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David Messler

David Messler

Mr. Messler is an oilfield veteran, recently retired from a major service company. During his thirty-eight year career he worked on six-continents in field and…

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Why Oil Investors Should Keep An Eye On ESG Scores

  • Legal and regulatory initiatives promulgated as a result of the 2015 Paris Climate Accords, have been the driver of these changes.
  • These efforts employ various approaches, depending somewhat on their footprint in the industry.
  • There has also been a private sector push for strict accounting of individual companies' ESG programs and the promulgation of various rankings for investor review.

Climate change and its perceived impacts from projected warming of the Earth through Anthropogenic Global Warming-AWG have instituted profound changes in how the world approaches energy sources. It comes as no surprise really, that legacy energy companies have borne the brunt of these changes given that their output, oil, and gas, are viewed as being key contributors to AWG. The result has been a rapid roll-out of individual strategies to reduce their individual Green House Gas-GHG, emissions-Scope 1, 2, and in the case of upstream oil and gas operators to change their product mix to reduce Scope-3 emissions.

The Paris Accords of 2015  set the stage for this ramp-up of concern about corporate GHG emissions. Companies had been “sniffing the air” of this sweeping change in how the world would power itself beginning in earnest in the early 2010s. The Paris Accords changed this incremental attitude toward the energy transition with its very declarative language that countries and industries begin to take serious steps toward reducing their GHG emissions. Soon the investment funds like Blackrock began to exhort banks and investors to extend their climate focus to investing and deny capital to upstream oil and gas developments, the goal being to force GHG reduction at the point source of origination.

By 2020 most energy companies had sophisticated platforms for adhering to and beating Paris climate goals, in some cases by 20 years in 2030. Key among the GHGs that are to be controlled or minimized are carbon dioxide and methane. An article discussed on RBN Energy’s blog, noted, 

“The primary focus is on reducing emissions of carbon dioxide (CO2) and methane –– CO2 because it is by far the most prevalent GHG and methane because of the intensity of its impact in the first several years after it is emitted into the atmosphere. GHGs are generated at pretty much every step in the production, delivery, processing/refining, and (especially) consumption of fossil fuels.”

As noted above, GHG emissions have been divided by regulators into three buckets: Scope 1 (GHGs directly caused by the facilities and equipment that a company owns or controls), Scope 2 (“indirect” GHGs from the electricity a company buys), and Scope 3 (all other indirect GHG emissions that occur in the company’s entire value chain, including the emissions generated when end products like gasoline, diesel, propane, and natural gas are consumed).

As this increased focus on controlling these emissions has matured, concerns about evaluating the true depth of individual company commitment to the cause have arisen. Driven in some measure by environmental activists’ impatience with the rate at which companies have made the energy transition a core part of their focus. The term “Greenwashing,” is sometimes used in frustration with companies that haven’t taken concrete steps to begin GHG reduction in their operations. The struggle between activist firm Engine #1 and ExxonMobil last year exemplifies this frustration on the part of climate-conscious investors. Engine #1 wanted to propose three independent directors that would accelerate the company’s implementation of GHG policies. ExxonMobil ultimately lost this contest and took on these directors. The RBN article goes on to characterize these lackluster efforts thusly- “A number of recent studies have suggested that ESG-focused mutual funds and exchange-traded funds (ETFs) underperform the broader market; that many companies touting their ESG cred have less-than-stellar records on compliance with environmental and labor laws; and that some companies use ESG as a cover for poor business performance.”

A number of rating and ranking agencies have also begun to track corporate ESG programs in an attempt to provide transparency to investors when evaluating these companies. Some of the leaders in this field include MSCI ESG Ratings, Bloomberg ESG Disclosure Scores, S&P Global ESG Scores, and Moody’s ESG Solutions Group. The agencies assign numeric or alphabetic rankings to companies so that investors can easily discern the ones really putting their shoulders behind ESG goals, and those who may just be greenwashing their results.

Thus far the forces pushing ESG and the Paris goals have had relatively free rein in their relentless march. At the end of June, the SCOTUS issued a ruling in the West Virginia vs EPA case that dealt a blow to some of the bureaucratic impetus in regulating ESG goals. A number of Federal agencies had recently broadened their mandates to include climate edicts that far beyond what Congress had expressly authorized in their charters. 

Notably, the Securities and Exchange Commission-SEC had proposed requiring publically traded companies to begin reporting their GHG emissions as part of their statutory quarterly and annual filings. In so doing adopting the aggressive posture the EPA had taken under the Biden administration to put up barriers to further oil and gas development. The Court, in their finding, determined that this was an over-step on the part of the regulators in interpreting or expanding environmental laws on the books. It further clearly stated that if these lines of enforcement were to be pursued in the future, Congress must expressly authorize it.

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For their part, oil companies have worked hard to reduce the GHG emissions that occur on their facilities. The RBN article noted, in particular, the effort of EQT Corp, (NYSE:EQT) citing the use of multi-well pads the reduce truck trips and water consumption. They are also shifting to electrically driven frac pumps powered by natural gas to eliminate diesel. The article notes that EQT expects to save 23 mm gallons of diesel annually in this manner. In addition, EQT has taken the following steps to enhance the ESG quotient in their field operations-

  • Reducing or eliminating routine flaring, which typically occurs due to a lack of infrastructure to either utilize the gas onsite or transport it to market.
  • Implementing leak detection and repair (LDAR) programs to minimize methane and other GHG emissions from pipes and equipment through audio, visual, and olfactory inspections; optical gas imaging cameras; portable gas detectors; and aerial methane monitoring.
  • Reducing venting, which is made possible, for example, by the use of vapor recovery units that remove vapors and gases (including methane) from storage tanks, then route them into pipelines rather than venting them into the atmosphere.
  • Moving to electrify operations that traditionally depend on internal combustion engines.
  • Increasing the use of renewable energy sources to provide low- or no-carbon power to their field operations and offices.

EQT and other American shale frackers aren’t alone in taking proactive steps, Canadian companies are also on board. Here is an example of a Canadian producer, Crescent Point Energy, (NYSE: CPG) declaration of commitment to ESG goals.

Crescent Point Energy

Your takeaway

The steps EQT and CPG are taking bolster their viability in this very ESG-conscious world. In spite of concerns about over-reach from regulators, this transition to clean energy exemplified by proactive steps like these is going to be with us going forward. With that in mind, it behooves investors to look deeply into public filings and investor presentations to ensure that the companies embrace the Paris Accords, and have robust implementation plans to reduce GHG emissions.

By David Messler for Oilprice.com 

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Leave a comment
  • Partivk Thistled on July 30 2022 said:
    Defining what ESG means would have been helpful ????
  • Alan Sas on July 30 2022 said:
    If we become more ESG conscious, like the Europeans, we could also have much higher energy prices and concerns about blackouts and cold winters. Maybe we could even shut down our farms and nuclear power plants. But at least if this ESG stuff results in having to go back to coal, unlike Europe, we have a multi-hundred year supply.

    Americans are slow, but they're not stupid. I think this ESG stuff will be completely discredited in the very near future...

Leave a comment




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