Supply chain tokens for oil & gas emissions reductions

In recent years, the Environmental Defense Fund, major oil companies and the Oil and Gas Climate Initiative, international organizations such as the United Nations Environmental Program and the World Bank, and institutional investors have made an effort to reduce methane leakage and flaring. Nevertheless, this remains a difficult goal to achieve because of a lack of data and proper financial incentives. Many oil wells do not have equipment to record how they are handling methane, and many companies simply do not report . Even if they do this information is stuck in data silos, making it difficult to share and verify reported values. As a result, each year at least $50 billion worth of methane is flared rather than being sold as a commodity (natural gas) and extracting rents from investing in infrastructure to capture it.

Fortunately, there has been progress. EDF (2021) is urging investors to engage energy companies to improve flaring and venting transparency, requiring collaboration to establish clear metrics. Several new data sources ranging from instrumentation at oil wells to independent satellite imagery is being made available. Converting this data into useful fuel value chain metrics requires integration with production data. Flaring Monitor, an open source project, has made some progress. This provides a key element of the solution presented in this challenge to bridge reporting silos in order to reduce waste methane emissions.

In this project, we will work on using blockchain technology to provide trusted data on methane and transfer that data to fuel consumers to incentivize methane reduction at the point of production. The first part of the project will integrate data from different sources to arrive at the best estimate of the methane emissions of a facility. The second part of the project will use Value chain (scope 3) reporting standards to calculate the impact of methane emissions reduction on fuels delivered to customers. It could then be used as part of the Supply Chain Decarbonization Project to incentivize the use of fuels with lower embedded emissions.

Through this we hope to help provide greater visibility to the oil producers, their investors, government agencies and NGO's involved in reducing methane flaring and leakage. We also hope to create an additional lever, where fuel consumers can actively participate by purchasing emission reduction and methane performance certificates.

The Solution

We propose to use a blockchain oracle, such as Chainlink, to integrate the different sources of data from methane emissions. Several independent sources, such as GGFR, Flaring Monitor, MethaneSat, UNEP IMEO, flare-intel, could be combined with company reported figures to arrive at an answer. A blockchain oracle assigns tokens for each source of data and weighs the data according to the tokens held by its source. It could increase or decrease the tokens for each data source as the data is subsequently validated or refuted.

Using the derived methane tokens, an oil & gas facility (well) starts constructing an emission profile for its fuel production. The profile is digitally encoded as a non-fungible token (NFT) smart contract that tracks embedded methane emissions across fuel supply chain stakeholders. A carbon tracker NFT (C-NFT) has been implemented using the ERC-1155 standard as part of the Hyperledger Labs Net Emission Token (NET) network to issue, transfer, and retire carbon tokens by different accounts.

Voluntary Carbon Track Tokens (VCT) are issue by industry members to note the amount of emissions
1. realized from flared/vented methane
2. contained in oil, natural gas, and derived fuels sold to other facilities
Audited Emission Certificates (AEC) can be issued by independent sources to verify the realized emissions of a facility.
AEC are also assigned to energy consumers to communicate embedded methane emissions downstream. Fuel consumed from high/low methane producers will carrier higher/lower embedded emissions.
Credits, in the form of methane performance certificates, are used to transfer the lower embedded methane emissions from one party to another, helping the receiver meet an emission reduction goal, while providing the supplier an incentive to reduce its methane emissions at the well.

In a simple example of an energy value chain, imagine an oil & gas producer that extracts fuel from a well. A power plant uses the gas to produce heat and electricity sent to a refinery to process the crude oil into fuel products, such as gasoline for cars, diesel for heavy transportation, and jet fuel for aircraft. The C-NFT contract is used to construct a digital emission profile for accounts owned by each facility, i.e., oil and gas well, power plant, refinery (Figure 2):

Figure 2 C-NFT illustration

Each step in the value chain (reporting "silos") consists of inputs and outputs and are transacted using the NET network in Carbon Dioxide equivalent (CO₂e) of Greenhouse Gas emissions. Based on the Value chain (scope 3) reporting standards:

Inputs are retired NETs for direct (scope 1) emissions due to fuel burned or indirect emissions for purchased energy (scope 2) or other upstream emissions (scope 3).
Outputs are tokens transferred downstream to the users of the fuel, such as power plant, refinery, freight companies or airlines.
- VCT are transferred as the CO₂e of fuels sold to consumers (used in commercial trade).
- AEC are indirect emissions, e.g., from selling electricity/heat

Emission profiles can explicitly reference a source C-NFT (arrows in Figure 2) to track embedded emissions, for example of the crude oil, or the heat and electricity supplied by the power plant, that went into the finished products.

In practice, we envision a supplier sends emissions tokens (e.g. VCT) to its customer from its facility's emission profile (C-NFT) with oracle-validated methane flaring. This allows organizations to bridge the internal boundaries of traditional data silos and construct a complete view of the energy value chain. An NFT is attached to each quantity of fuel it sells so that the consumer could correctly calculate the total emissions.

The consumer (e.g., Fuel user such as a freight carrier or airline) can identify the embedded waste methane emissions through public view functions of the NFT, such as carbon intensity (CI) metrics:

CI of oil & gas supplied (Fuel trade out) -> flared gas + leakage / fuel outputs
CI of Refined fuel trade -> other emissions (e.g., electricity/heat, flue gases) / refined fuel out

A CI certificate is simply a transferrable claim of origin backed up by data. The NFT(s) provide a methane performance certificates for the output fuel tokens, helping producers with lower carbon intensity to obtain greater value for their products. It is similar to a Renewable Energy Certificate (REC), but whereas a REC attests that electricity produced is from a renewable source, the CI certificate attests the total emissions of the fuel produced. The consumer can reduce their fuel CI by purchasing carbon tokens from a low methane emission supplier. Emission profile certificates tied to carbon tokens could be transferred between two users of fuel so that a user which is looking to reduce its emissions footprint could pay for a lower carbon fuel, without physically taking delivery of it. This would require simultaneously transferring, with the aid of a smart contract, fuel tokens between the certificate sender and receiver and subtracting the embedded emissions of the fuel inventory of the consumer and adding back it to the embedded emissions of the fuel inventory of the producer. In future transactions, the producer would have to attach a higher CI to the fuel it sells as it sells certificates of lower embedded emissions. This creates a mechanism where a producer of lower carbon fuels could monetize greater value for their output.

As an example:

Supplier has 1 million gallons of diesel with a carbon intensity of 9.88 kgCO2e per gallon (see EIA estimates.)
Customer has 100,000 gallons of diesel with a measured carbon intensity of 12.88 kgCO2e per gallon, from a high methane flaring producer.
The customer wants to lower the carbon intensity of their fuel to 7.9 (20% below average), so they need to purchase -(12.88 - 7.9) * 100,000 = -498,000 kgCO2e carbon intensity from supplier through a certificate.
After the transaction, the supplier still has 1,000,000 gallons of diesel, but they can no longer sell them with a carbon intensity of 9.88. Having sold the customer -498,000 kgCO2e carbon intensity, they now have 9.88 * 1,000,000 + 78,987 = 10,378,000 million kgCO2e of carbon intensity.
So in future sales, the supplier must now claim carbon intensity 10.378 per gallon and pass them to its customers..

In contrast, an offset is an accounting of emissions reduction in return for an investment, such as equipment for capturing, storing, and transporting methane This creates an incentive to make capital investments at high carbon intensity producers to reduce them. To be valid, an offset must follow the general principles of carbon offsets, such as Additionality, Correct Baseline, Permanence, Real, and Leakage protection – In other words, the emissions reductions must not have occurred without the investment from the buyers of the offsets. The offset would be a token which would transfer the emissions reductions to the buyers of the offsets, which again could be a fuel user.

Investors could also purchase C-NFTs' with verified low methane emission profiles as part of their commitment to combat climate change and support the financing of additional infrastructure to reduce methane emissions.

Figure 3 Architecture for verifying waste emission.

Figure 3 depicts an ongoing effort by the blockchain carbon accounting team to collect emission data points into a database (orbitDB) using IPFS or Fabric. These are connected to Ethereum contracts (NET/C-NFT) using a ChainLink oracle service or DAO.

The next step will involve building tools to pull in different data sources to support independent auditing and verification (MRV cycle):

company voluntary reports/ ERP sensors (gas flaring)
independent tracking service such as Flaring Monitor

Other Value chain scope 3 tools/services

According to the GHG Protocol Guidance on Upstream Transportation and Distribution, supplier provided carbon intensity is an acceptable metric for calculating GHG emissions and preferred over industry averages and model based figures.

To our knowledge there is no system focused designed to bridge the MRV systems used by organizations to directly identify value chain emissions.

The GHG Protocol provides a free tool to help measures cross-sector value-chain impacts. It provides inputs typically used in LCA practices, which may only provide historic/aggregate data from several years ago. It is more focused on providing measures for individual organizations as opposed to connecting reporting activities. However, according to the Carbon Disclosure Project (CDP), value chain reporting has not been very successful in reducing emissions (Patchell 2018).

Value chain reporting often employs Life Cycle Assessment (LCA) practices, which can be difficult for organizations to implement on their:

Access the credible metrics restricted by data silos across emission measurement, reporting and verification (MRV) systems
Rely on historic data based that may be several years old
Employ of on model estimates that may be subjective and hard to validate

Standard LCA practices applied to fuel CI standards have no been very effective in mitigating emissions (Plevin et al 2017).

CarbonChain is a comparable solution to help organizations assess emission impacts across commodity supply chains. However, it operates as a centralized services, focusing on gathering data into a bigger silo, rather than connecting them.