HOUSTON—Both public and private oil and gas investors are ramping up their scrutiny of environmental, social and governance (ESG) issues, and in an election year, don’t expect the pressure to ease.

“There will be a whole new section in all the new loan agreements that will address compliance with ESG,” warned Jim Finley, CEO and owner of Finley Resources Inc., at the recent NAPE Global Business Conference. “There’ll be a huge amount of checklists you’ll have to do for your banking groups. All capital providers have this high on their agenda. You’d better be prepared internally with policies that come into compliance with what the industry expects.”

But capital is just one tile in an existential game of dominoes for the oil and gas industry. Next is …

Permitting

“Permitting is getting significantly more challenged,” said Brian Frederick, former president of DCP Midstream LP, at NAPE. “Whether it’s for right-of-way, whether it’s for plants, whether it’s for wells, I think that is a big, big concern and that will be a governor on activity if we don’t get that solved and create a set of rules that work.”

In a short-term, practical sense, the permitting delays are exacerbating the sense of uncertainty over project completion in both the upstream and midstream sectors, said Tom Lloyd, director of marketing and midstream for Marathon Oil Corp.

“If there’s going to be a permit change, we need to know that in advance so we can communicate with our midstream so we can probably build-out,” Lloyd said. “We don’t build out where we shouldn’t either because capacity would be a mismatch.” 

The end result of that mismatch creates another environmental headache…

Flaring

“We didn’t get the infrastructure buildout, [that’s] what causes flaring,” Frederick said. “I would foresee in the next handful of years that it will stop, that the regulations will totally change. We better get aligned between E&P and the midstream because you won’t be able to go up to North Dakota and light up the night sky every night. Five years from now, I don’t think that will exist. The whole world is changing.”

That change is driven by public perceptions of climate change, which is in many cases fueled by societal polarization and an election year…

Politics

Steven Russo, shareholder with Greenberg Traurig LLP, and a former chief legal officer of the New York State Department of Environmental Conservation, noted the harsh shift in rhetoric on climate change during recent Democratic presidential debates compared to debates during the 2016 campaign. Two leading candidates—Sen. Bernie Sanders (D-Vt.) and Sen. Elizabeth Warren (D-Mass.)—have pledged to ban hydraulic fracturing on federal lands.

“The advocates used to be OK with natural gas as a bridge fuel, and really just trying to take on coal and still get improvements in fossil fuel emissions from natural gas,” he said during a roundtable at the Marcellus-Utica Midstream conference (MUM) in December in Pittsburgh. “They have now decided: no fossil fuels. Fossil fuels need to go and they need to go quickly.”

It’s not an attitude confined to the presidential election, nor is it primarily a New York state issue pushed by Gov. Andrew Cuomo, despite the obstacles his administration has placed in front of pipeline projects.

“As a New York lawyer, I’m sorry for some of the nonsense that’s happened in my state,” Russo said. “I think it’s regrettable the attitude with regard to major oil and gas projects in the state, but I don’t think it’s going to be unique to New York. I think we have to look at New York and think, this is potentially the future for many states, especially where they’re controlled by the Democratic party. I think you’re seeing it in California, you’re seeing it in other states.”

Mark Mathis, founder of the Clear Energy Alliance, agreed.

“The rhetoric has gotten more extreme and ramped up,” he said at MUM. “Interestingly, what’s happening in New York is happening in other states. It’s happening in California, it’s happening in Texas. We’ve got politicians, regulators who have fully embraced what I call energy fantasy. These fantasies are manifesting themselves in regulations and everybody’s just going along with it.”

In short, a large political movement to arrest development of fossil fuels means, for the oil and gas industry, that…

They Don’t Like Us

A number of speakers at the conferences confessed that the public perception is something of a gut punch, given how safety and environmental protection have been drummed into them since their first day on the job. And it creates a recruiting challenge.

“Our ability to hire, retain, to create that pride and culture within your company, this is a very important thing, and it’s something we’ve been doing it all of our careers, we care about it, but we have done a terrible job of communicating what we do,” Finley said. “We have to understand who our stakeholders are and communicate what we’re doing.”

Frederick agreed, and admitted that the industry has pretty much lost the public relations battle for the last 20 years.

“People want to work for a company they’re proud of, that runs a good operation, that doesn’t harm the environment, that, if you have a spill you clean it up the right way,” he said. “They want to be proud of who they work for. How do you attract people to this industry? You’ve got to change the public perception of what we do. I’m incredibly proud of this industry, I’m incredibly proud of what we do.”

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