Wednesday, 07/27/2022 Published by: Housley Carr
Over the past few years, the simultaneous drives for action on climate change, diversity in the workplace, and corporate accountability have coalesced into the environmental, social, and governance (ESG) movement. The energy industry has been at the center of all this, of course, because significant volumes of greenhouse gases (GHGs) are generated with the production, processing, transportation and –– especially –– consumption of hydrocarbons. But while many energy companies have developed ESG strategies and goals, the ESG movement has also come under increasing scrutiny and criticism –– and from all sides, it seems. So where does the movement stand today, and what are its prospects in a world that is now as focused on energy security and affordability as it is on quickly reining in GHG emissions? In today’s RBN blog, we discuss highlights from our new Drill Down Report on the issues surrounding ESG.
It’s not surprising that ESG came to the fore in the late 2010s, or that players in the energy industry — oilfield service companies, E&Ps, midstreamers and refiners — have taken on central roles in the movement. Back in 2015, the Paris Agreement attracted the world’s attention and made it clear that governments and industries of all stripes would be taking serious steps toward reducing GHG emissions. Also, a new generation of entrepreneurs and investors was eager to take socially responsible investing to the next level with the multifaceted aims of making corporations more open, more diverse in their management and staffing, and more committed to improving their environmental performance.
By 2020 and 2021, most energy companies had developed ESG strategies in which they detailed their efforts to reduce emissions of carbon dioxide, methane and other GHGs and to ramp up their efforts on the social and governance fronts. But there’s been some blowback, especially lately. Advocates of more aggressive climate action have asserted that ESG programs by many hydrocarbon-focused energy companies are little more than greenwashing, a subterfuge designed to soften the skepticism among ESG-minded investors and lenders and the general public about their industry and its activities and products.
Investors, lenders and policymakers have legitimate questions about the degree to which the claims of environmental progress by energy companies are vetted –– in other words, how do we know if their purported gains are real, or go beyond what companies are required to do by law? Also, 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.
As for energy companies themselves, many are surely making honest, earnest efforts to reduce flaring, minimize methane releases and make their operations more efficient and cleaner. Just as surely, some in the industry believe that a lot of ESG is very “squishy” or even bunk, but think they need to “play along” to appease hydrocarbon-wary investors and lenders and/or show the general public (and politicians and regulators) that they “get it.”
What’s in the Drill Down
As we discuss in the new Drill Down Report, the E (for environment) in ESG is mostly about reducing GHG emissions or otherwise mitigating their impacts on the planet in general. The report explains that 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. To help in the measuring and tallying, the powers that be in the ESG world divide a company’s GHG emissions 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).
The report examines what each type of energy company — from oilfield service providers to refiners — is doing to reduce its GHGs. For oil and gas producers, for example, these efforts include:
E&Ps are also increasing the use of multi-well pad drilling (to reduce how much ground needs to be disturbed); piping instead of trucking away crude oil and produced water (to cut diesel use); and recycling and re-using produced water.
We provide examples. Consider the steps that EQT Resources, the largest U.S. producer of natural gas, is taking to achieve its ESG/sustainability goals. Among other things, the company has committed to achieve net-zero GHG emissions from its production-segment operations on a Scope 1 and Scope 2 basis by 2025 (or sooner, if possible). The chart below shows EQT’s progress so far.
Figure 1. EQT Production-Segment GHG Emissions (Scope 1 and Scope 2; in metric tons of CO2 equivalent). Source: EQT
EQT also has established goals to reduce its Scope 1 GHG emissions intensity to below 160 metric tons of CO2 equivalent (MtCO2e) per billion cubic feet of natural gas equivalent (Bcfe) — a roughly 70% reduction compared to 2018 levels — by or before 2025, and to reduce its Scope 1 methane emissions to below 0.02% — a roughly 65% reduction compared to 2018 — within the same period. Again, the charts below show the company’s progress so far.
Figure 2. EQT GHG and Methane Emissions Intensity (Scope 1). Source: EQT
EQT has said that its GHG emissions-reduction efforts in 2022 are being driven, in part, by the program the company started in 2021 to eliminate natural gas-powered pneumatic devices from its operations. EQT also has cited its aggressive LDAR program, as well as its use of “green completions” technology, which transfers the natural gas at the wellhead to a separator immediately after well completion, instead of flaring or venting the gas. As a result, EQT did not vent or flare any gas during its completions operations in 2021 and has said it will only resort to flaring in emergency situations. To further reduce emissions of methane during production operations, the company uses glycol pumps rather than natural gas pneumatic pumps on existing dehydration systems. These pumps only emit gas embedded within the glycol and do not need to be powered by natural gas pressure, which results in lower methane emissions.
And, in 2020 EQT transitioned substantially all of its fracturing (frac) fleets from diesel to electric fleets powered by a natural gas-fired turbine using EQT-produced natural gas. The company has projected that the use of electric frac fleets will eliminate more than 23 million gal/year of diesel use. EQT also obtained independent certification of natural gas produced from about 200 of its well pads, which collectively produce about 4 Bcf/d, making the company the largest producer of responsibly sourced natural gas in North America.
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In the Drill Down Report, we also point out that well over 100 ESG rating/ranking entities perform in-depth analyses of large, medium and small companies and their sustainability practices and goals. They use the information they gather to develop ESG scores, ratings and rankings to calculate which companies are out front on ESG issues, which are lagging, and which (over time) are improving. Institutional and individual investors and many lenders consider these ESG ratings when making decisions about which companies to invest in or lend to. We note that, as critics of ESG will point out, in the U.S. there is little regulatory oversight regarding ESG programs and ESG scores, and the various assessors can and often do differ widely in their ratings. However, there are a number of ongoing efforts to provide more standardization and structure to the process.
The leading ESG rating agencies include MSCI ESG Ratings, Bloomberg ESG Disclosure Scores, S&P Global ESG Scores, and Moody’s ESG Solutions Group. As an example of their work, the table below shows the large- and mid-cap oilfield service companies, E&Ps, midstreamers and refiners based in the U.S., including (from left to right) the company’s stock symbol, its name, its overall ESG rating (AAA being the best, followed by AA, A, BBB, etc.), and its “Environmental Pillar Score,” (EPS) or rating on environmental matters only.
Figure 3. MSCI ESG Ratings for U.S. Large- and Mid-Cap Energy Companies. Source: Charles Schwab/MSCI
Finally, the report discusses the criticisms that the ESG movement — and efforts to advance it— have faced. For example, there has been blowback to the Biden administration’s push for a faster-paced decline in GHG emissions and to the Securities and Exchange Commission’s (SEC) controversial proposal to require all publicly traded companies to report their GHG emissions and obtain independent certification of their estimates. The Supreme Court’s June 2022 decision in West Virginia v. EPA, which scaled back the Environmental Protection Agency’s (EPA) authority to implement GHG-reduction rules similar to the ones the Obama EPA proposed a few years ago but were never implemented, also poses a challenge to the ESG movement. In effect, the ruling appears to limit regulators’ leeway in interpreting (or expanding upon) environmental statutes and suggests that Congress would need to approve legislation that specifically authorizes EPA to ratchet down GHG emissions from the power-generation sector and other key parts of the economy over time.
And, of course, there’s the global energy crisis sparked by Russia’s February 2022 invasion of Ukraine and the subsequent sanctions on Russian energy exports by the U.S. and its allies. The net effect has been a re-evaluation by policymakers and others in Europe, the U.S. and elsewhere of the pace of the energy transition. The emerging view seems to be that it may take more time for the pace of the transition to a lower-carbon economy to pick up steam than many had hoped and that, at least in the near term, the risks and costs of that transition need to be balanced with energy security and maintenance of available, affordable energy.
It is too soon to know for sure, but all of that could have the effect of reducing the urgency of ESG-related efforts by U.S. energy companies. Many of these companies want to address legitimate concerns about climate change, but at the same time they don’t want to get too far ahead of their peers, particularly if that would put them at a competitive disadvantage.
For information about RBN’s new Drill Down Report on ESG, click here.
“Almost Paradise (Love Theme from Footloose)” was written by Eric Carmen (music) and Dean Pitchford (lyrics). The song features Loverboy’s Mike Reno and Heart’s Ann Wilson on vocals, and appears as the third song on the album, Footloose: Original Motion Picture Soundtrack. Writer Eric Carmen was the lead singer of the legendary Cleveland power-pop band The Raspberries, which had a Platinum single with “Go All the Way.” He’s also had several hits as a solo artist, including the mega-hit power ballad “All by Myself.” “Almost Paradise” is a classic ’80s power ballad, with ’80s production that includes electronic drums with the kick drum mixed with so much high-end point that it sounds like a basketball on a hardwood floor. The song was released as a single in March 1984 and went to #1 on the Billboard Adult Contemporary chart and #7 on the Billboard Hot 100 Singles chart. Personnel on the record were: Mike Reno, Ann Wilson (vocals), Chas Sandford (electric guitar), Keith Olsen (bass, acoustic guitar, producer), Bill Cuomo (keyboards, synthesizer), and Jim Keltner (drums). In 1989 Eric Carmen, with singer Merry Clayton, released a single of the song.
The album Footloose: Original Motion Picture Soundtrack was recorded at various studios in the Los Angeles area in1983-84. The nine-song album had different producers for each artist’s song. The producers involved were Kenny Loggins, Lee DeCarlo, George Duke, Keith Olsen, Jim Steinman, Bill Wolfer, David Foster, John Boylan and Sammy Hagar. Released in January 1984, the album went to #1 on the Billboard 200 Albums chart and has been certified 9x Platinum by the Recording Industry Association of America. Seven singles were released from the LP, and six of them became Top 40 hits.
Footloose is a 1984 American musical drama directed by Herbert Ross. It starred Kevin Bacon, Lori Singer, Dianne Wiest and John Lithgow. The film grossed over $80 million, making it the seventh highest-grossing film of 1984. A remake of the film, directed by Craig Brewer, was released in 2011.
Mike Reno is a Canadian singer, musician, and the lead singer for the band Loverboy. They have released nine studio albums and 29 singles. He still records and tours with the band.
Ann Wilson is an American singer, musician and songwriter for the band Heart. With Heart, she has released 15 studio albums, nine live albums, nine compilation albums and 64 singles. Wilson continues to record and tour with the band.
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