Rachel Carson’s Silent Spring, released in 1962, is considered the starting point of environmental awareness for the general public. That book was focused on overuse of pesticides and their effect on bird populations—hence the “silence” Carson saw coming to springtime.
Today that concern has spread greatly, to include fossil fuels, among other things. Investors in New York, California, and elsewhere are now inspecting every potential investee for their commitment to environmental, social, and governance issues—and the petroleum industry is a particular target.
ESG Bubbles to the Surface
Amy Stutzman
Amy Stutzman, a managing director the Complex Financial Reporting group for Opportune, LLC, says the ESG concept is not really new in oil and gas. “The concept of sustainability and ESG has been around for a long time,” she said. “Two of the standards that we use when we’re helping our clients report on these issues are the Sustainability Accounting Standards Board and the Global Reporting Initiative.” GRI was founded in 1997 and SASB (pronounced ‘Sazby’) in 2011.
While these standards are not new, Stutzman noted their increased importance, saying, “I think what’s progressed, and why we are hearing so much more about these now than we ever have before, is because it’s become such an investor issue. Today, it’s really being driven by investors—it’s a mandatory requirement. In order to get capital, you really have to be aware of and addressing these issues.”
Stutzman cites the completion of the Paris Agreement—or Paris Accord as it’s commonly known—on April 22 (Earth Day), 2016, as a watershed for the ESG movement. Then in May of 2020, the “BlackRock Letter” addressed to CEOs from Larry Fink, president of BlackRock Investment Solutions, laid out his recommendations for how corporations should deal with ESG. Fink and others “are saying, ‘Hey, if you want us to invest in you, here are our expectations.’”
Also in 2020, Kimmeridge Energy Investment Company issued a white paper entitled, “Preparing the E&P Sector for the Energy Transition: A New Business Model,” that has directly influenced the oil and gas sector. It specifically addresses ways to reduce emissions and sets dates for compliance.
Activist investors have bought stock in publicly-traded energy firms in order to vote for ESG-related policies. Many majors have shifted billions from oil and gas development to wind and solar projects in order to boost ESG ratings and to prepare for a perceived future where fossil fuels diminish in importance. In December 2020, Chevron’s CEO, Mike Wirth, told Bloomberg TV that they would spend $2 billion in 2021 on energy transition investments—ones that would not include wind and solar, where they feel others like ExxonMobil are already well ahead.
But how far down the size ladder do ESG requirements go? Do small firms with just a few wells need to be in on the changes?
“I think that it’s all sizes of companies that are getting involved,” Stutzman noted, “with this really being driven by the flow of capital and investor demands.” Majors such as ExxonMobil and Shell, along with larger independents, have been following ESG for a while. “They’re already publishing data and sustainability reports annually. We’re getting calls even from smaller producers, more of the kind we traditionally think of as mom-and-pops, because they’re being asked by their investors for this information.”
There are some things that smaller companies can do to create an ESG message, even if they can’t invest directly in wind or solar. Reducing emissions and flaring, recycling produced water, and transporting water by pipeline versus trucking—these are things, Stutzman said, that can be done by companies up and down the ladder.
Community involvement is another aspect of ESG. “Oil and gas companies—and I speak this from personal experience growing up in Oklahoma, a very oil-and-gas dependent state—the industry does a lot for the communities that they work in.”
In previous times community activities, whether they were dedicated to funding education, health care, or other services, were done behind the scenes. Stutzman believes these stories now need to be told, to highlight the positive impacts of oil and gas companies of all sizes, as part of their ESG reporting.
Spreading the Word
Furthering the discussion on small caps and ESG is an organization founded in February of 2020. The Energy ESG Council hopes to help oil and gas companies define and address ESG issues. The council’s Interim Director, Rachel Racz, said the founding idea was to help oil and gas firms overcome confusion about how to move into ESG issues.
EESG’s focus is on small to midsize companies because the majors are already spending large sums on acquiring renewable energy facilities, planning sustainability and governance issues, and promoting the fact that they’ve done this. “But,” said Racz, “the real need is for small, sub-$1 billion-companies” who are getting investor questions about ESG, to find some help.
A good starting place is in “what they’re already doing right. We say ESG is: big G, little S, little E. It all starts with governance. So let’s figure out how they’re doing governance, how they’re treating their employees well, and then we can go into the environmental ideas,” she said. Helping companies explain those successes to investors is the next step for the Council.
“Bottom line,” Racz continued, “any company can engage in ESG—your business most likely is already practicing good ESG. Our goal is to show you what you’re doing right and to lead you in the direction of continuous improvement and accountability.”
Racz observed what other leaders have also seen, that “marketing and PR are not a strength of this industry, and it really has to become that. We have to start screaming from the rooftops what we’re doing right. And we’re doing a lot really well.”
ESG questions have almost completely replaced inquiries about making a profit, to the point where most questions “have nothing to do with money.” Board member diversity and environmental issues are at the forefront.
Part of the challenge in reporting is that there is little standardization. In addition to the reporting platforms listed by Stutzman, Racz said there are approximately 650 total. “We’ve identified the top four that investors care the most about,” she said, indicating that these can be used as a baseline for standardization.
Racz’s interest in helping start the organization came through her work history, involving six years running NASDAQ’s oil and gas sector. Most recently she worked for a frac sand company before helping start the ESG Council. Her focus at NASDAQ was to help oil sector executive teams and boards prepare for IPOs and generally engage the investment community. “At that time, ESG was just starting in the United States,” she said. “It was regulated heavily in Europe, but back in the United States it was just something we were talking about. We were talking about it in investor meetings, but nobody was really engaging in it.”
In fact, it was more of an “eye roll” for longtime oil and gas executives then, she recalled. They were more focused on profits and taking care of employees at investor meetings.
At the frac sand company, Vista Proppants, she heard ESG questions from the receiving end and got a different perspective. The nature of the questions gave her pause. “What I found was that a lot of the questions that the investment community was asking had nothing to do with Vista as a company at all. It was just a very limited view that these investors had about the oil and gas world.”
By the end of 2019 Racz and some industry executives were discussing ways to take action. “What we said was that we need to start an organization that takes the bull by the horns in a way that gives us the driver’s seat.”
In March of 2020 they floated the idea on LinkedIn, asking for a virtual show of hands from readers who would be interested in an organization designed to help them with ESG issues.
Within one week there were 600 enthusiastic responses.
As of the end of 2020 the organization was finishing up some materials aimed at helping companies start their ESG journey. This will especially help startups.
“I get calls, probably, four times a week from someone who just got funding, and they’re like, ‘Hey, we have money, we haven’t started operating, but we’re told we need to have an ESG platform. What do we do?’”
One Company’s ESG Focus
A Ft. Worth service company startup believes it’s found the sweet spot, where “environmental” meets “profitable.” While the E in ESal doesn’t stand for environmental—it’s short for Engineered Salinity—the company’s cofounder and CEO, Salem Thyne, says his company is dedicated to both. “We are trying to break the stigma about the irresponsibility and wasteful practices in oil and gas through science, education, business transparency, and a forward-looking green sustainable investment profile,” he said by email.
ESal’s service involves the realization that wettability (whether the formation is preferably water wet or oil wet) is a major factor in production efficiency, and that it can be adjusted to boost oil production by up to 50 percent. Their selling point is the fact that, with proper testing and changes in salinity and other properties, much of the oil that’s currently left in the ground can be recovered.
Thyne continued, “We believe that the old way of doing things in the oil business is at an end. We must do more than talk about environmental stewardship and start to display it by adopting technologies that maximize the recovery from each and every well.”
ESal’s backstory is somewhat akin to that of Charles Goodyear’s discovery of how to make rubber a viable product. He accidentally discovered the process he would dub “vulcanization” when he dropped a mixture of rubber and sulfur on a hot stove in 1839. That happy accident kept rubber from being sticky, and led to its prolific use in tires and much more.
The ‘aha’ moment for ESal was less dramatic—and probably less acrid than scorching rubber and sulfur in the kitchen—but no less revelatory.
Salem Thyne’s father, Geoffrey Thyne, PhD, had spent several years working with the Enhanced Oil Recovery Institute in Laramie, Wyo. There he had
Salem Thyne
unintentionally proven “that low-salinity water flooding didn’t work. At least, not on the project that the institute was hired to prove it would,” the younger Thyne recalled.
While this was not the ideal outcome, Dr. Thyne realized that the knowledge of the truth should still be worth pursuing.
Shortly thereafter, father and son were on Christmas vacation at Winter Park, Colo. The year was 2012. On that trip the elder Thyne discovered the roots of what his discovery meant to oil production. They decided to found ESal in order to hone their understanding of what kind of wettability is best for boosting production, how to test for that and, finally, how to achieve it. Since most wells leave two-thirds of the existing oil behind, the Thynes saw wettability testing and adjusting as a way to get more of that stranded oil out without drilling new wells.
They see several green aspects to what they do. Wettability changes are achieved without the use of chemicals. And, said Salem Thyne, “By using only specific water, ESal can help operators produce more oil, reduce production water from the reservoir, eliminate disposal costs through reinjection, and lower per barrel production costs. This, in turn, reduces the existent unnecessary waste and energy consumption needed to produce oil. Less energy for more production equals efficiency.”
It’s also a connection to the future. By reducing production costs they believe the extra profits to producers can be invested in carbon-reducing technology. Said Thyne, “As a company, we have a charter requiring 20 percent of our profits to be re-invested into such activities. Many times, this leaves the barrels extracted from the ground with our technology being carbon neutral. This is just the beginning as we have an extensive plan for producing carbon-neutral oil and investing in renewable green energy projects for the future of the company, society, and planet.”
Rachel Racz suggested the industry shout its ESG accomplishments from the rooftops. But some of the shouting currently in the air around the industry may just be from certain ones kicking and screaming as they are dragged into new realities, and not just about ESG. Few times have seen the upheavals the came to a head in March of 2020. This decade will definitely be the epoch of the nimble, the creative, and the resilient.
Oil and gas has always been those things. It will be interesting to see what the industry looks like in 10 years.
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Paul Wiseman is a freelance writer in the oil and gas sector. He can be reached at fittoprint414@gmail.com.