During our recent research trip to the US, we met with seven oil and gas companies to look at shale operations, including majors such as Exxon and Chevron and smaller players such as Noble Energy and Talisman.The meetings confirmed the complexity of the field, and also that practices vary significantly across companies.
However, one thing stood out from almost all of these meetings: the lack of targets to guide the companies’ efforts and initiatives. Several companies had emission reduction initiatives in place; an example hereof is Noble Energy’s effort together with the Environmental Defence Fund and others for technological development to detect and close methane leaks. However, none of the companies had publicly communicated targets in place to reduce methane and GHG emission, neither long-term nor short-term.
What comes first?
This is somewhat a ‘chicken or egg’ dilemma: as a company you can set targets that will guide your efforts, or you can implement reduction initiatives that will lower your emissions and thus guide your targets. Companies tend to favour the latter for obvious reasons. However, for investors it is crucial that we see a clear target commitment to enable us to hold companies accountable, to compare them to their peers and to assess risk. With regulation on carbon getting tighter, we look for deliberate and sophisticated plans and targets from companies to guide their reduction efforts. Not only to clarify the risk profile of individual companies; it is crucial for the financial viability and sustainability of the industry to limit its methane leaks, as a leak of only 1-3% (see this blog) can flip shale gas from being a recommended “bridge fuel” to having a worse emission profile that coal.
Some companies reported to have internal targets, but communicated that due to frequent buying and selling assets activities, it would be difficult to implement a common reduction target for GHG and methane across a company’s combined portfolio. This could be solved by introducing what we also found to be lacking, namely play-by-play reporting.
Regions and plays such as Marcellus, Bakken and Eagle Ford are inherently different in numerous and significant ways. Investors need to see play-by-play reporting in order to compare a company’s efforts to:
a) peer efforts,
b) current regional regulation (companies proudly spoke about their efforts even though these were required by regulation. We need to know: are the companies simply complying to the rules, or are they going above and beyond?)
and c) how companies operate compared to the specific risks in the area, e.g. how do they work to reduce their water usage in water constrained areas?
We need to see companies report play-specific reduction targets and play-specific quantitative information on issues such as water and chemical usage. As of today, they do not. To distinguish the poorer operators from the better, it is crucial to see an increase and improvement of such reporting.
How are we following up?
Subsequent to our meetings we are providing companies with an investor expectation document, where we clearly outline the improvements we wish to see. Setting short- and long- term reduction targets for methane and GHG and reporting on progress are key. The same goes for play-by-play reporting. We further want to see the companies striving for zero use of open-pits, as well as increasing the use of greener fracking fluids. Going forward, we will follow up with the companies on their development related to our communicated expectations.
Separate from our trip, Nordea is also engaging over 50 oil and gas companies over their fracking practices, as part of an investor initiative through the PRI. Again, target setting is key, as is increased transparency around operations.
Lastly, we will encourage both the companies we met and others we are initiating contact with, to certify their shale operations according to the principles on environmental stewardship being developed by Center for Sustainable Shale Coalition, a coalition of four O&G companies, NGOs and others. These are 15 guiding principles for more sustainable shale operations, related primarily to air and climate, as well as surface and ground water. Companies can certify their operations towards these performance indicators, a clear indicator they are walking the talk and reducing environmental risk and limiting negative impact. It would also make it much easier for investors to identify the better players from the more risky players. To read more about the initiative, go here: www.sustainableshale.org
Much is still needed in terms of state (and federal) regulation, but as investors we will continue to push companies to strive for best practices in addressing their environmental and social impact, including new technologies – even if that means going beyond existing regulatory requirements.