The ESG perspective: A shift in the ESG movement?

MARK PATTON, CONTRIBUTING EDITOR 

A shift in the ESG movement? 

I have discussed the push-and-pull we have been seeing in the ESG movement, especially as it applies to oil and gas. I believe we will continue to see this before things normalize. There is a possibility that we will see a continuation of this push-and-pull, as the politics of ESG change. Today, we are seeing the effects of a new President in the United States and, as expected, a reversal of U.S. participation in the Paris Climate Accords.  

We also have seen that President Trump has hit a pause button on many provisions of the Inflation Reduction Act (IRA), but details on which provisions are still not clear. But before we start announcing a complete ESG rollback, let’s take a look at what other newsworthy items have taken place. 

Financial community reaction. The Net Zero Asset Managers (NZAM) Initiative, a multi trillion-dollar group of investment managers, has halted their primary activities after BlackRock announced its exit from the group. A related coalition, called the Net Zero Banking Alliance (NZBA,) has seen every major U.S. bank exit, including Goldman Sachs first and then later followed by Morgan Stanley, Citi, BofA, JPMorgan and Wells Fargo. Additionally, five of the six largest Canadian Banks have also exited the NZBA. These announcements are rumored to have led to the stepping down of Barclay’s head of Sustainability. 

New York’s situation. And while this was all happening, the State of New York announced $1 billion to “decarbonize” New York. It appears that a lot of focus on this investment is in the area of nuclear power, but it includes other low-carbon and decarbonization efforts. Additionally, New York has delayed its “cap and invest” plan, which would require greenhouse gas emitters and fuel suppliers to pay for emission allowances projected to be $1 billion annually. I guess they figured out how devastating the impact would be on their economy.  

Additionally, Google has announced a large-scale purchase of carbon credits at a level of 100,000 tons, while Amazon announced it will invest $1 billion to decarbonize its deliveries in the EU. This is beginning to look like a rollback of ESG in the U.S., while we continue to see investment in the EU. Consistent with that, Ed Miliband, the UK’s Secretary of Energy, and Net Zero announced that decarbonization is too large to stop, and the EU efforts will continue. 

EU confusion. Not unlike the issues with ESG reporting that we have seen in the U.S., the EU is also faced with numerous ESG standards from a variety of groups that can make compliance seem daunting. As a result, we have seen a merging of these standards, yet there are still multiple standards and some lingering confusion. As a result, there is an upcoming “Omnibus” package directed at reducing the administrative and reporting burden by addressing some of the overlap and inconsistencies in the multiple ESG standards. This action has some multinational EU companies worried, with Nestle, Mars and Unilever warning against changes in ESG reporting that could weaken the ESG movement. What a contrast from what we are seeing in the U.S. 

ESG’s status in the U.S. Chris Wright, who will likely become the next Secretary of Energy, pushed back against the ESG reporting requirements by the SEC while he was at Liberty, and there have been challenges against the SEC for an overreach. It is expected that this will bring a significant reduction to ESG reporting requirements, if not an end to them entirely. Are we seeing an end to ESG in the U.S.? 

Well, not exactly. We already have seen significant investment in decarbonization by major oil companies in the U.S., notably ExxonMobil, Occidental and Chevron, which have individually invested billions. The 45Q Tax Credit for CO₂ sequestration and utilization has been around since 2008 but was increased under the IRA. Will that provision get halted? I don’t expect so; we are too far down that road. And we continue to see more investment in this area.  

You see, investing in decarbonization allows us to call oil and gas “sustainable,” but more importantly, there is a new industry evolving that will generate new income streams for these major oil companies. Essentially, we are seeing the 45Q as an investment in a new industry that will employ people and grow into a for-profit enterprise. We have already seen an announcement from Occidental saying that they expect revenues from low carbon to exceed their chemical division. 

Remember, the vast majority of carbon tax credits issued under 45Q have been for enhanced oil recovery (EOR) or waterflooding. And I don’t expect this to change. If anything, we will see growth in the use of CO₂ in EOR. In fact, there has been an effort to try to use the concept of CO₂ for EOR in unconventional wells; purely experimental at this point. But as I said, you should expect to see growth in the use of CO₂ for EOR this year and the coming years. 

But what about methane? The Methane Emission Reduction Plan (MERP) was a big part of the IRA. And with President Trump rolling back and pausing much of the IRA, what will become of methane regulations? Again, major oil has made some significant investment in methane over the last couple of years, including having people specifically responsible for managing methane emissions. We have seen the emergence of “Responsibly Sourced Gas” (RSG) that can be sold at a premium and the emergence of certifying companies to certify RSG, which requires reduction of methane emissions.  

The LNG angle to methane. More importantly, we have seen the reversal of Biden’s halt to LNG facilities and, as a result, we see many projects proceeding to increase U.S. capacity for LNG. This is important, as we need LNG to increase our exports of natural gas. And becoming a supplier of natural gas to the EU has geopolitical importance, allowing us to replace Russia as a major supplier of natural gas to the EU. This remains significant, especially as we expect their will be continued opposition to Russia throughout the EU, and having an option to Russian natural gas will be a benefit to the EU.  

The only problem is that the EU requires natural gas to meet EU standards, which include methane emission reduction. As a result, I expect that we will continue to support some form of the MERP to be consistent with EU standards, to allow the selling of natural gas to the EU and justify the increase in LNG capacity. These next few weeks will definitely be interesting, and I will do my best to stay on top of these topics.