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Exploring ESG in Upstream Operations: Examining Achievements, Obstacles, and Emerging Patterns03/02/2023
ESG (Environmental, Social, and Governance) considerations have become a crucial factor in the upstream oil and gas industry, specifically in the exploration and production (E&P) of oil and gas reserves.
The environmental part of upstream E&P is focused on reducing the impact of exploration and production activities on the environment. These initiatives can include minimizing water waste, reducing greenhouse gas emissions, and safeguarding biodiversity.
Social factors focus on engaging with stakeholders, including local communities, to ensure that E&P activities are carried out in a socially responsible manner. These initiatives can include providing employment opportunities, respecting the rights of indigenous communities, and reducing the impact on local cultures and traditions.
Governance sides focus on ensuring that the company's operations are conducted in a transparent and ethical manner. This can include maintaining high standards of corporate governance, complying with relevant laws and regulations, and managing risks effectively.
ESG initiatives in upstream E&P nowadays
Some specific examples of ESG initiatives in upstream E&P include:
- Implementing methane detection and reduction programs to minimize greenhouse gas emissions
- Developing and implementing water management plans to reduce the amount of water used in production activities and to minimize the impact on local water resources
- Engaging with local communities to understand their concerns and to develop plans to address them
- Investing in renewable energy sources to reduce reliance on fossil fuels
- Conducting regular audits and assessments to ensure compliance with applicable laws and regulations Overall, ESG considerations are increasingly seen as critical to the long-term sustainability of upstream E&P operations.
As a result, many corporations are investing significant resources into ESG initiatives in order to reduce their environmental impact, engage with stakeholders, and maintain high standards of governance.
Experience of leading O&G companies: applying ESG in practice
There are several companies in the upstream sector that have successfully implemented ESG practices in 2020-2022:
Shell has been actively investing in several Carbon Capture and Storage (CCS) projects to capture carbon dioxide from industrial processes and power plants, such as the Quest CCS project and the Gorgon CCS project. Shell has also set methane emissions reduction targets and is implementing measures to reduce emissions from its operations, exploring ways to promote a circular economy, and launching social initiatives such as its Access to Energy program and investing in social impact funds to support sustainable development initiatives.
TotalEnergies has been focusing on several key ESG projects and initiatives in the US. The company has invested in renewable energy projects, including solar, wind, and battery storage, and in 2021, it acquired a 2.2 GW solar portfolio from SunPower. TotalEnergies has committed to reaching net-zero emissions by 2050 and has set intermediate targets for reducing emissions from its operations and products. The company is also expanding its electric vehicle charging infrastructure through its subsidiary, TotalEnergies Gas & Power North America.
Equinor has undertaken several ESG initiatives in the US in recent years. One of its key projects is the development of offshore wind farms, with the company planning to build up to 4.5 GW of capacity in the US by 2025. Equinor has already completed the 30 MW Block Island Wind Farm off the coast of Rhode Island and is currently working on several other projects, including the Empire Wind project off the coast of New York and the Beacon Wind project off the coast of Massachusetts.
ConocoPhillips is focused on improving the energy efficiency of its operations, such as by using advanced technologies to reduce energy consumption and emissions. In 2021, the company announced plans to install solar power facilities at its sites in Texas to reduce emissions and save costs. ConocoPhillips has set ambitious carbon reduction targets, including a 45% reduction in greenhouse gas emissions intensity by 2030 and a net-zero emissions goal by 2050.
ESG trends under the microscope: how O&G companies improve their image
The upstream sector is witnessing several noteworthy trends in the realm of ESG:
- Carbon Reduction
With an increasing emphasis on carbon neutrality, upstream companies are striving to cut down their carbon footprint and achieve net-zero emissions by 2050 or earlier. This involves investing in renewable energy, energy efficiency measures, and exploring novel technologies to mitigate emissions from oil and gas operations.
- ESG Reporting
Upstream companies are increasingly reporting on their ESG performance, covering carbon emissions, water usage, waste management, human rights, and community engagement. There is also a trend towards greater standardization and harmonization of ESG reporting frameworks.
- Community Engagement
The importance of community engagement is gaining recognition in the upstream sector. Companies are prioritizing the development of strong relationships with local communities, including Indigenous peoples, and addressing the social impacts of their operations.
- Diversity and Inclusion
There is a greater focus on diversity and inclusion across various aspects of upstream operations such as board and executive diversity, workforce diversity, and supplier diversity.
- Renewable Energy
Upstream companies are investing in renewable energy projects like wind and solar to diversify their portfolios and reduce their carbon footprint. Hart Energy has reported on various renewable energy services and products, including:
Offshore wind power: the expansion of offshore wind power in the US and highlighted projects like the Vineyard Wind initiative off the coast of Massachusetts.
Solar energy storage: the increasing adoption of energy storage solutions like batteries, which are used to supplement solar energy systems.
Biofuels: use of biofuels, such as ethanol and biodiesel, as an alternative and renewable energy source for transportation.
Renewable natural gas (RNG): the growing interest in RNG as a renewable energy source for the transportation sector, especially for heavy-duty trucks.
Geothermal energy: the potential of geothermal energy as a sustainable and renewable energy source for generating electricity, particularly in regions with significant geothermal activity.
Opinion of key advisers on the ESG progress and trends
ESG considerations are increasingly becoming an important factor in the upstream oil and gas industry. Here are some quotes from advisors and consultants in the USA on the influence of ESG in upstream:
"ESG is no longer a ‘nice-to-have’ for oil and gas companies; it’s a must-have. Investors, regulators, and other stakeholders are demanding it, and companies that fail to meet ESG expectations risk losing their license to operate." - Ken Miller, Managing Director at Duff & Phelps.
"ESG considerations are becoming critical for upstream oil and gas companies as investors focus on companies that are demonstrating good ESG practices. Companies that invest in ESG will ultimately benefit from improved access to capital and a better reputation with stakeholders." - Mark Ellis, President and CEO of Linn Energy.
"ESG is a business imperative for upstream oil and gas companies. Companies that prioritize ESG can improve their operational efficiency, reduce risks, and enhance their reputation with stakeholders." - Prabhat Mishra, Partner at EY.
"The upstream oil and gas industry faces significant ESG challenges, including carbon emissions, water use, and social impact. However, companies that embrace these challenges and adopt sustainable practices will be better positioned to succeed in the long term." - Keith Barnett, Vice President at Opportune LLP.
What are companies struggling with?
Enterprises that have faced challenges in implementing ESG practices in the upstream sector:
- SandRidge Energy's bankruptcy and environmental violations: SandRidge Energy, a small oil and gas company based in Oklahoma, filed for bankruptcy in 2016 amid low oil prices. The company also faced allegations of violating environmental regulations, including wastewater injection violations.
- Halcón Resources' environmental violations: Halcón Resources, a Texas-based oil and gas company, faced multiple lawsuits and fines over violations of environmental regulations, including violations of the Clean Water Act and the Resource Conservation and Recovery Act.
- Ultra Petroleum's methane emissions: Ultra Petroleum, a Colorado-based oil and gas company, faced allegations of exceeding methane emissions limits in Wyoming. The company ultimately settled with the state of Wyoming for $1.5 million in fines and agreed to implement measures to reduce emissions.
- Goodrich Petroleum's fracking controversy: Goodrich Petroleum, a Louisiana-based oil and gas company, faced controversy over its fracking operations in Louisiana. The company faced accusations of contaminating groundwater and violating environmental regulations.
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To effectively manage ESG issues in O&G companies, a comprehensive approach is required, addressing multiple managerial issues. First, ESG considerations must be integrated into the corporate strategy, setting goals that align with business objectives, reflected in budgeting, capital allocation, and risk management. Accurate and efficient collection, management, and reporting of ESG data is necessary for identifying relevant metrics and indicators, such as greenhouse gas emissions, water consumption, and social impact indicators.
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