, such as the implementation of alternative energy projects.
The first challenge: Establishing a baseline
Before companies can begin identifying and investing in emissions reduction initiatives, they need to obtain a proper and exhaustive inventory of their GHG footprint. A detailed baseline of emissions allows companies to identify areas with a high potential for emissions reductions, based on comparisons with best-in-class benchmarks. An emissions baseline also forms the basis for deriving a “business as usual” scenario, which projects future emissions in the event that no actions are taken. Such scenarios make it easier to set goals for emissions reductions and also serve as a valuable reference point for monitoring performance on an ongoing basis. The raw information contained in such an inventory is often already available, but companies don’t generally aggregate it because they are not required to do so. To gain greater insights about emissions reduction potential, companies must distill this data in a well-structured baseline for every subsidiary or business unit. They should also delineate between direct or Scope 1 emissions (e.g., combustion, flaring and venting, and fugitives) and Scope 2 emissions resulting from imported sources (e.g., electricity and water).1 Companies can compile two types of emissions inventories: equity-based and control-based. For pragmatic reasons, companies may elect to use a control-based approach, as they will have more power to implement changes in subsidiaries in which they own a controlling stake.
Scope 1 emissions are emissions that a company / business generates directly whereas Scope 2 emissions result from the import of goods / utilities such as power and water that bear a carbon content.
Developing a GHG reduction program
Once companies establish their vision for GHG emissions management at the corporate and national levels, they should then identify potential emissions reduction initiatives across the value chain. These opportunities can be grouped into five broad categories: Continuous operations and maintenance (O&M) improvements: Companies may achieve emissions reductions and fuel savings through improved process controls and direct inspection and maintenance programs. For example, in the oil and gas sector, this includes systematic de-fouling and operational measures leading to reduced emergency flaring. Such improvements require little capital investment, yet have the potential to yield emissions reductions of as much as 10 percent. Improving equipment efficiency: These initiatives target GHG emissions reductions by improving the efficiency of equipment such as heaters, burners, boilers, compressors, turbines, and motor systems. In refineries, such equipment typically accounts for 65 percent of emissions. At one refinery, optimizing the combustion efficiency of heaters, burners, and boilers required an investment of approximately $120 million with a potential internal rate of return of nearly 30 percent and a potential payback period of fewer than three years. Reducing heat requirements through process improvements: Companies in process industries can realize energy efficiency improvements via the optimal use of heat and optimization of steam systems. To achieve this, they will need to conduct pinch analysis — i.e., systematic analysis of energy flows and use in processes, which helps determine the minimum energy a process requires. Flaring and venting reduction: In the oil and gas and petrochemicals industries, venting is a major source of direct methane emissions that often results in losses of significant value. Hydrocarbon vapors often have higher heat content than pipeline-quality natural gas, making them more valuable than natural gas. Vapor recovery systems (VRSs), which can
capture up to 95 percent of hydrocarbon vapors, can retain this value by allowing the vapors to be resold, used as on-site fuel, or fed to processing plants to recover valuable natural gas liquids. Industry experience reveals that the installation of VRSs can be quite profitable. In one example, an independent oil company installed VRSs at two locations at a cost of $200,000 and saw its investment recouped in less than two months due to the high value of the gas recovered. Structural initiatives: While the initiatives enumerated above can be launched unilaterally, companies may also selectively pursue more challenging and complex projects that involve multiple stakeholders or business units. These initiatives, such as cogeneration with grid tie-up and the use of residual heat, the application of solar thermal for providing heat to processes, and the development of solar power to offset power consumption, offer great potential for emissions reductions. Additionally, NOCs can consider CCS with enhanced oil recovery (EOR) (see “Carbon capture and storage and enhanced oil recovery”, page 12), and companies in the petrochemical sector can explore carbon conversion, involving the use of captured CO2 as feedstock — for instance, for urea and methanol processing. Once companies have identified the extent to which the above opportunities are applicable to their operations, they should prioritize them based on the trade-off between their emissions reduction potential and their cost and difficulty. This ensures that efforts are focused on those opportunities with the greatest potential for emissions reduction in the context of practical capacity constraints. Companies must then analyze in greater detail the initiatives that make the short list to determine their investment requirements, economic attractiveness, and potential risks. This assessment should also determine eligibility for carbon finance support and identify whether relevant CDM methodologies exist. Short-listed initiatives may be mapped on an emissions reduction investment curve to capture the returns associated with each opportunity (see Exhibit 2, page 13). The investment curve shows that the most profitable opportunities feature returns well above the typical returns expected for capital projects and make the overall economics of GHG management very attractive at the portfolio level.
An oil company installed VRSs at two locations at a cost of $200,000 and recouped its investment in less than two months.
Carbon capture and storage and enhanced oil recovery
Carbon capture and storage (CCS) encompasses a variety of technologies to capture, transport, and sequester carbon dioxide emissions. Countries around the globe are pushing ahead with investments in CCS in the hopes of enabling commercial scale deployment by 2020. Governments are dedicating a collective $15 billion each year to fund more than 200 projects and induce investments from the private sector. Leading oil companies should assume an important role in the development of CCS, as they are in a unique position to leverage their upstream capabilities (e.g., geological characterization and overall reservoir management) for the storage of carbon dioxide in oil and gas reservoirs and other geological formations. Enhanced oil recovery (EOR) storage represents the most attractive application of CCS for Middle East NOCs in the near term. EOR, a reservoir management technique for tertiary recovery, has the potential to significantly improve the economics of CCS projects due to the additional oil — and, thus, revenue — it extracts. Although EOR benefits vary substantially according to recovery rates and prevailing oil (or gas) prices, Strategy& analysis suggests that EOR may completely offset the costs of integrated CCS projects in the most favorable cases. That said, NOCs will likely have to look to outside partners to source carbon dioxide. Carbon dioxide quantities available in downstream or petrochemicals (e.g., from large boilers or in hydrogen production) will generally meet the requirements of pilot or small-scale operations. For commercial-scale deployments, though, NOCs will have to turn to national power generation. A case study performed by Strategy& in a Gulf Cooperation Council country suggests that the carbon available in the power sector matches the storage potential of EOR operations. Under such models, NOCs could one day become net sinks for carbon dioxide, capturing and storing more carbon dioxide than they produce. Countries and NOCs of the Middle East looking to pursue CCS and EOR within the next 10 to 15 years should start laying the foundation now. Among other issues, they will need to assess their EOR injection requirements, increased production potential resulting from EOR, sources of carbon dioxide at the national level, and nominal capture-to-sink configurations. Middle East countries also need to develop a regulatory framework and the policies to facilitate the implementation of CCS. The liabilities associated with the longterm storage of CO2 are among the key regulatory issues that should be addressed. Given the span and complexity of CCS projects, the potential benefits available to NOCs, and NOCs’ capabilities, NOCs should take a lead role in establishing a clear road map to drive CCS developments in the region. NOCs should rally relevant stakeholders including power utilities, government policymakers, research institutions, and financing agencies in a concerted regional effort spanning beyond national frontiers.
Exhibit 2 Emissions reduction potential depends on target returns
Emissions Reduction Investment Curve for a NOC in the Middle East
Internal rate of return (Log scale)
100% 30% 20% 10%
4.5 mtpa CO2 reduction with a 51% IRR 16 mtpa CO2 reduction with a 14% IRR
1% 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Mtpa CO2 abatement Cumulative IRR IRR of individual initiatives CO2 capture from hydrogen plant Site-wide process integration and optimization of heat requirements Flare gas recovery Optimization of heater/ furnace/burner/boiler/combustion efﬁciency Optimization of motor systems (compressors, pumps, fans, etc.) Optimization of steam systems O&M optimization and continuous emissions control program
In the aggregate, the opportunities available to companies in process industries in the Middle East can potentially reduce emissions by more than 40 percent, with even greater potential when factoring in major structural opportunities such as carbon capture and storage (see Exhibit 3, page 15). Designing the GHG management program to implement emissions reduction initiatives in phases will allow companies to focus first on “quick win” projects with short implementation lead times, accelerated payback periods, and near-term emissions reduction potential. By prioritizing projects in this way, companies will be able to generate early positive cash flows to fund more capital-intensive projects later on, as well as gain greater insights in setting annual emissions reduction objectives. Achieving quick wins will also boost confidence in such projects by raising awareness of their successes.
Companies in process industries in the Middle East can potentially reduce emissions by more than 40 percent.
Exhibit 3 Using all available measures can reduce emissions significantly
Potential GHG Emissions Reductions over Time (2010–2030)
Business as usual (Efﬁciency loss scenario)
BAU GHG emissions MtCO2e per year
2015 Continuous O&M improvement
Emissions after abatement. Further possible savings from: - CCS/EOR with capture of CO2 from non-client sources (mainly electricity generation) - Strategic projects that could be pursued in the long run (e.g., solar and cogeneration) - Offsetting initiatives in the broader economy (e.g., energy efﬁciency)
Equipment optimization for energy efﬁciency Site-wide process optimization and cascading of heat Flaring and venting reduction CO2 capture within NOC perimeter for products/storage Emissions after abatement
Note: MtCO2e = metric tonne CO2 equivalent Source: Strategy&
Establishing processes and infrastructure
Once companies have established their strategic course and the design of the program, they will need to act upon three critical aspects of their business to lay the foundation for the program’s successful implementation: (i) develop an operating model, processes, and capabilities for GHG management; (ii) institutionalize GHG management through active monitoring and market-based transfer pricing policies; and (iii) manage communication about the GHG strategy implementation and results. Designing an operating model for GHG management involves defining the activities, processes, and organizational structure required to govern and implement the program, including the mechanisms to allocate and approve funding for chosen initiatives. A key challenge here resides in achieving a balance between central consolidation and control on one side, and sufficient latitude for business units to manage their respective parts of the GHG program on the other. Companies will also have to ensure that they have the right set of capabilities to deploy the GHG management strategy. For instance, in order to fully leverage carbon finance mechanisms, companies will need to develop specific capabilities related to CDM project identification, registration, evaluation, development, and implementation. Carbon finance is a world unto itself, and many companies don’t have the in-house expertise required to manage the process for obtaining CDM credits. In particular, the ability to demonstrate CDM additionality by analyzing investment barriers is critical. Overall, workforce training and recruiting programs focused on building both foundational and incremental skills are fundamental to fostering an effective GHG management team.
The second key aspect companies will need to address is the institutionalization of GHG management, including the ongoing monitoring of GHG emissions. After companies have established an emissions baseline, they will need to maintain accurate carbon inventories to regularly assess the effectiveness of their GHG management strategy or to identify areas in need of improvement. Another component of the institutionalization of GHG management is the adoption of market-based transfer pricing policies, as fuel and electricity prices are key inputs in conducting cost-benefit analyses of GHG management projects. When these costs are subsidized, as is often the case in the Middle East, they distort this analysis and can deter companies from making investments that would have been profitable when factoring in opportunity costs. Accordingly, companies should review transfer pricing policies and set evaluation guidelines to ensure that their assessments are based on the real market value of these inputs. The last key component of institutionalization is the integration of GHG management into the company’s performance management framework. Companies should adapt their performance management framework to ensure their operations are aligned with the overall GHG management strategy. This is done by setting implementation milestones early in the deployment phase, and establishing results-based indicators to monitor ongoing performance in emissions reductions against target objectives. The performance management system should be tied to existing incentive structures to ensure that company leaders and employees are motivated to drive the strategy’s implementation.
Companies will need to maintain accurate carbon inventories to regularly assess the effectiveness of their GHG management strategy.
Finally, a comprehensive communication plan is necessary to engage employees and external stakeholders. Internally, the plan should seek to educate, enlist, and reward participants, including company leadership, staff, contractors, and business partners. Internal communications may involve written publications such as newsletters but also more participatory forums such as workshops and town hall meetings. Companies should gear external communications toward raising national awareness about the implications of climate change and the importance of energy efficiency. Communication should celebrate successful emissions reduction initiatives. In any communication, messages should be carefully constructed to avoid compromising the company’s ability to qualify for CDM assistance.
Governments and companies in carbon-intensive sectors of the Middle East can turn the growing global pressure to address climate change into a great opportunity. By adopting a systematic and programmatic approach to managing their GHG emissions, they can support the longterm sustainability of fossil fuels while improving their public image, enhancing their capabilities, and making profits.
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This report was originally published by Booz & Company in 2011.
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