Driving fuel efficiency: CPAs’ changing role in oil and gas reporting

Ryan Bogner, EY’s Americas digital sustainability leader, is the keynote speaker at the AICPA & CIMA Oil & Gas Conference in November in Las Vegas.

He explains on this episode of the JofA podcast how the regulatory landscape will affect reporting going forward, the link between cost efficiency and carbon efficiency, and why, even with more focus on sustainable energy sources, demand for oil and gas remains high.

What you’ll learn from this episode:

• Bogner’s explanation of how reporting directives in Europe can affect U.S. companies.
• How changes in the regulatory landscape could affect CPAs’ reporting and assurance duties and timelines.
• An update on the release of the SEC climate rule’s final version.
• Definitions of “carbon efficiency” and “carbon intensity.”
• Why Bogner says that demand for oil and gas as an energy source isn’t diminishing.

Play the episode below or read the edited transcript:

To comment on this episode or to suggest an idea for another episode, contact Neil Amato at Neil.Amato@aicpa-cima.com.

Transcript

Neil Amato: Welcome to the Journal of Accountancy podcast. This is Neil Amato with the JofA. I’m joined on the show today by a speaker at the upcoming AICPA & CIMA Oil and Gas Industry Conference. His name is Ryan Bogner. He is Americas digital sustainability leader at EY. Ryan, first, welcome to the podcast.

Ryan Bogner: Thanks so much, Neil.

Amato: One of the topics that you plan to address as a keynote speaker at the event is the regulatory landscape as it relates to oil and gas. There are proposed rules from March 2022 from the SEC, and I guess we’re waiting on a final version of those rules. But it’s not just U.S. standards that companies have to be aware of and understand, I guess. So you’ll address that in the session.

Bogner: That’s right. The European Union’s Corporate Sustainability Reporting Directives (CSRD) was adopted in late November 2022 and went into effect January of this year, and it’s applicable to quite a few companies headquartered in the U.S. Some of our clients in the oil and gas sector are preparing for mandatory reporting under that mandate as early as fiscal year 2024.

CSRD has a broad range of reporting requirements that go well beyond the scope of the climate reporting rule proposed by the SEC. CSRD uses a double materiality concept, fairly new to the U.S. and North America to scope the different sustainability topics to be reported on. These topics are broken down into three pillars: environmental, social, and governance, and subsequently into 10 European sustainability reporting standards, the SRSs. The UK also has equivalent regulation.

Critically, both the EU and UK rules are based on operational footprint within the jurisdiction, while the SEC proposed regulations and most other climate regulations globally determine applicability based on where the company is listed on a public exchange. The punchline is that while some small private oil and gas companies may avoid reporting in the near future, it seems that for many companies, the reality of financial-grade audited climate reporting is quickly approaching.

Amato: Regarding some of the particular focus areas that CPAs advising these companies or actually working in the finance functions of the companies in the sector, what do they need to know regarding those proposed SEC climate rules?

Bogner: That’s a great question. Overall CPAs have an important role to play. I think, from a reporting perspective, they have an assurance and an advisory role. From an assurance perspective, it’s critical that companies are ready for reduced timelines associated with the climate rule compared to historical [Environmental Protection Agency] (EPA) and state emissions reporting deadlines. Typically, those happen mid-year, while the proposed SEC rule has filings as a part of the 10K, which would be a much shorter time period and require more near real-time reporting.

Additionally, there’s a shift from no assurance for those EPA reporting requirements to limited and then reasonable assurance within the SEC proposed rule. Auditors really need to help their clients understand the implications of that and what that means from a data availability standpoint, from a process standpoint, to make sure that clients are ready if and when those SEC rules are adopted. From more of an advisory standpoint, helping companies get ready for this, I think one of the key areas for CPAs is helping companies improve the reporting processes, both from an efficiency and controls perspective.

When you have to report in a much more timely fashion, you have to report under reasonable assurance. There’s an expectation that you’re going to be doing that in a much more financial-grade reporting way. That means that there are going to be changes at the data acquisition level, the data processing level, but also the reporting — like how do you make sure that you get appropriate signoffs, that you have a workflow where people are signing off and basically supporting that reporting process and the controls in an inappropriate way. Then I would say, that’s not where the impact the CPAs can make stops. Beyond reporting, CPAs can help executives understand the existential importance of sustainability, and particularly carbon emissions and how that will really impact the ability to continue to profitably produce and market oil and gas throughout the energy transition.

Amato: We’re recording this episode in mid-September. It is possible that those SEC rules become final, I guess, in October, but we’ll just have to wait and see on that front, because there has been wait-and-see mode probably for about the last 12 to 18 months, I guess.

Bogner: Yeah. I think the reality is — when and not if — there’s going to be some type of climate reporting required in the U.S. from a financial standpoint through the SEC. I think the question is, there’s obviously a lot of politics around it, and the SEC has this on their agenda and will have it on their agenda during every rule-making session until they actually make the rule. So it was on it in March, it’s going to be on it in the fall in October. If it doesn’t pass this October, it will be on next March. That’s the way it will run until we actually get a rule, I think.

Amato: Now one of the learning objectives in the session summary touches on “the efficiency advancements in unconventional oil production,” and it goes on to say that those advancements have led to both cost efficiency and carbon efficiency. Now, the CPA audience, I think, understands cost efficiency. But could you explain carbon efficiency and how it ties in?

Bogner: Great question. Carbon efficiency is simply the quantity of production normalized by the amount of carbon embedded in that output. This is an important metric because it relates to the underlying embedded-in-carbon intensity of the commodity being produced. More and more, the cost of carbon emissions are being pushed back to the producer and the emitters of those emissions across all sectors. To date, that cost of carbon emissions has largely been externalized. This obviously has an outsized impact on oil and gas producers and will impact the viability and financial health of different reserves and operations into the future. But I think getting back to the core question of how are carbon efficiency and cost efficiency tied, I’ll give a couple of brief examples.

One example: If you lose product, for example, through leaks or flaring of natural gas, you’re both causing more methane or carbon dioxide to find its way into the atmosphere, reducing your carbon efficiency. But you’re also reducing the amount of product produced across all of those fixed costs. So you ultimately reduce both carbon efficiency and your cost efficiency. Another example: If you require more energy to extract production, that energy costs both money, and also typically, carbon to produce that energy. The case I go into in my talk in November is going to be the case for unconventional efficiency increases. There’s been a significant cost reduction driven by advances in well technology that allow the reuse of the same well infrastructure to serve a much larger downhole geologic space. By increasing the amount of production against the same fixed cost and the same fixed carbon investment, you’re seeing increases in both cost and carbon efficiency for those assets.

Amato: You mentioned the phrase in there, “carbon intensity.” What exactly is that and why is that important?

Bogner: Carbon intensity is basically the inverse of carbon efficiency. You can think of it as taking a fixed unit of production, like a barrel of oil, and saying, how much carbon did it take to produce this barrel of oil and deliver it to a customer? They’re just the inverse of each other. One is production over carbon, the other is carbon over production. The thing that’s important is when you’re looking at marginal barrels of oil — thinking about additional production from an existing asset, or you’re thinking about potentially doing [exploration and production] and going and finding a new oil and gas asset — one of the key metrics going forward will be carbon intensity.

There’s going to be a desire for lower-carbon-intensity natural gas, lower-carbon-intensity oil. In fact, some of our clients have seen up to a 50% margin premium for zero-carbon-intensity natural gas and you will see differentiation of commodity products based on carbon intensity, and you’ll see potentially hydrocarbon staying in the ground if the carbon intensity is too great to extract them. It’s going to be a critical measure and a critical metric for understanding your reserves and understanding how your operations will be able to produce profitably going forward.

Amato: You mentioned, I guess, improved technology in wells. What are some of the other opportunities available to companies in this sector to help them improve their operational efficiency?

Bogner: There are quite a few. It really depends what part of the sector you’re talking about. We talked about one aspect of unconventional production, but there are a variety. For example, in downstream and chemical refining and fuels refining, you see operational assets not being operated at their peak efficiency. Because operators want to basically want to keep the operating parameters within what they know and what they feel safe doing. Whereas for a long time we’ve known that there are production and energy benefits to potentially adjusting how those assets are operated.

For a long time, that has a cost implication for sure, an energy implication for sure, but it also has a carbon implication. As you have more and more of these drivers adding up, there are ways to digitally enable the operator to make better decisions, to make more efficient decisions, in how they’re operating fixed assets. That’s one example.

Another example is more and more we see technologies coming online that can actually provide real-time feedback to things like leaks and the need for flaring and things like that. Having the ability to in real time take intervention and change things about how operations are being handled to either go and repair that leak or to address potentially something that’s going to cause a need for flaring. And we see some of the more advanced companies adopting those and seeing real impacts. One of the oil and gas majors in the Permian [Basin] has significantly reduced their non-emergency flaring through use of some of this operational technology. We’re seeing companies take that on, and again both from a cost perspective, but also being focused on what is their future from a carbon intensity perspective and their operations.

Amato: As the outsider I am in this sector, when I think of oil and gas, I just think of filling up my car tank or maybe getting an electric vehicle down the road. I guess electrification is part of this discussion, but a complicated part of it, right?

Bogner: Yeah, electrification of transportation is ongoing. We see the effects of that and I think long term, there’s proven technology now. But it takes a long time to turn over a fleet from gas-powered to electric vehicles, and while that’s happening in the U.S, we’re seeing that slowly start to happen. Even the most aggressive regulation — like California has a mandate that in 2030, no new gas cars will be sold in California. Well, that’s 2030. That’s still seven years out. It’s the most forward-looking in the U.S., and even if you sell no new gas cars in California in 2030, it’ll be another 15 to 20 years before that turns over the fleet naturally. There isn’t this imminent end to when gas will be used in transportation.

The other side of it, too, is oil and gas are used significantly across industry for a lot of things beyond just transportation. I think, as consumers, we can over-index on how much that’s important to the industry. When you look at long-term projections, you still see significant demand for oil and gas into the mid- to long-term in almost all scenarios. The challenge we have is that life requires energy. All parts of life require energy, and especially modern life is very energy intensive. There’s not a lot of appetite for reducing net demand for energy, and in the near term, the energy transition is going to have to rely on oil and gas for a significant component of that into the future. And we don’t see reductions in oil and gas demand happening really anytime before mid-century at the earliest and will still stay a significant component of the energy mix for quite awhile.

Amato: Now, the conference begins Nov. 8 in Las Vegas. In the show notes for this episode, we’ll include a link to the conference agenda so you can learn more about it. Ryan, I’ve learned a lot today. I appreciate that. Is there anything you’d like to add in closing?

Bogner: The No.1 thing to take away is there’s a lot of activity happening in sustainability, in carbon emissions, in the oil and gas sector. Understanding how that potentially impacts the company you work for, the company you advise, is going to be critical to being relevant to this conversation and ultimately hope to share some of that knowledge with all the attendees in November.

Amato: That’s great, Ryan. Thank you very much.

Bogner: Thanks, Neil.