Environmental, Social, and Governance (ESG) Issues in Oil & Gas: Public Relations and Investor Relations
It seems ESG is the new buzzword, especially in investing. With Black Rock’s Larry Fink and others committing to investments that more clearly help the public good and that promote sustainability and decarbonization there is more intense focus on weeding out the ones that are less clearly beneficial. That includes some fossil fuel investments. Black Rock recently decided to divest from coal especially.
Compared to other industries the two with the most environmental and social risk are metals & mining and oil & gas. Upstream, midstream, and downstream oil & gas sectors as well as the oilfield service sector is exposed to ESG risks. Most oil and gas companies have environmental, health, and safety (EHS) staff involved in ESG issues. CEOs and executives should also be finely attuned to these issues. In the past decade or two it has been CSR (corporate social responsibility) and statements of environmental stewardship that have graced company websites. Some have dissed such statements as mere rhetoric. These days banks, investors, shareholders, and the public want some kind of demonstrable proof of commitment to ESG risks and developing a corporate culture of compliance. ESG risks need to be adequately evaluated and communicated throughout the company.
Some socially responsible investors (SRIs) are even condemning some of their funds for allowing companies with ESG risks into their portfolios. Black Rock still invests in oil & gas companies like Exxon and many others, even though they have stated that ESG is now a major factor in what they will consider for investment. Some SRIs that emphasize fossil-free funds call that hypocritical. According to the WSJ article referenced below, 8 in 10 sustainable investing funds include oil and gas companies. Others would argue that they should be included, especially if they can demonstrate that the risks are being mitigated.
Among the environmental issues in oil & gas are flaring which contributes to CO2 emissions, permitting requirements, methane and VOC leak detection and repair, wastewater management, operations pollution and emissions, land disturbance, solid waste management, habitat disturbance, and local disruptions like truck traffic, light, and noise. ESH staff for oil and gas companies as well as field staff need to know the various requirements of federal regs like the Clean Water Act and the Resource Conservation and Recovery Act (RCRA) as well as state and local requirements.
The social issues involve public relations and addressing the concerns of those who are strongly against oil & gas production, even though they utilize it and benefit from it and may not understand the implications of their policy positions. Effective safety management is one key to reducing social risks. Market access via pipelines, both proposed and under construction is a major social risk as pipeline opponents work hard to deflect and slow down progress on pipelines.
Governance issues are the federal, state, and local regulations and ordinances that must be followed and things like spill and emergency response plans and interactions with regulators. The S&P paper referenced below suggests that government-owned oil & gas companies can exacerbate governance risk by the inherent lack of transparency in those state-owned companies.
While much recent ESG focus on the industry has been on Repsol and BP’s pledges to decarbonize to some future net-zero energy state that includes investing in renewable energy technologies, that is something so far strictly confined to majors. Smaller independent companies can ill afford to invest in other industries that are marginally profitable at best and dependent on government incentives. They are better off focusing on reducing violations, developing compliance culture in the field, addressing methane and VOC emissions, addressing flaring if applicable, doing carbon accounting across operations and supply chains, and addressing ESG requirements of investors.
Flaring
Flaring is an issue in oil fields where there is associated natural gas with oil production and a lack of natural gas pipelines so that gas ends up getting burned off. In the Permian Basin alone the flaring of gas peaked in late 2018 at 900MMCF/day. In terms of CO2 emissions that’s pretty big, over 1% of all natural gas produced in the U.S. Add in some other U.S. petroleum basins such as the Bakken and the total at that peak was about 1.3 BCF/day, over 1.5% of total U.S. natural gas production burned away. However, the current volume of flared gas in Texas is down at 650MMCF/day. The lack of pipelines to store and transport the gas is the major issue but cost of putting in pipelines often exceeds any profit for operators and it also takes time to build those pipelines. Direct pipelines from the Permian basin into Mexico have helped both the operators and the Mexican buyers who get it at a good price which helps the economics for Mexican manufacturing and gas power plants. Texas and North Dakota are the two states that account for most gas flaring and venting. Different states have different rules about flaring. The DOE and private industry are working on several ways to reduce flaring by utilizing the gas by putting it to work in power or conversion plants, but such ventures are also costly compared to just burning it off. Texas and North Dakota may come to require more reductions of flared gas which will result in some wells with high gas-to-oil ratios to be shut-in or choked back. If such regulations do occur, they could potentially affect up to 1.2 MMbbl/day of Permian oil production and smaller amounts of Bakken and Eagleford (TX) oil production. The associated gas also helps to keep natural gas prices low. If the gas could be recovered without shutting in and choking back wells it could be put downward price pressure on gas. Flaring in its current condition also presents a hidden climate cost of US oil production.
In the Permian flaring by company is scored by “flaring intensity” which is simply gas flared per barrels of oil produced. Regulation by flaring intensity is a better and more fair approach than by flaring volumes alone argues Texas Railroad Commission’s Ryan Sitton. He notes that the world flaring intensity is at 0.14Mcf/barrel. The highest flaring intensities are in Iran and Iraq at 0.37Mcf/barrel. Flaring intensity in Texas is at 0.09 Mcf/barrel which is actually slightly lower than the US avg. of 0.11 Mcf/barrel. He argues that cutting flaring in Texas would increase it in other places resulting in net higher carbon emissions. So, oddly enough, requiring less flaring by volume in Texas could result in more imported oil and oil from other basins which have higher flaring intensities. Thus, any reductions via shut-in or choke-back should be targeted to high gas-to-oil ratio wells only.
Pioneer CEO Scott Sheffield recently suggested that investors should divest from the top flarers in the Permian. He suggests that if Permian producers cannot drop their flaring rates to below 2% of gas produced by the first half of next year when new pipelines are slated to come online then they should be divested. The CEO of Parsley Energy and the leader of Shell’s Permian operations generally echoed the sentiment. Concho Resources announced recently that they have dropped their flaring rate to 1.6% compared to 3.6% in 2017. Currently the avg. flaring rate in the Permian Basin is about 5% of gas produced.
Methane and VOC Leak Detection and Repair
Despite the Trump administration rolling back Obama’s federal methane leakage rule the industry is still committed to leak reduction and investors want to know the details. The International Energy Agency and environmental and industry groups are studying global methane leakage with new infrared satellite detectors and various projects are detailing emissions better. One is IAE’s Methane Tracker project. The new data should pinpoint where the most leakage is, so that leak repairs can be cost-estimated and fixed. The EPA was set to require accounting and reporting of company methane leakage before Trump pulled the rule. Many companies are continuing anyway to address leakage since it is kind of a low-hanging fruit due to recovering saleable gas, anticipating future requirements, and because it is good public relations and investor relations strategy. Some recent infrared analysis suggests that methane leakage has been underreported by up to 40% but there is debate about those numbers. Methane dissolved in oil and condensate bubbles out after it depressurizes from subsurface to atmospheric pressure. Oil and condensate tanks are major sources of methane and VOC emissions and need to be provided with vapor recovery systems. In prime natural gas producing areas like the Marcellus in the Appalachian Basin, methane leakage is low, similar to, or possibly lower than previous EPA estimates. Where high leakage rates have been identified they can be mitigated with current technologies. Environmental Defense Fund in partnership with academia and industry plans to launch a satellite in early 2022 to better quantify methane emissions through infrared technology around the globe from various sources. Their goal is to cut oil and gas sector methane emissions by 45% by 2025. There is some debate about the quantification of infrared data as opposed to other methods. In fact, quantification of methane emissions can only be an estimated range due to large number of potential sources and variables. How they are measured can change the numbers a bit too. Nevertheless, the range given by the EPA is probably close and remains significantly below any threshold to negate the climate benefits of gas relative to coal. The coal industry itself emits about one third of the methane emitted from oil and gas.
Greenhouse Gas Emissions Accounting and Disclosure
Not only are oil and gas operators calculating their carbon footprint, but the oilfield service sector is as well. Emissions need to be measured and disclosed in today’s regulatory environment and opportunities to reduce emissions across all aspects of operations need to be considered. In some North Sea oil operations electrical power is being supplied from shore rather than gas turbines which are more carbon intensive than the electric power. They are also reducing the number of people working offshore. Reducing the number of people working onsite in the oil and gas fields is another factor. With effective online data hubs transmitting well data in real time there is opportunity to work very effectively off-site, which eliminates transportation emissions and makes safety easier. Rigs may use friction reducers to cut the power requirements to lift the drill string off bottom. These and other energy conservation measures are likely to be further explored in order to reduce emissions. Other emissions reduction opportunities are explored later in this article.
Permitting
One issue with permitting is requirements for environmental assessments and surveys. This is more likely to be an issue in environmentally sensitive areas or with government-owned lands. Industry and its supporters have argued for streamlining permitting so that projects can be developed in a more timely manner. Eliminating duplicity in biological surveys by doing blanket regional surveys is one way operators have been doing this. Even so, some states like Colorado with stronger regs, will likely continue to see longer permitting times. In Colorado, approved permits have been cut in half due to new environmental regs. There are things there more characteristic of western states like effects on wildlife and local water usage. Colorado oil and gas companies are beginning to realize that slower permitting is the new norm there. It is unclear (and I would say unlikely at this point at least in the near term) that other states will follow. The ability to get permits approved quickly can affect companies’ bottom lines and needs to be considered, especially in the typically volatile price environments associated with oil and gas. The slow-down in permitting is already beginning to affect the industry in Colorado and will likely lead to a slow-down in oil & gas production in the state, despite favorable geology.
Anti-Fossil Fuel Sentiment
In a recent survey (Ernst & Young 2017) of people of different ages about their perceptions of the energy industry the total net positive perceptions were just 21%. Broken down it ranged from 31% net positive among Millennials to a mere 9% net positive among Gen Xers. Generally younger people expressed a more negative perception of the industry. Overall 59% of respondence had a positive view of natural gas but only 35% of respondents had a positive perception of oil. Both the general public and investors are scrutinizing oil & gas companies and making demands that sustainability and emissions issues be addressed. Thus, oil & gas companies are increasingly encouraged to develop “carbon strategies.” They need to consider the possible impacts of things like carbon pricing, stranded assets (particularly for projects that take a lot of time to develop), operational decarbonization, greenhouse gas reporting, and leak detection and repair. All of the above come with significant new costs to the industry. Some of the majors are beginning to develop plans and timelines for “net zero” carbon emissions. This assumes they will add more renewables to their portfolios as well as reduce operations emissions.
More than one current viable Dem presidential candidate has vowed to target the oil & gas industry. Bernie Sanders is willing to go to extremes to vilify the industry by banning fracking altogether. Although, he would not likely succeed even if elected, it shows there is considerable popularity of curbing fracking, which is how most of the oil & gas is produced. Oil & gas as a whole provides more than 70% of primary power production in the U.S. and nearly 70% of that comes directly from fracking (and that % will continue to grow). Banning fracking is not at all viable. Renewable sources would take years, perhaps decades, and incredible cost just to pick up some of the slack.
Investor Demands for Accountability and Sustainability
Investors in for the long-term are considering things like oversupply keeping profits low and decarbonization pushes lowering future demand. Oil majors like BP and Exxon have long invested in renewable energy projects and R&D. Exxon scientists were pivotal in developing lithium batteries. While the percentage of renewables in their portfolios have varied over the years mostly due to profitability, it is clear they want to leave the door open for transitioning into cleaner energy companies in the future.
Compliance with ESG will become a more routine part of loan agreements, stressed Jim Finley, CEO of Finley Resources, Inc. at the recent NAPE Global Business Conference. He says banking groups will have checklists which companies must address. This suggests that things like carbon accounting, best practices, and best technologies will become requirements rather than choices.
Carbon accounting and disclosure will be a necessary feature going forward. Investors will demand it. Another issue for investors is the possibility of stranded assets where expensive long-term projects will not be able to realize their full returns due to changes in regulatory requirements. Developing strategies for low carbon business models is the wave of the future, like it or not.
ESG Compliance Opportunities for Oil & Gas Companies
There are ways to comply with ESG demands that may help a company’s public image. One is simply making a demonstrable effort to reduce operation emissions of pollutants and CO2. The pumping requirements of the many-staged, high-rate, high-volume frac jobs of today are considerable. Diesel is the most common fuel to run large trucks, frac pumps, and other equipment. Some companies use natural gas from their nearby fields to power these ops. Electrified frac fleets are being piloted as well. Costs are of course an issue here and with oil & gas prices and profits very low at present there is additional challenge. Industry partnerships, consortiums, and DOE projects could be of help. Various projects are trying to better understand methane emissions and regional water management issues. Better water management practices can reduce truck traffic and occurrences of spills. Reusing higher percentages of frac water can preserve regional water resources. Compliance with acknowledged industry best practices and best technologies for reducing emissions is another way to address ESG concerns. Being ahead of possible regulatory changes is also a good strategy so some companies prefer to go beyond mere compliance.
"New Energies" and Some Thoughts on the Details of Decarbonization
As mentioned above some of the majors are devoting more capital towards “New Energies.” These involve renewables like solar and wind but also things like algae-derived biofuels and energy efficiency improvement. A recent forum: Perspectives on the Future of Oil and Gas, at the Payne Institute for Public Policy at the Colorado School of Mines, involved executives from BP, Shell, and Equinor. According to Equinor, things that need to occur to keep reasonably close to Paris Accord scenarios include big changes in carbon pricing and fuel efficiency standards, more than half of vehicles being electric by 2030, an 80% reduction in coal demand, solid growth in biofuels, 80% more nuclear energy by 2050, massive subsidized investments in renewable electricity, and a huge increase in CO2 capture and sequestration. These are tall orders, none of which is of much concern to the current US administration. Even if such changes are made by 2050 the world will still need significant amounts of oil and gas. Shell’s “Sky” scenario from 2018 would halve CO2 emissions by 2050 and reach net zero by 2070. Requirements for that scenario are also challenging: North Americans halving their energy consumption per capita by 2050, accelerated growth in electrical consumption (electrification), replacing natural gas with biofuels, more carbon capture and sequestration, a massive reforestation effort, and a global market of electric cars solely by 2030 (sorry, but this does not even seem possible), 95% of buildings converting to electric power. 40-50% of industry converting to electric power, and 25% of heavy transport converting to electric power. BP stressed the need for more natural gas and continued investment in new oil and gas fields during the transition, which will not happen overnight.
There is some opportunity for the use of renewables in carbon capture and sequestration, particularly with the use of so-called “blue hydrogen” (natural gas or naptha sourced hydrogen) or “green hydrogen” (clean electricity-sourced hydrogen) to help reduce emissions in refining, CCS, and heavy transport. Exxon and Repsol are working to incorporate these cleaner energy changes into their operations. Offshore wind may be helpful in several ways from providing energy to offshore platforms to using decommissioned offshore platforms for offshore wind development. Chevron recently bought Natron Energy to take advantage of their data, battery, and EV-charging capabilities.
Director of the Bureau of Economic Geology at the University of Texas at Austin, Scott Tinker brings some interesting perspectives to the decarbonization debate. He suggests that there is a need to rely on both regulatory policy and technology with compromises being made on both sides of what has become a divisive issue wrought with biases and partisanism. He suggests dropping the narrative of carbon vs. non-carbon sources of energy as it is well known that both will be needed far into the future. 80% of global energy comes from fossil fuels so ramping down is going to take lots of time no matter how one looks at it. He concludes that “Both the economy and the environment must be solved for simultaneously.”
References:
Oil Industry Faces Rising ESG Pressures This Election Year – by Joseph Marman, in Hart Energy, Feb. 10, 2020
Does ESG Present a Risk to 1.2 MMb/d of Permian Production? – by Corey Boettiger, in BTU Analytics, Feb. 4, 2020
ESG for Energy: Three Things Companies Should Be Doing (Part 2) – by Tony Jones, Opportune LLP, in Hart Energy, Feb. 12, 2020
Natural Gas Venting and Flaring Increased in North Dakota and Texas in 2018 – by Energy Information Administration, Dec. 6, 2019
Natural Gas Flaring and Venting: State and Federal Regulatory Overview, Trends, and Impacts – by US Dept. of Energy, June 2019
Owning the Narrative: Managing Public Perceptions of the Oil Industry – by Heather Saucier, in AAPG Explorer, Feb. 2020
Analyst: Uncertainty is the Oil Industry’s Greatest Challenge – by David Brown, in AAPG Explorer, Feb. 2020
Oil Majors Plan for Low-Carbon Future – by Heather Saucier, in AAPG Explorer, Feb. 2020
The Myopia of a Carbon-Only Lens – by Barry Friedman, in AAPG Explorer, Feb. 2020
Defining the Oilfield Service Sector’s Role in Meeting CO2 Goals – by Cameron Wallace, in World Oil, Feb. 3, 2020
BP, Shell, Total Seek Norwegian Green Power for Oil Platforms – by Nerijus Adomaitis, Reuters, in Hart Energy, Feb. 13, 2020
BP’s Net-Zero Goals Sees the Major Dwindle Oil Activity – by Mary Holcomb., in Hart Energy, Feb. 12, 2020
MSCI’s Five ESG Trends to Watch in 2020 – by Linda-Eling Lee, Meggin Thwing, and Ric Marshall, in Green Money (greenmoney.com), Feb. 2020
Oil & Gas Experts on Regs: Resist the Rocky Mountain Sigh – in Hart Energy, Feb. 19, 2020
Texas Names Best and Worst Companies for Gas Flaring – by Carl Surran, in Seeking Alpha, Feb. 19, 2020
Defining the Oilfield Service Sector’s Role in Meeting CO2 Goals – by Cameron Wallace, in World Oil, Feb. 3, 2020
Texas Regulator Says Stricter Flaring Rules Would Increase Global CO2 Levels – by Cameron Wallace, in World Oil, Feb. 19, 2020
ESG for Energy: Three Things Companies Should Be Doing (Part 1)– by Tony Jones, in Hart Energy, Feb. 11, 2020
Partnership Advances Satellite Mission to Cut Oil Industry Emissions – by Velda Addison, in Hart Energy, Jan. 30, 2020
Pioneer CEO Scott Sheffield Urges Investors to Divest in Top Flarers – by Jennifer Hiller, Reuters, in Hart Energy, Feb. 20, 2020
ESG Industry Report Card: Oil & Gas, in S&P Global (spglobal.com), June 3, 2019
The Role of Oil and Gas Companies in the Energy Transition – by Robert (“RJ”) Johnston, Reed Blakemore, and Randolph Bell, in Atlantic Council (atlanticcouncil.org), Jan. 9, 2020
ESG for the Oil and Gas Industry – What You Need to Know for 2020 – by Dan Genovese, in Oil & Gas 360 by Enercom, Jan. 3, 2020
ESG Funds Enjoy Record Inflows, Still Back Big Oil and Gas – by Akane Otani, in Wall Street Journal, Nov. 11. 2019
Colorado Oil and Gas Well Permitting Cut in Half by Drilling Reforms – by Zachary Frazier, RPL, in Oklahoma Mineral (oklahomaminerals.com), Nov. 13, 2019
