Less Money, Better Metrics 🧮

Word Count: 630; a 4.6 minute read

‍The Big Picture:  So far, the oil and gas industry has been mostly immune to the broader market slowdown. That said, both debt and equity providers are looking to see discipline and improvement across all performance measures - including carbon emissions - since commodities can experience swings and downturns are always around the corner. This means that operators who focus on capital, operational and carbon discipline will be rewarded by capital allocators and those operators that can communicate carbon performance and future carbon reductions will have a leg up in a tighter capital market.

“If you want access to capital availability, you need to have a plan in place and show [ESG] progress,”  - Rusty Hutson, CEO, Diversified Energy

Going Deeper: Even with high energy prices and public market exuberance, E&Ps have been hesitant to increase capex to boomtime levels and this trend is expected to continue into 2023, where capex growth is likely to be no more than 10% - 15% for most operators.

• Operators will be expected to automate, simplify, and do more with less since oil and gas employment sits well below all-time highs
• Rig counts are below pre-pandemic levels even in historic profitable times
• Competition for talent is fierce and expensive
• Those who embrace automation around collecting and analyzing reporting standards - like carbon - will come out ahead when markets shift again

‍Why it Matters: The industry has seen this shift before. In the late 1990’s / early 2000’s, a number of safety and process-related metrics were being captured and reported. Good safety is good business, and companies that had above average safety programs tended to perform better. Driving the energy industries push for ESG performance, specifically carbon, are demands from banks and financial institutions.

• More banks are linking executive pay to environmental performance
• Several financial institutions are limiting their exposure to oil & gas to move towards eliminating financed emissions.
• Organizations continue to be added as signatories to ESG-focused coalitions (e.g., Principles for Responsible Investment)

‍The Solution: Oil and gas operators need to start thinking of how to stay ahead of the pack, especially with a likely downturn coming in the energy markets. This means learning from financial and process safety practices to improve how E&Ps measure, manage, and communicate carbon performance.

Make sure your company is:

1. Setting material and measurable goals: Consider the environmental impacts of your company, leverage science-based targets, and align to a recognized industry standard. Talk to your investors to understand what frameworks they are using. While you might be tied into Environmental Partnership, your investors might be leaning on GRESB.
2. Measuring operations and emissions. Know your molecule and look at new technology and services that make measuring of actual emissions both feasible and transparent. Be able to make measured data dynamic and auditable - a PDF report for a methane detection company stashed away in a drawer is not useful.
3. Communicating performance to stakeholders. Stakeholders vastly vary in the world of ESG. Capital allocators want to know past performance along with future performance. Be able to provide carbon forecasts and risk, including the impact of taxes and fees associated with emissions from proposed regulations. And the financial world doesn’t like to wait for an annual report - quarterly earnings and monthly performance reviews are norms and this now applies to carbon.s.

Transparent with data and data management. Have the controls in place to know who, what, when and how regarding your data. Be able to communicate the methodology and scope you are using with your emission reporting. Leverage knowledgeable, experienced 3rd-party auditors who can combine GHG expertise with non-financial verification.