This month, EQT, the nation’s largest natural gas producer, plans to launch a pilot project that will certify it to start selling not just natural gas, but something it calls “responsibly sourced natural gas.”
EQT’s move comes on the heels of a similar announcement from Chesapeake Energy, one of the pioneers of fracking which recently emerged from bankruptcy. Both EQT and Chesapeake will seek certification from outside providers, including a business called Project Canary, which touts its ability to collect data on methane emissions and pollutants from oil and gas wells and offers a certification it calls TrustWell™.
“There is a generation of Millennials around the globe who have written off fossil fuels,” Chris Romer, co-founder of Project Canary, told the oil and gas industry trade publication Rigzone this month. “We need to address the brand problem.”
But it’s difficult to pin down what “responsibly sourced” gas means, in part because of a growing number of competing certification programs that all offer their own definitions. When it comes to Project Canary in particular, the company says its standards are high — and that there’s not enough gas from its most “responsibly sourced” wells to meet demand from buyers.
These latest branding efforts arrive amid a broad ESG investment wave that emphasizes the ways businesses approach environmental, societal, and corporate governance issues. Industry advisors are increasingly offering up new ideas about how oil and gas companies can use the language of ESG to market their fossil fuel as different from the competition’s.
Platinum Gas
Last November, the Wall Street Journal reported that French utility Engie was halting negotiations on a $7 billion deal with gas exporter NextDecade, which was seeking buyers for gas from its proposed Rio Grande LNG export terminal in Brownsville, Texas. The halt to negotiations followed pressure from the French government over concerns about the climate and environmental impacts of fracked gas from the U.S. The move sent shock waves through the oil and gas industry, which has rarely seen major deals flounder over environmental or climate concerns.
This month, on April 19, NextDecade announced it would also seek certification from Project Canary for the Rio Grande LNG export terminal. “Project Canary’s independent measurement and certification platform will provide transparency and give confidence to our customers who are increasingly focused on securing low greenhouse gas-intensive LNG,” Matt Schatzman, NextDecade’s CEO, said in a statement accompanying the announcement.
When it comes to certification, Project Canary uses its own internal rating system to assess how responsible it believes a driller has been on each well. It says it seeks to tailor its ratings to the circumstances by, for example, giving more weight to freshwater consumption issues in states experiencing droughts.
Its TrustWell certification is subdivided into three tiers: Silver, Gold, and Platinum. Forty-one percent of TrustWell wells are currently “Silver” rated, the company said, and another half carry a “Gold” level rating. Nine percent met the company’s “Platinum” standards.
In a few cases, wells have failed to reach the minimum standards required for Silver-level wells, Project Canary said. “Of the 20 operators who have undergone certification with Project Canary, 3 (three) of those operators have had wells that were not fit for certification,” a spokesperson told DeSmog.
Project Canary compiles details about each well, including information about the well’s construction, the wastewater it produces, and its track record on spills and accidents.
“One of the mistakes that some of the NGOs made is they said it’s just methane,” Project Canary’s Romer said, referring to other non-government organizations that offer their own certification programs, adding that European importers have expressed interest in a broader array of environmental issues including water contamination and well casing quality.
Project Canary offers to place devices it calls “canaries” — sensors that can monitor for methane and other pollutants like volatile organic compounds (VOC) — at the corners of a well site, so that buyers aren’t reliant on self-reported data from oil and gas drillers.
“Our canaries are showing all of these people are leaking more than they reported” to the Environmental Protection Agency (EPA), Romer told DeSmog.
“We’ve already had two E&P’s, just so you get this, who’ve asked us to shut off the canaries,” Romer said, using an industry term for drillers — “Exploration and Production” companies — adding that Project Canary refused. “They have asked us to shut off the canaries, and we’ve told them hell no. Shut off the canaries, we’ll take them down.”
Gas buyers, he said, can have access to Project Canary’s rating, the underlying data about the well (which Romer said involved 600 different data points and filled a thousand pages per well) and a review by the Colorado School of Mines. “We already know for a fact that financial institutions are asking for the data.”
But so far, the public won’t get to see that data, at least not on a routine basis. “It’s the company’s decision to do that,” Romer said when asked if Project Canary would allow drillers to keep the data confidential or if the data collected would be made public.
Drillers can also choose which individual wells they want to certify. “They’re usually doing their largest wells to start,” Romer noted.
“Our vision is net zero emissions,” Romer said. “We’re the first company to buy offsets in real time.”
One strategy, he said, for offsetting methane from wells is to go find leaking abandoned oil and gas wells and measure the emissions spewing from those. “And then we’re going to create a carbon offset by plugging and abandoning that well, so it never leaks methane again.”
When it comes to methane, one of the biggest sources of concern is the oil and gas industry’s use of venting and flaring. “In the RSG [responsibly sourced gas] gas deals that are rated Platinum,” Romer said, “there is no flaring.”
Asked if buyers can arrange to purchase gas only from Platinum-rated wells, Romer said that he’s been asked, but right now, there simply aren’t enough Platinum-rated TrustWell wells for a deal like that to work so they focus instead on a mix of Platinum and Gold.
“We wouldn’t be able to give them enough volume off of Platinum only,” he said.
Voluntary Programs Have Left Emissions Rising
More broadly, there’s no consistent universal definition or established baseline for certification programs for “responsibly sourced” gas. Each voluntary program sets its own standards, decides how opaque or transparent its data will be, and how it will treat companies that perform worse than their peers or wells where environmental regulators discover spills, violations, or other law-breaking.
TrustWell and other “responsibly sourced” certifications are hardly the first effort from the oil and gas industry to advance voluntary initiatives by individual companies as a solution to widespread pollution problems (which, incidentally, include not only accidental leaks and spills, but also deliberate practices like venting and flaring). Since 1993, the EPA has even been administering one voluntary program called “Natural Gas STAR” — and each year, its partner companies have reported more methane emissions reductions than the last. But meanwhile, the industry’s methane emissions have continued to rapidly rise.
The American Petroleum Institute, the trade association representing the oil and gas industry, did not respond to questions from DeSmog about how “responsibly sourced” gas certification projects affect the oil and gas industry as a whole.
“This is the sort of thing that you see in industries that are in trouble,” Clark Williams-Derry, an energy analyst with the Institute for Energy Economics and Financial Analysis, said about the emergence of these new types of certifications.
“It’s past the denial stage and now it’s in the bargaining stage,” he said, comparing a shift away from challenging climate science and towards promoting individual companies as more climate-friendly than others to the Kubler-Ross stages of grief. “And so, they’re bargaining with each other, they’re bargaining with their clients, they’re bargaining with the markets, with Wall Street.”
The problem for natural gas, in particular, is that environmental efforts tend to add costs — and gas is already facing significant competition on price from renewable energy. Williams-Derry pointed to similar efforts in the past from coal companies, saying that the more environmentally-beneficial a practice like attempting to offset carbon emissions is, the more it tends to add costs, at the same time as the costs of renewable energy continue to fall. “You’re adding costs to something that’s already more expensive than the competition,” he said.
‘A Distinct Lack of Controlling the Narrative’
The rebranding efforts arrive amid growing discussion within financial circles about so-called ESG investment — a business philosophy which emphasizes the environment, social responsibility, and corporate governance. ESG funds have become so popular that in 2020, they represented roughly a quarter of all new U.S. stock and bond capital investment according to Morningstar, up from just 1 percent in 2014.
Oil and gas analysts and advisors have begun warning that the oil and gas industry must move rapidly to reframe their marketing in ESG-friendly ways.
“Right now there is a distinct lack of controlling the narrative from all companies, whether they’re small cap, mid cap, large cap, regardless of region, frankly regardless of if they’re private or public,” Dan Romito, a Nasdaq vice president who specializes in investor relations, business development, and product strategy, told the Hart Energy ESG Conference on March 31, an online conference sponsored by pipeline company Energy Transfer and other firms within the oil and gas sector. “So companies really have to focus on getting control of that narrative, right, and starting small.”
Romito pointed out that companies have some leverage as they decide how to put their best foot forward: they control what information they make public about their operations. That means “the companies should be the one dictating what the core focus of their ESG profile is,” he said. “They should be the ones providing quantifiable metrics to the marketplace.”
The ability to attract new investment and lending is of particular importance for oil and gas companies that have struggled to make a profit from fracking. The financial costs of shale drilling have created a paradox of riches for drillers who produced massive amounts of oil and gas in the U.S. over the past decade but also found themselves deeper and deeper in debt.
“This is the sort of thing that you see in industries that are in trouble.”
Clark Williams-Derry, an energy analyst with the Institute for Energy Economics and Financial Analysis
“Every company and board that I work with worries about access to capital right now, and has for a few years, but it’s particularly acute,” Hillary Holmes, co-chair of the Global Capital Markets Practice at the law firm Gibson Dunn told the Rice Energy Finance Summit in November, “and that’s true of Fortune 50 companies, Russell 3000 or privately held companies that just emerged from bankruptcy, it’s just hard for everybody.”
Not too long ago, drilling and pipeline financial deals were happening nearly daily, she explained, but, “as we all know in our honest moments, the industry’s had quite a change since 2014,” she added, referring to the most recent year when crude oil prices topped $100 a barrel, “and that’s led to a lot of mistrust in lenders and investors.”
ESG’s influence isn’t just limited to investors or Wall Street. “You’re gonna start seeing it in leasing, credit facilities, [joint operating agreements] — things like that,” Cody Miller, co-CEO of Dale Operating Co., a Texas-based oil and gas company, told the March ESG conference attendees. “I think that’s where we’re going.”
ESG is also affecting private equity-backed transactions, explained Christine Hommes, a partner at Apollo Global Management, which markets itself as “one of the largest alternative asset managers serving many of the world’s most prominent investors.” Many private equity organizations are seeking to sell off the shale oil and gas drilling assets collected during the heady days of the fracking boom of the 2010s — but many have struggled to find interested buyers.
“Across our portfolio for a long time, ESG has been really important,” Hommes told the March ESG conference, “I think both as we think about our impact on communities, how we manage businesses, but also important as we think about potential exits and making sure that our portfolio companies are well-positioned to exit.”
A Difficult Trio for Oil and Gas
For any fossil fuel company, one of the fundamental problems with a focus on the environment is glaringly obvious: the science is clear that their products are primarily responsible for climate change. The United Nations’ Intergovernmental Panel on Climate Change — which included oil and gas representatives in its studies — reported that fossil fuels accounted for 89 percent of global carbon emissions in 2018.
But ESG involves more than just environmental issues — and not all ESG funds emphasize environmental issues to the same degree.
For the shale drilling industry, however, this means more scrutiny of its track record on the ‘G’ in ESG: governance (specifically corporate governance or the way that a company is managed). Many shale companies have struggled for years to reach profitability — but meanwhile, shale’s top executives remain among the highest-paid in the U.S., the Wall Street Journal reported in October 2020. “You’ve had 10 years of consistent value destruction with management teams getting paid for it,” Ben Dell, managing partner at private investment firm Kimmeridge Energy Management Co., told the Journal.
The ‘S’ in ESG stands for “social,” and it’s often defined in ways that include both a company’s impacts on the communities in which it operates and on labor and workforce issues, including themes like racial justice. Here, the oil and gas industry’s track record includes what climate reporter Kendra Pierre-Louis describes as “a legacy of white supremacy,” including a long history of hiring primarily white workers for high-paid roles. “The oil and gas industry workforce is generally less diverse than American workforce as a whole, and African Americans are especially underrepresented,” Axios also reported last year.
“The energy industry is really challenged around diversity and inclusion,” Dennis Kennedy, founder of the National Diversity Council told Business Insider last summer, as oil and gas executives circulated memos and published statements decrying the death of George Floyd, a Black man from Minneapolis who died on May 25, 2020 as a white police officer knelt on his neck for more than 9 minutes.
The fossil fuel industry’s impacts on surrounding communities also cut along racial and gender lines, watchdog organizations report. On April 14, the Women’s Earth and Climate Action Network (WECAN) released a 100-page report calling for divestment from the fossil fuel industry based on what it called “an indisputable connection between the fossil fuel industry’s practices and negative impacts to African American/Black/African Diaspora, Indigenous, Latina/Chicana, and low-income women’s health, safety, and human rights in the U.S. and parts of Canada.”
Beyond ESG, of course, there’s also the financial under-performance that has dogged the oil and gas industry in recent years and buoyed the movement to divest.
“The market message is clear,” Tom Sanzillo, director of financial analysis at the Institute for Energy Economics and Financial Analysis testified Monday in the Colorado House as he spoke in support of a state bill that would encourage pension fund divestment. “The fossil fuel sector has historically contributed handsomely to pension funds across the world. It can no longer do so. Today, it is a much smaller industry, with high risks, low profits, and a troubling outlook.”
‘Early Days’
Major battles are only just beginning over how ESG-focused investors and businesses should treat fossil fuel companies — if they decide to do business with them at all. Adding to the potential for confusion, a vast array of ESG standard-setting organizations and ratings options are jostling for attention from investors.
“This is the wild west and it’s early days,” Dan Pickering, long-time oil analyst and founder of Pickering Energy Partners, told the Hart Energy ESG Conference. “Nobody’s figured out exactly what the metrics are.”
As a result, ESG-focused nonprofits have begun springing up, offering to advise the energy industry on ESG issues or to coordinate the industry’s approach to ESG themes.
“Because there’s so much subjectivity to the extent that somebody can pull together this data — and that’s the reason we put this in a nonprofit format, so it’s not seen as a dubious actor — then we can start making a difference in terms of helping folks better understand possibly the winners or losers,” W. David de Roode, chairman of one such organization, the Energy ESG Council, explained during the ESG conference.
Some analysts predicted that some of the most important battles over how to define ESG in a standardized way are likely to take place as banks try to align their standards so that multiple lenders can back the same oil and gas projects.
“It’ll be set with debt providers first, because they have to embed it into their underwriting and debt providers, especially commercial banks have struggled the last couple years with losses and they have challenges to their under-writing models as is, especially on the [reserve-based loan] side,” Christina Kitchens, managing partner at 3P Energy Capital told the ESG conference. “Most deals have to have several banks involved in them, so there has to be a degree of agreement to what the relevance and importance is to the E part, to the S part, or to the G part.”
These battles have already begun attracting some attention from federal regulators. This month the Securities and Exchange Commission (SEC) issued a Risk Alert warning that “the variability and imprecision of industry ESG definitions and terms can create confusion among investors” and warned about the weakness of some efforts to ensure compliance with ESG standards.
The SEC is also taking public comments specifically on climate change-related questions right now, including a focus on how regulators should treat companies within the oil and gas industry.
At the same time, New York City has just sued ExxonMobil, BP, Shell, and the American Petroleum Institute in state court, Reuters reported, “arguing that the companies are misrepresenting themselves by selling fuels as ‘cleaner’ and advertising themselves as leaders in fighting climate change.”
Meanwhile, some oil and gas companies have begun openly accepting that efforts to curb climate-changing pollution are inevitable. “And over time, higher carbon oil and gas will be phased out. There’s no point of pretending that,” Mike Anderson, senior vice president of sustainability and external affairs at the deepwater drilling company Kosmos Energy told the ESG conference.
But, he insisted, his company’s oil is better for the climate than his competitors’. “Not all barrels are the same. Not all barrels are high carbon. Some barrels are lower carbon,” he said, emphasizing how much pollution takes place when a specific barrel of oil is produced — not how much pollution is produced when it’s burned.
“So that’s already a really powerful conversation to have with the Biden administration: we accept we need to go down this route, but which are the barrels of oil you want to displace and which are the barrels of oil you want to keep, given that we’re headed towards a 50 million barrel a day world in 2050,” he continued. “And that’s got to be the conversation about the transition — it’s not about ending it or saying it’s terrible or saying ‘no, no, you can’t do that,’ it’s about having a sensible conversation.”
But while the industry works to attract continued investment in fossil fuel production, greenhouse gas pollution relentlessly continues to rise.
One week after Hart Energy’s ESG conference, carbon dioxide levels in the atmosphere reached a daily average of 421.21 parts per million — the highest levels ever seen in human history.
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