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Paradise - Environmental, Social, and Governance Issues Take Center Stage in the Energy Industry

The run-up in crude oil prices the past couple of months has supported a rise in energy stock prices — since early November, the S&P 500 Energy Sector Index has increased by more than 40%. Yet, many investors, lenders and others remain wary of oil and gas companies, not only due to the energy industry’s historic volatility but also the unique social, political and financial pressures that hydrocarbon producers, midstreamers, and refiners face in demonstrating that they are addressing environmental, social, and governance issues. ESG has come to the fore in the U.S., Canada, and elsewhere, and will shape activity in the oil patch this decade and beyond, and energy companies that ignore it or only pay lip service do so at their peril. Today, we begin a series on the growing significance of ESG and how upstream, midstream, and downstream players are incorporating it into their strategies and operations.

When Pioneer Natural Resources announced its $7.6 billion acquisition of Parsley Energy in October 2020 and discussed the strategic and financial benefits of the deal, it highlighted the two companies’ “best-in-class” ESG practices, including a combined natural gas flaring intensity that is one-third that of its peers, and aggressive efforts to reduce the use of fresh water in their Permian drilling-and-completion programs. In early December, a month before the Pioneer/Parsley merger closed, Pioneer released one of the most comprehensive sustainability reports ever assembled by an oil and gas company: 61 pages of text, photos, and graphs that discussed almost every imaginable environmental-, social-, and governance-related issue. Pioneer’s message to investors, lenders, and the broader public couldn’t have been clearer. It was telling the world that not only is it aware of the importance of climate change, workplace diversity, and a host of other ESG matters, it was acting to address them and making plans to do more. This included setting goals to reduce its greenhouse gas (GHG) emissions by 25% from their 2019 levels within 10 years; eliminate all routine gas flaring by 2030 at the latest, with an aspiration to reach that goal by 2025; and relying less on fresh water and more on treated effluent water from the cities of Odessa and Midland, TX, for its Permian operations.

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