Advanced BioFuels USA

by Brandon Johnson & Uday Turaga (ADI Analytics)  Investors and consumers are pressuring companies to seriously incorporate Environment, Social, and Governance (ESG) practices into their culture and operations. ESG has gone from a nice-to-have feature to a must-have pre-requisite as it is influencing investments and will ultimately decide winners and losers in the energy market going forward. The pressure of ESG is being felt throughout the oil and gas value chain with upstream facing the most scrutiny for its impact on the environment, and midstream for its social impact and governance structure.

…

Specifically, we see most pressure in environmental areas followed by social and governance issues. The oil and gas industry – refining and upstream, in particular – have always faced consistent environmental and related regulatory pressure. What is, however, different now is a growing push towards decarbonization. Similarly, oil and gas companies – midstream, in particular, have faced social pressures but they have intensified in recent years. Finally, although larger oil and gas players have sophisticated practices in these areas, governance issues are back in the spotlight because a number of smaller companies have entered the shale and unconventional oil markets in North America in the past decade.

Environment

1. Upstream oil and gas seems to be under a microscope in regards to environmental issues with flaring, wastewater management, and induced seismicity being just a few concerns raised by stakeholders. Large operators are investing in decarbonization and in carbon capture and storage (CCS) projects and have improved transparency in reporting key metrics pertaining to emissions. The Oil & Gas Climate initiative, consortium of majors and NOCs, was formed to accelerate the industry’s response to climate change primarily through technology innovation investments and advocacy.
2. Historically midstream operators have avoided the brunt of ESG scrutiny levied at the energy industry, but recent spills and methane leaks have become a concern as noted by the temporary suspension of the Dakota Access pipeline. Even as the massive shale infrastructure buildout nears its end, stakeholders are pushing for uniform reporting of incidents, spills, and emissions across operators.
3. Despite the environment-friendly credentials of LNG, pressure is mounting for more transparency in emission reporting, reductions in methane leakage, and sustainable practices in sourcing natural gas. LNG buyers have also focused on sustainability as BP recently sold cargoes of its “green LNG” into Europe and Shell offset emissions from cargoes sold into South Korea and Japan. Similarly, reporting is becoming important as operators and LNG carriers such as Cheniere and Flex LNG recently produced their first ESG and Corporate Responsibility reports.
4. Environmental scrutiny of refineries has moderated after decades of pressure to produce low-sulfur and cleaner fuels. Long-term focus is shifting to renewable hydrogen and renewable fuels as governments across the world are seeking to reduce emissions in populous cities.
5. Utilities have expedited coal-fired power plant retirements due to poor economics and low utilization rates in favor of natural gas-fired power plants. Many utilities have set carbon reduction targets and have planned significant investments in renewables and battery technologies as they prepare for a coal-free future long term. Near term, utilities are trying to reduce fugitive gas emissions across their assets. ADI’s recent work in Europe has highlighted this issue. 

…

All of these ESG trends in energy markets will have important and broad-ranging implications. A few include the following:

1. Investment dollars already constrained in the traditional oil and gas markets will now flow to projects and companies with robust and materially relevant ESG practices.  ADI’s recent work has shown that even private equity investors will turn down opportunities entirely due to ESG considerations. 
2. Company practices around ESG communications, reporting, and data analytics will have to evolve and mature rapidly.  Over the years, ADI has helped oil and gas operators prepare for, secure, and improve performance on global sustainability benchmarks — the Dow Jones Sustainability Index, in particular — and such recognition, coveted already, is going to become more difficult without sophisticated data analytics, communication strategies, and reporting practices. 
3. The upcoming U.S. Presidential could dramatically accelerate the ESG movement if there is a change in the administration but do little to slow down the current pace.  In recognition of this, ADI is supporting scenario planning and war gaming exercises with our clients to understand the role of a dramatic shift in pressure around ESG could help senior executive clarify their options and identify specific no-regress near-term initiatives. 
4. Innovation will be the most critical lever to achieve material, step-change improvements in ESG performance.  Oil and gas companies recognize this and have, therefore, been investing aggressively in early-stage start-ups through various venture capital vehicles.  However, adoption of these technologies within oil and gas operators has been the Achilles heel of these efforts.  Thoughtful, science-based approaches to drive new technology scale-up and commercialization is an area where ADI has recently helped a few corporate venture capital groups. 
5. Finally, talent management will have to reorient to accelerate the pipeline of leaders as well as competencies to meet ESG goals.  In recognition, ADI’s clients have sought our support to benchmark their talent management practices relative to the top tier’s best practices and develop appropriate training and leadership programs.  READ MORE

Will Trump’s New Investment Proposal Help The Oil & Gas Industry? (OilPrice.com)

Excerpt from OilPrice.com: The U.S. Department of Labor – which has recently proposed a rule that would limit retirement funds’ investments based on environmental, social, and governance (ESG) criteria – is unlikely to incentivize more funds to invest in oil and gas companies, Bloomberg Green Columnist Kate Mackenzie says.  

At the end of last month, the U.S. Department of Labor proposed a new rule, which explicitly says that retirement plan fiduciaries must select investments and investment courses of action “based solely on financial considerations relevant to the risk-adjusted economic value of a particular investment or investment course of action.”  

“The Department is concerned, however, that the growing emphasis on ESG investing may be prompting ERISA plan fiduciaries to make investment decisions for purposes distinct from providing benefits to participants and beneficiaries and defraying reasonable expenses of administering the plan,” it said in the proposed rule.

According to Bloomberg’s Mackenzie, it looks like the Department of Labor sees ESG investment strategies as underperforming the market, while in reality, they have outperformed them in recent years, studies have shown.

“Generating more hurdles to the incorporation of ESG criteria will have a chilling effect, leading to plan participants losing access to ESG options—many of which have outperformed their indices over time and especially during the market shock related to COVID 19,” Lisa Woll, CEO of US SIF: The Forum for Sustainable and Responsible Investment, said, commenting on the proposed rule. READ MORE