Paradise, Part 5 - The Social and Governance Parts of ESG

We get that the primary focus for oil and gas producers, midstream companies, and refiners needs to be on the business side of things — the strategies and capital plans they develop and implement to survive and hopefully thrive, and the day-to-day decisions they make to keep things running smoothly — and that’s what we at RBN devote most of our time to as well. Still, it seems increasingly apparent that many of these same companies need to pay more attention to environmental, social, and governance issues, not only because ESG is a front-and-center concern of investors and lenders but because addressing these issues in the right way can help to improve a company’s operations and prospects. The environmental element of ESG typically gets the spotlight, at least for companies that produce, transport, or process oil and gas, but the social and governance parts are important too.

There’s no question about it, the corporate world is very different now than it was even a couple of years ago. In recent months, we’ve been receiving a number of inquiries from clients and subscribers about ESG in the energy sector — so many, in fact, that we decided that a deep dive into all things ESG was warranted and maybe overdue. Rest assured, it’s not a matter of political correctness or being “woke.” Instead, the deeper we dove (dived?), the more we became convinced that, while there may be elements of ESG that seem fuzzy, feel-good, or even flaky, producers, midstreamers, and refiners stand to gain from the simple process of evaluating, from the ground up, the parts of their businesses that relate to environmental, social and governance issues.

As we said in Part 1, many investors and lenders have become hesitant — even averse — to putting their money in oil and gas. It’s not just the energy industry’s historic volatility that’s been giving them pause, it’s the unique social, political and financial pressures that hydrocarbon producers, oilfield service companies, midstreamers, and refiners face in demonstrating that they are addressing ESG issues. In Part 2, we discussed the fact that environment issues take center stage when investors and lenders consider the ESG-related performance of energy companies. By far, the leading environmental issue facing the industry today is greenhouse gas (GHG) emissions, which are generated at pretty much every step in the production, processing, delivery, refining, and (especially) consumption of fossil fuels. We noted that, to help in the measuring and tallying, it’s become common to divide a company’s GHG emissions into three buckets:

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