In my last column, we ended with this question: “How do we measure success”? When it comes to ESG, there are many standards and guidelines, and they all don’t necessarily measure the same objectives. ESG covers a wide spectrum of issues, within which you still have inconsistencies on what metrics are important.
One company may report emission reductions, while another reports carbon footprint reductions. The concern here is some metrics are vague, while others are specific. So, when a goal of “Carbon Zero” is used, how are you calculating carbon footprint? Are you buying offsets? Are the offsets audited? You cannot take a simplistic view of a complex problem. Solar panels are marketed as a way to achieve carbon neutrality. In reality, manufacturing solar panels creates a carbon footprint, and you have to utilize the panels for years to offset that footprint. You don’t start with zero. This assumption leads to a gross miscalculation of carbon footprint.
Then there is the issue of offsets; are you planting trees? Are the trees still alive? Were they ever planted? How are the offsets calculated and audited? People are trying to make money off ESG initiatives, and this is going to attract some unscrupulous individuals looking to make a quick buck. So, buyer beware.
So, what metrics are important? Unfortunately, no clarity here either. You have Sustainability Accounting Standards Board (SASB) standards, which are used primarily to communicate sustainability information to investors in a financial manner. Meanwhile, the Global Reporting Initiative (GRI) standards report the impact of businesses on sustainability issues. Additionally, the Task Force on Climate-related Financial Disclosures (TCFD) recommendations help with climate-related financial disclosures, so investors can understand risks related to climate issues. And the Integrated Reporting (IR) Framework supplies capital providers with information to understand how the business model and strategy drive value. Less used but relevant are the UN’s Sustainable Development Goals and the program set up by Science Based Targets that report Halliburton, Schlumberger and Nabors as clients. So many options and so many directions; so, what’s to choose?
Currently, ESG reporting isn’t mandatory, but the SEC did issue a request for public comment on climate change disclosures last March. Now that the comment period is closed, I would expect to see some guidance in 2022, which may make the path clearer to what standards will be reported and tracked. Keeping it simple, many people will argue the goal is about reducing methane and CO2emissions. When you consider Greenhouse Gases (GHG), methane and CO2 are always in the top 5, but so are water vapor and NOX.
What to measure? According to the EPA, the U.S. generates 11.4 times as much CO2 as NOX, yet NOX has 265 times the Global Warming Potential. So, shouldn’t we add NOX to our priority list? While CO2 has been reducing since a peak in the early 2000s, and methane has been reduced 15% in the period between 1990 and 2019, NOX has remained flat since 1990. It is hard to argue against adding NOX to our list. I have more respect for companies expressing their goal as a percent reduction in emissions, because this is a quantifiable goal, where we can measure values and confirm goals. Unfortunately, many of these other standards are like saying “I will try to be a better person.” A nice goal, but how do you measure success?
Now, if our priority is to reduce methane, CO2 and NOX, shouldn’t we measure butane, ethane and propane, which also have impacts? Again, this is a very complex issue, and personally, we are barely beginning to understand all of the impacts. I’m not trying to complicate things, but the reality is that as we reduce methane, we are indirectly reducing butane, ethane and propane. Field gas is never pure methane, but a mixture of gases. Because we aren’t measuring these other gases, we will never claim the benefit of reducing them.
ESG motivation. One of the biggest obstacles to addressing ESG issues within the oil and gas industry has been the focus on profits and Lease Operating Expense (LOE). We will measure methane, because we are required to, but we don’t want to measure butane, ethane and propane, due to the extra cost, without considering that you are indirectly reducing these emissions and not reporting it. We continue seeing low-bid awards without considering emissions or carbon footprint, but that is changing slowly. With so many private companies operating in oil and gas, I understand the focus on profit, because they live and die on their cash flow. We have to understand that things are changing quickly, access to capital is moving away from oil and gas, and we have to address ESG and make it a priority.
According to Morningstar, asset flows into sustainable funds were around $22 billion in 2019, while through the first three quarters of 2020 that number was nearly $31 billion. That is a dramatic increase in one year. The CEOs of BlackRock and State Street Global Advisors proclaimed the importance of sustainability in their investment decisions. In 2019, 90% of the S&P 500 published sustainability reports. The path is clear—we will be providing sustainability reports with our financial reporting. Auditing firms are already training auditors to understand sustainability reporting as part of their audit practices.
This issue isn’t going to go away or solve itself, but I’m not saying we sacrifice profit for sustainability goals. What I’m saying is that we need to do both. But more importantly, we need to make sure we are developing quantifiable goals and being completely transparent in our approach. If we do this, we will measure success using real data, with real numbers, and achieve real success.
- Executive viewpoint: TRRC opinion: Special interest groups are killing jobs to save their own (February 2024)
- Management issues: New U.S. House Speaker is strong supporter of oil and gas industry (December 2023)
- Oil and gas in the Capitals (October 2023)
- Embracing the opportunity of ESG to deliver a sustainable future (September 2023)
- Executive viewpoint (April 2023)
- Global offshore market is on the upswing (April 2023)
- Applying ultra-deep LWD resistivity technology successfully in a SAGD operation (May 2019)
- Adoption of wireless intelligent completions advances (May 2019)
- Majors double down as takeaway crunch eases (April 2019)
- What’s new in well logging and formation evaluation (April 2019)
- Qualification of a 20,000-psi subsea BOP: A collaborative approach (February 2019)
- ConocoPhillips’ Greg Leveille sees rapid trajectory of technical advancement continuing (February 2019)