Resources | ESG and Diversity | November 9, 2023

3 Ways Leading Oil and Gas Companies Are Building a Sustainable Supply Chain

While net zero targets are now standard in the oil and gas industry, only leading companies are delivering on goals for Scope 3 emissions.

While net zero targets are now standard in the oil and gas industry, only leading companies are delivering on goals for Scope 3 emissions.

Increased pressure from stakeholders, regulators and consumers is driving significant demand for sustainable supply chains in the oil and gas industry. The sector is responsible for about 5.1 billion metric tons of greenhouse gas emissions, or about 15% of energy-related global emissions. Upward of 95% of these are Scope 3 — emissions that companies are indirectly responsible for throughout the supply chain.

Many oil and gas companies are evolving to address global energy and climate goals, with many setting net zero targets by 2050. However, only the minority of oil and gas organizations, those leading change in the industry, include Scope 3 emissions in these targets. Those organizations that include Scope 3 emissions are ensuring that the bulk of emissions produced within oil and gas supply chains are accounted for. 

Environmental, social and governance (ESG), a set of criteria used to evaluate a business’s sustainability and ethical practices, are central to these businesses’ strategic goals — not just another checklist item. Companies that deliver on these commitments can help support a healthier planet, improve operational efficiency, attract investors and lenders, and enhance their global reputation.

When it comes to supply chains, what sustainability challenges are oil and gas companies facing, and what strategies are major companies using to instigate lasting change?

Supply chain visibility is a key concern for oil and gas sustainability

Traditionally, oil and gas supply chain decision-making has been driven by cost efficiency and mitigating potential risks, such as technical and subsurface risks. These factors are relatively straightforward to evaluate.

With the introduction of sustainable supply chain and ESG standards, relevant supply chain data becomes a lot more complex and difficult to monitor. This is partly because ESG and Scope 3 activities are inherently challenging to measure, and because investor and regulator standards are constantly changing.

However, many organizations also lack the technologies and processes to measure supply chain sustainability and monitor progress. According to a 2021 survey by Boston Consulting Group (BCG) across several sectors, including energy, only 9% of organizations track emissions comprehensively. What’s more, the organizations surveyed reported a 30% to 40% error rate in their measurements. This suggests a significant lack of visibility into supply chain processes, including expected carbon emissions.

Without sufficient data, companies often struggle to take concrete actions toward sustainability and ESG targets and to present accurate findings. With increased scrutiny from stakeholders, consumers and financiers, companies may find it difficult to maintain a strong reputation and access capital in times of economic uncertainty.

3 strategies for a sustainable supply chain in oil and gas

Investing in supply chain sustainability can enable oil and gas companies to improve supply chain visibility and reach net zero targets and ESG goals. What strategies are industry innovators using to get there?

1. Reduce environmental impacts in the supply chain

Reducing unnecessary emissions and implementing renewable energy sources in the supply chain are two of the main ways that leading oil and gas companies are changing. In May 2023, the International Energy Agency (IEA) published a report examining critical steps needed in the oil and gas industry to reduce carbon emissions. Of these steps, the agency identified five core areas to achieve global energy goals:

  • Reduce methane emissions
  • Eliminate nonemergency flaring
  • Use low-emissions electricity
  • Integrate carbon capture, usage and storage (CCUS)
  • Adopt low-emissions hydrogen in refineries

Methane accounts for 20% of global carbon emissions and is 25 times more potent than carbon dioxide (CO2) at trapping atmospheric heat. Reducing methane is an impactful way to move closer to international emissions targets and one of the most cost-effective solutions. ESG-focused companies are investing in and developing technologies to detect and repair methane leaks and reduce emissions. For example, SLB has created a continuous methane monitoring instrument that can identify leaks more accurately than mobile sensors.

Additionally, some organizations are investing in renewable energy sources at upstream facilities. For example, rather than using inefficient power sources such as natural gas generators, BP has electrified most of its wells in the Permian Basin in Texas. This resulted in a 140,000-metric-ton reduction in CO2 by the end of 2021.

2. Improve supply chain visibility and efficiency through digital transformation

Digital transformation is enabling more efficient and transparent supply chains in oil and gas. Research correlates the use of advanced technologies such as artificial intelligence (AI) in the oil and gas industry with reduced waste and environmental degradation caused by safety risks. AI can also make oil and gas supply chains more efficient and provide greater visibility into supplier activities.

Some technologies may directly address sustainability initiatives. For example, blockchain solutions such as GreenToken can give oil and gas companies a more accurate way to track Scope 3 emissions and other ESG activities in their supply chains.

In other cases, companies may invest in tools to streamline processes and consequently reduce carbon emissions over time. Shell is regarded as an industry innovator when it comes to AI. In 2021, the company partnered with other energy and technology companies to launch the Open AI Energy Initiative, an ecosystem of AI solutions to support the energy and process industries.

Through the use of AI solutions, Shell has optimized drilling processes and developed detection systems for equipment failure, both contributing to reduced emissions. A data science expert at Shell has reported that the company’s digital technologies have reduced its CO2 emissions at a liquefied natural gas facility by up to 130 kilotons per year.

3. Incentivize sustainable suppliers

Innovative fintech solutions are enabling global companies to integrate measurable ESG initiatives and sustainability into the supply chain without compromising their balance sheets. For instance, early payment programs are an effective way to reduce the cost of goods sold (COGS) by accepting discounts from suppliers in exchange for early payment. As an alternative to traditional financing sources, early payment programs can give oil and gas companies a risk-free way to access cash returns and improve margins. In turn, early payments boost supplier cash flow and strengthen the supply chain.

C2FO’s Early Pay solution takes this a step further by integrating supplier ESG and diversity, equity and inclusion (DEI) programs into the platform. Known as Opportunity Marketplaces, the solution allows enterprises to segment and offer more competitive early payment options to diverse-owned suppliers and those that use ESG best practices.

This approach can improve an enterprise’s financial performance as well as support the cash flows of diverse and sustainability-focused suppliers. By giving these suppliers financial incentives, Opportunity Marketplaces also give oil and gas companies an easy, measurable way to meet ESG goals. The solution has been launched with several major global companies such as Walmart, which uses Opportunity Marketplaces as part of its Supplier Inclusion Program.

In summary

Many oil and gas companies are in the process of revising their business strategies to incorporate sustainable supply chains. This often means adopting more environmentally friendly practices, such as reducing methane emissions, or investing in technologies that make supply chain activities and Scope 3 emissions more transparent. Some leading companies are even shifting their entire business model to incorporate renewable energy. Although these changes can entail significant financial investments, fintech solutions such as early payment programs can support oil and gas organizations financially while they address ESG targets.

Take your ESG strategy a step further with C2FO’s Opportunity Marketplaces. Learn more here.

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