Oil and gas: where now for ESG in the energy sector?

Last year turned out to be a good one for oil and gas companies. After several years in the doldrums, prices soared and the likes of BP, Exxon Mobil, Shell, Chevron et al were able to weigh in with multi-billion dollar profits.

Oil and gas platform in the sea
Think Global People Spring 2022 Issue
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And that, of course, was before the further surge in prices following this year’s Russian invasion of Ukraine.
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Yet for all its current profitability, the sector has a very real and persistent problem: it is playing a major role in the destruction of our world’s environment. It is estimated that the industry’s operations account for 9% of all human-made greenhouse gases and that the burning of the fuels it produces creates another 33% of global emissions.Amid growing concerns – and activism – over the future of the planet, many oil and gas companies are looking to reinvent themselves in 2022 and, according to a recent report on the industry from Deloitte, plan to show renewed emphasis on environmental, social and governance (ESG) goals. The consulting company’s report said that the sharp rise in oil prices over the past year coupled with global demand now almost back to pre-pandemic levels meant the industry was able to invest in riskier and expensive green energy projects, such as carbon capture, utilisation and storage.Bloomberg Intelligence also reported that “oil companies are finding it increasingly difficult to raise financing amid rising environmental, social and governance concerns, while banks are under pressure from their own investors to reduce or eliminate fossil-fuel financing”.According to Goldman Sachs, the cost of developing fossil fuels has now surpassed that of renewable energy projects. “That’s an extraordinary divergence, which is leading to an unprecedented shift in capital allocation,” said analyst, Michele Della Vigna. “This year will mark the first time in history that renewable power will be the largest area of energy investment.”

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Green shoots or greenwashing?

Nevertheless, demand for both oil and gas are continuing to grow. According to the United Nations Environment Programme, countries across the world still plan to produce twice the amount of fossil fuels than the level needed to meet the target of limiting average global warming to 1.5° Celsius above pre-industrial levels.Oil companies are at least paying lip service to the need to move away from fossil fuels. “There is a growing recognition and a growing acceptance for the need for a variety of approaches to make sure that we make progress on reducing emissions but, at the same time, don’t compromise the quality of people’s lives,” commented Darren Woods, Chief Executive at Exxon Mobil, as the oil giant checked in earlier this year with fourth-quarter profits of $8.9 billion.Mr Woods said the company was committed to investing in carbon capture and sequestration, biofuels such as renewable diesel, and hydrogen energy.For its part, BP undertook to spend more on low-carbon energy alternatives even as it reported eight-year high profits of $12.8 billion for 2021. CEO Bernard Looney told investors that, by 2025, the company planned to dedicate 40% of its spending budget to projects that aided energy transition, such as wind farms, hydrogen projects and electric vehicle charging networks. Much of this work would be concentrated in the UK, Mr Looney told the Guardian newspaper.“BP’s historic links in the UK give us a foundation here,” he said. “But the real reason we will focus on the UK is the opportunity: the wind resources here are among the best in the world. The UK is also blessed with a society and an economy which wants to transition. It’s a good place to invest and it’s a place that we know.”Charlie Kronick, an analyst at Greenpeace UK, said that although there was “no doubt that BP now has the most ambitious plans of any of the oil giants to pivot away from climate-wrecking fossil fuels as their core business”, the company was still only “the best of a bad bunch”.He added, “It should be clear by now that we can’t wait to solve this problem one oil company at a time.” Instead, he said it should be up to governments “to step in to end the growth in fossil fuels and to massively raise ambition to reduce emissions”.Yet even Saudi Arabia – a nation whose name remains synonymous with massive oil production – recently transferred Aramco shares worth $80 billion to its sovereign wealth fund to invest in green projects.Crown Prince Mohammed bin Salman said the move was “part of the kingdom’s long-term strategy to support the restructuring of its economy”.However, oil companies across the world are being accused of greenwashing: making claims about their efforts to achieve ESG targets while pouring increasing amounts of investment into oil and gas exploration. An analysis by campaign group ShareAction has shown that 25 global banks who pledged in April last year to reduce emissions had since provided $33 billion in loans and other financing to companies with major oil and gas expansion plans.A recent report from researchers at Tohoku University and Kyoto University in Japan found that while leading oil companies were now frequently using terms such as low carbon, climate and transition in their annual reports, their actions on clean energy were mostly pledges and that the companies remained financially reliant on fossil fuels.“We thus conclude that the transition to clean energy business models is not occurring, since the magnitude of investments and actions does not match discourse,” said the report.

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Energy firms 'on notice'

On February 28, the Intergovernmental Panel on Climate Change (IPCC) issued a stark warning on the likely consequences of climate change, prompting UN Secretary-General António Guterres to place oil and gas companies “on notice” because fossil fuels were “choking” humanity. He accused them of not doing enough to cut emissions.“Oil and gas giants and their underwriters are on notice,” he said. “You cannot claim to be green while your plans and projects undermine the 2050 net zero target and ignore the major emission cuts that must occur this decade.”Mr Guterres added that “the present global energy mix is broken” and called for more progress on the move away from fossil fuels. “As current events make all too clear, our continued reliance on fossil fuels makes the global economy and energy security vulnerable to geo-political shocks and crises,” he said.“Instead of slowing down the decarbonisation of the global economy, now is the time to accelerate the energy transition to a renewable energy future. Fossil fuels are a dead end for our planet, for economies. A prompt well-managed transition to renewables is the only best way to energy security, universal access and the green jobs our world needs.”And there are some very practical reasons why the world’s oil giants should be turning green. According to Daniel Romito, Director of ESG Strategy and Integration at Pickering Energy Partners – the Houston-based energy asset management and investment strategies company – ESG has transcended from being a tick-box exercise for oil firms. Investors are now looking for improved disclosure of ESG-related issues supported by quantitative data to garner capital, he told this year’s Independent Petroleum

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“ESG now impacts all access to capital – your insurance, your banking and your equity, is all heavily influenced. Now, it’s not the end all be all, but it is heavily influenced by your ESG profile.”He said investors were not only basing their capital allocation decisions on how well executives absorbed ESG practices into their businesses, but were also agitating for qualitative and quantitative ESG metrics to better examine which companies could compete within the transition towards carbon-free.Yet, Fortune magazine reported in February that, with oil prices surging and with governments pushing for action to address the climate crisis, some analysts and ESG investors expected oil and gas companies to take advantage of their bumper profits and invest more in low-carbon technologies. “But Big Oil has taken a different tack. High commodity prices are good for existing production streams, and so... the oil majors are shoring up their business by repaying the debts they’ve accumulated over Covid-19, increasing their dividends, and buying back shares.“And as big oil companies funnel cash back to investors and strengthen their balance sheets, they are taking their foot off the gas on green investment.”

The development dimension

Additionally, fears persist that, if ESG results in oil companies pulling back from traditional development projects across the globe, it could deny people in the developing world – especially in Africa – from enjoying the benefits that have been regarded as the norm for so many years in the West.Mohammed Barkindo, Secretary-General of OPEC, recently insisted that it would be a tragedy if Africa’s oil and gas resources became stranded assets because of the global drive towards decarbonisation. He described any talk of halting investments in the sector as misguided.“It would be a tragedy of unimaginable proportions if, despite billions of dollars being poured into investments for these resources (oil and gas in Africa), they went west as stranded assets,” he told an energy conference in the Nigerian capital, Abuja. “The environmental aspect of ESG is perhaps outweighing the need to address the social and development issues.”Mr Barkindo described the oil industry as “under siege” by climate change activists while development needs were being overlooked in Africa – a continent, he said, that accounted for less than 3% of global carbon emissions and an area where almost 600 million people had no access to electricity.“Any talk of the oil and gas industries being consigned to the past and of the need to halt new investments in oil and gas is misguided,” he added.
Steve Kayizzi Mugerwa, Professor in Global Human Development at Georgetown University in Washington and a former chief economist at the African Development Bank, agrees.“The net-zero concept has moral, economic and geopolitical questions: how will the Western world and its development institutions help eradicate economic poverty in Africa while on the other hand preventing the continent from developing its abundant energy resources – in other words, natural gas in Tanzania and Mozambique and so on?“Does this not, in effect, perpetuate energy poverty, which has been a huge driver of the decimation of forests in sub-Saharan Africa? In terms of industrialisation, how will that happen without cheap energy? Will African countries be punished for using the same carbon-intensive techniques that powered Western affluence?”The oil and gas industry, it seems, is on the horns of a dilemma. Unfortunately, that means the future of the world’s climate is on one, too.
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