Until recently it was a universally acknowledged truth that you could talk about the weather, but there was nothing you could do about it. Now companies, especially energy companies, are expected to do something about it.

Earth is habitable because natural greenhouse gases - water vapor, carbon dioxide (CO2), methane (CH4) and nitrous oxide (N2O) - absorb infrared radiation, trapping heat in the lower atmosphere. The greenhouse effect raises the average temperature of the earth's surface to about 34°C (93°F). When the concentration of CO2 in the atmosphere was observed to be increasing, concern developed that this could make the earth warmer.
The Kyoto Protocol, created in 1997 but yet to be ratified, requires industrialized nations to reduce emissions of six greenhouse gases relative to 1990 emissions. The six gases (Table 1) include three naturally occurring gases (CO2, CH4 and N2O), one man-made gas (SF6) and two classes of gases, hydrofluorocarbons (HFCs) and perfluorocarbons (PFCs).
Many of the man-made gases have long lifetimes in the atmosphere in comparison with the natural gases. These "Frankengases" may absorb infrared radiation at wavelengths that otherwise would be largely unabsorbed.
The gas with the largest warming potential is SF6. It is used as an insulator in ultility-scale electrical equipment and in magnesium smelting.
HFCs, which contain only hydrogen, fluorine and carbon atoms, were introduced as alternatives to ozone-depleting substances and were rare before 1990. HFC-134a replaced freon as the standard refrigerant for automobiles and refrigerators.
PFCs consist of carbon and fluorine atoms and have long lifetimes in the atmosphere. PFCs are used as etchants and cleaning agents in the manufacturing of semiconductors and are emitted as byproducts of aluminum smelting. Like HFCs, PFCs were introduced as alternatives to ozone-depleting substances.
Man-made gases are not a major problem for the petroleum industry. The spotlight is on the petroleum industry because of CO2, by far the most plentiful and widely produced greenhouse gas. Worldwide, between 75% and 90% of anthropogenic emissions of CO2 are from combustion of fossil fuels.
The amount of CO2 produced per unit of energy depends on the type of fossil fuel (Figure 1). Natural gas generates less CO2 per unit of energy than other fossil fuels because it has a higher ratio of hydrogen to carbon. Since substitution of natural gas for coal reduces CO2 emissions by a factor of about two, conversion to natural gas has been described as "halfway to renewables."
Besides combustion of fossil fuels, the other way human activity affects the concentration of CO2 in the atmosphere is through changes in land use that result in the destruction or restoration of natural sinks for CO2. Clearing of forest areas for housing, crops and pastures reduces the amount of carbon removed from the atmosphere by vegetation.
The Kyoto Protocol accepts in principle that forestry practices may be included in the accounting of a nation's greenhouse gas emissions, but the rules remain to be determined. Major issues have yet to be resolved on absorption and release of carbon from vegetation.
Many environmental groups oppose the use of forestry to offset CO2 emissions from fossil fuel. These groups are concerned that forestry offsets will enable the United States to avoid emissions reductions. Instead, these environmentalists favor reduction in fossil fuel use through greater use of renewable energy and enhanced energy efficiency.
Fossil fuel combustion and production also accounts for a sizeable percentage of the other natural greenhouse gases (CH4 and N2O) covered by the Kyoto Protocol. Although agriculture plays a large role in CO2 emissions through land use changes, it plays an even bigger role in the emissions of CH4 and N2O.
About a third of US CH4 emissions are energy-related (Figure 2). CH4 releases from coal mining are responsible for about 30% of the energy-related emissions. In the United States, the three main sources of CH4 emissions are energy production and consumption, agriculture and waste management. CH4 emissions are more difficult to determine than CO2 emissions because they may be accidental (as in leaking pipelines) or incidental to biological processes.
Fossil fuel combustion is a significant contributor to N2O emissions, but is not the major cause (Figure 3). Nitrogen fertilization of agricultural soils is by far the largest source of anthropogenic N2O emissions in the United States.
Vehicle fuel combustion accounts for about 17% of the N2O emissions. The US Department of Energy found that a vehicle's catalytic converter can change nitrogen oxides (NO, NO2 and NO3) into N2O. The problem occurs when the catalytic converter is warming up or malfunctioning.
Kyoto Protocol
No industrialized countries subject to emissions limitations have ratified the Kyoto Protocol, although 29 developing countries have. The protocol will not enter into force until industrialized nations that accounted for 55% of the total CO2 emissions in 1990 ratify the treaty. The protocol could go into force without ratification by the United States.
Although the Kyoto Protocol has not been ratified, businesses are under pressure to reduce emissions of the six Kyoto gases. Without waiting for Kyoto, countries and even individual states within the United States are attacking greenhouse gas emissions. For example, Norway has a US $50-per-tonne CO2 tax, and California passed a bill providing for voluntary reporting of emissions of the Kyoto gases. Even if Kyoto is never ratified, companies will face a patchwork quilt of regulations affecting emissions of greenhouse gases.
Ratification of the Kyoto Protocol would not result in uniform international rules. The protocol provides emission reduction targets for each industrialized nation. The links between national emission limitations and corporate emissions probably will be resolved on a regional or national level.
The Kyoto Protocol includes several "flexible mechanisms" by which industrialized countries can reduce the cost of emissions limitations. Through emissions trading, industrialized countries can transfer portions of their quotas to one another. However, this trading is between countries, not companies or business units of multinational companies. Under "joint implementation," industrialized countries can undertake emissions reduction projects in other industrialized countries and receive a negotiated share of the emission reduction resulting from the project. The "clean development mechanism" allows industrialized countries to undertake emissions reduction projects in developing countries and receive credits applicable to their national targets. For all these mechanisms, the detailed specifications including the company roles remain to be negotiated.
How companies will retain or obtain the right to emit greenhouse gases has not been determined. Whether rights are auctioned to the highest bidders or grandfathered, it is unlikely companies' emissions will be linked like countries' to a 1990 baseline. Since the Kyoto Protocol was not created until late 1997, even with great effort companies cannot generate accurate 1990 baselines. Basing a company's right to emit on 1990 values is further complicated because in the intervening years, the population of companies has changed considerably with some vanishing and others being created.
Business issues
Petroleum companies are certainly not strangers to risk. Companies routinely face geologic and political risks and have developed methodologies to assess them. Many petroleum engineers are highly skilled in calculating risked economics.
Global climate change has reached a point of government and public concern, where we must incorporate it into our business planning just as we do other risks. The decision is not whether or if greenhouse gases must be considered as a business issue, but how to take emissions into consideration.
As with many challenges, the first step is to look at those factors that can be controlled directly. In this case it is corporate emissions. Accurate inventory of emissions is more difficult than it sounds. It is well known how much pressure companies have been under to reduce staff and cut costs. Headquarters' requests for information on greenhouse gas emissions fall on already heavily burdened staff. Without careful documentation of the sources of all the data, a database may be filled with numbers that bear little relationship to reality.
Once the sources of emissions are identified, the next step is to identify the most economical reductions. Operations personnel must recognize the importance of this effort and become fully engaged in reducing greenhouse gas emissions. The hands-on staff must be willing to take the time to assess accurately their operations and make recommendations for improvement. Products must be competitive not just on a cost basis, but also on an environmental basis. Energy production should be environmentally competitive on the basis of emissions-per-unit output.
Since CO2 emissions are closely linked with energy usage, improvements in energy efficiency will reduce emissions-per-unit output. In a perfect world, low-cost or no-cost options for reducing emissions through improved energy efficiency would not exist, because the improvements would already have been made for purely financial reasons. However, time is often in tight supply, and realistic projects for reductions are dependent upon the price of energy. Investing more time in exploring ways to reduce emissions could identify opportunities for improvement.
In some upstream operations, energy efficiency may have little meaning because natural gas is essentially available at no cost in locations in which gas is flared. In the effort to reduce greenhouse gas emissions, one of the big goals is to eliminate flaring. The challenge is to figure out fiscally viable and preferably profitable ways to use gas in areas without gas infrastructure. Many factors can come into play, including new technology for gas-to-liquids and for liquefying natural gas. Creation of new markets and growth of existing markets is also critical to natural gas developments. The "clean development mechanism" could be a factor aiding the substitution of natural gas for less environmentally friendly fuels.
Greenhouse gas emissions also must be considered in the plans for new capital investments. One approach is to estimate the future emissions and determine the cost of purchasing sufficient emissions credits to cover the operation. However, estimates of the future cost of carbon credits make predicting oil price look like an exact science. A reasonable range of values could be from zero to the Norwegian tax rate of $50 per tonne of CO2.
Alternatively, the cost and timing of capital investments to mitigate greenhouse gas emissions from the project could be determined. Installation costs for the emission mitigation equipment probably would increase after certain phases of construction. Comparison of the additional capital costs to mitigate greenhouse gas emissions with the estimates of the cost of purchasing carbon credits would determine the approach to minimizing emissions from the project.
An upstream analogy would be determining how many well slots to have on an offshore platform while the field size was still being assessed. Adding more slots later could be prohibitively expensive, so companies may be willing to risk the additional investment on the odds that sufficient field reserves will be present.
Changing perspective
For petroleum companies, climate change must evolve from being a high-level public relations issue to being an operational concern. As with other environmental and safety issues, this involves changing the mindset of the operating personnel and giving them good tools and the support needed to approach the issue with intelligence.