Energy investors throughout the Permian Basin and the world are considering aspects beyond financial success and production levels, opting to also look at how companies react to environmental and social issues when choosing where to put their money.
Initiatives in environmental, social and governance, known as “ESG” in the industry, came into prominence in recent years and were pushed into the foreground of the fossil fuel investment community with recent efforts by the new administration of President Joe Biden to address climate change along with a societal trend toward such issues.
Nick Volkmer, vice president of ESG and renewables for energy industry analytics firm Enverus, formerly Drillinginfo, said the push for ESG initiatives is mostly driven by investor concerns that companies are addressing environmental and social issues along with producing oil and natural gas.
He said a recent report showed 3,000 investment firms across the world representing up to $100 trillion in assets recently signed on to the Principles for Responsible Investment – a network supported by the United Nations seeking to increase responsibility in investment.
This signaled, Volkmer said, that ESG considerations by investors must be shared by the companies that rely on them.
“We talk to investors every day and we talk to operators too. A lot of what we’re seeing in the ESG world is investor driven,” Volkmer said. “It’s looking not just at a company’s finances and economics but also adding another pillar to the investment as investors make sure their portfolios are optimized.”
What this means on the ground in the Permian Basin of southeast New Mexico and West Texas – one of the U.S.’ and the world’s most prolific oil plays – is operators like Diamondback Energy are looking to spend more on efforts to curb their carbon footprint and respond to government policies aimed at reducing pollution and climate change.
During its 2020 Fourth Quarter Disclosure to investors, Diamondback reported it installed air-driven pneumatic valves which are used to pressurize storage tanks.
The valves are traditionally powered by natural gas, leading to emissions.
The new valves will reduce emissions of greenhouse gasses at Diamondback’s facilities, and the company planned to spend up to $70 million to retrofit all of its tank batteries with similar, modernized devices.
Diamondback also reported it cut its flaring – the process of burning off excess gas from the wellhead – from 5.7 percent of produced gas in 2019 to 0.5 percent last year, a reduction of 87 percent.
The company also sought to electrify its drilling and completion equipment to reduce the use and emission of natural gas while also conducting quarterly leak detection using flyover and infrared cameras, and minimizing the use of storage tanks on the surface.
Overall, the company committed to reducing its greenhouse gas intensity from 2019 levels by at least 50 percent by 2024 and its methane intensity by 70 percent during the same time frame.
“It’s companies agreeing that we need to take this into consideration,” Volkmer said. “That’s why it’s grown so much over the last few years. Investors are looking at this as a way to understand the resiliency of their investments.”
Before ESG came into prominence, Volkmer said investment was primarily based on a company’s production levels and financial performance.
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Recently, market analysts suggested the world could be at peak demand for oil, meaning demand for fossil fuels might not continue to grow in the future, he said investors are finding more ways to distinguish between investments in a potentially shrinking market.
“There’s a question on the long-term demand of hydrocarbons. You’re looking at how all these oil companies position themselves in the future,” Volkmer said.
“We’re going to need oil in foreseeable future but maybe not everybody’s oil. I think everyone is in agreement that if you could get oil from a company with zero emissions or a company that has emissions and it’s the same price, you’d want the company with zero emissions.”
For the Permian Basin, Volkmer said ESG is of higher concern than possibly anywhere else in the world as it’s one of the most active regions for energy development.
“When you look at the Permian, it’s the epicenter of US oil and gas development. I think it gets a higher amount of scrutiny,” he said. “When you have so much investment going into one place and have so much production coming from it, there is a lot more scrutiny on various aspects, one of those is environmental performance.”
On the governance side, New Mexico state regulators under the administration of Gov. Michelle Lujan Grisham who took office in 2019, quickly began seeking ways to enact stricter regulations intended to curb the climate impact of the oil and gas industry.
This also presented an issue for investors, Volkmer said, as they considered how much a company would have to spend to comply with tougher, upcoming requirements.
“A company’s environmental performance has never been so visible. Now that it’s visible you can start seeing it impact decision making,” he said. “Investors have been asking for this.”
Further fueling the push for ESG investments, environmental and shareholder groups alike recently began calling on major energy companies to embrace a future of less carbon pollution.
Major Permian and global producer Chevron recently shared its climate change goals with investors in a March 9 presentation.
Chevron reported spending more than $1 billion on carbon sequestration, while announcing it had reduced methane emissions from onshore operations by 85 percent since 2013 and planned to eliminate flaring by 2030.
During the presentation, Chevron Vice President of Upstream Jay Johnson said addressing climate change was a primary goal of the energy giant moving forward.
“Lowering carbon intensity requires resolve, advancements in technology and thoughtful investments,” he said, per a transcript of the presentation. “We believe that the future of energy is lower carbon. And we’re making the commitments and taking the actions today to deliver the cleaner energy the world needs.”
Josh Eisenfeld, corporate accountability campaigner at national environment group Earthworks argued Chevron’s commitments to lower its “carbon intensity” or the amount of emissions per barrel of oil, was not adequate as it planned to increase drilling operations in the Permian and other regions and carbon pollution overall appeared to rise.
He said Chevron should join calls to the Biden administration to cut methane emissions by 65 percent by 2025 under the Clean Air Act.
“The intensity metric is meant to confuse the public on the difference between a climate and health measurement and an economic one,” Eisenfeld said. “For climate and health, total methane pollution from all operations is what matters, and it is increasing at an alarming rate.”
Adrian Hedden can be reached at 575-618-7631, [email protected] or @AdrianHedden on Twitter.