For a transition to a more successful zero state environmental impact business model, a number of key elements will need to be considered:
- Decarbonization: (the process of removing carbon from the routine activities or a company, sector or the entire society) is critical and will entail several alternatives including renewable energy production, storage and distribution, gas as a transition to a low carbon economy, hydrogen gas, CO2 sequestration, and/or CO2 offsetting by reforestation.
- Water Management: Water scarcity and water quality are increasingly important and more attention will need to be focused on water consumption, water discharges and produced water as reservoirs are depleted. Net Zero Discharges and Net Zero Water Balance will be drivers.
- Transparency and Traceability: Increased scrutiny by stakeholders and financial institutions will determine whether a company has the Social License to Operate and capital to run the business. Companies will need high levels of transparency and traceability as without it, stakeholders and investors will not support their business – the risk of social opposition and loss of reputation becomes too high.
- Environmentally Sound Management Practices: There is a lot of material on this topic and whilst it is not the subject of this article, it is worth mentioning the following:
Facilities designed to avoid or minimize environmental impact on a routine basis;
Facilities designed to avoid system failures on non-routine situations;
Facilities operated following sustainability principles;
Appropriate maintenance of facilities to ensure risks are minimized;
Continuous training of personnel to operate the facilities in a sound manner;
Reduced human error by motivating and empowering personnel that has a clear set of KPIs aligned with a sustainable strategy.
- Decommissioning: This has become increasingly important; areas to consider include legacy and liability management, contaminated land clean-up, oil spill response and the management of expectations for repurposing redundant facilities.
Looking ahead it is clear that investors, shareholders and stakeholders are placing ever-increasing importance on environmental considerations across the whole commercial spectrum. Oil and Gas companies are no exception. Investors scrutinize environmental and social impacts to assess whether investments are in accordance with certain principles that are continually moving closer to Net Zero Environmental Impact.
According to Coller Capital survey (2017) , 20% of Limited Partners in North America refused to participate in Private Equity projects due to Environmental and Social Governance (ESG) issues. Those figures are 34% and 36% for Europe and Asia-Pacific respectively. Another study conducted between the Harvard Business School and the Oxford University through a survey among more than 400 investment professionals, highlights that for 82% of the respondents they consider ESG factors material to investment performance . This trend is growing globally.
What are the cost implications for Oil and Gas companies for moving towards Zero Impact on the environment? There is no doubt that significant investment may be required in some areas – some Oil and Gas companies are already investing in renewable energy production or impact offsetting, or changing their process to accommodate for the expected demand due to the transition for example.
However other elements may require a refocus of effort such as an increased use of alternative technologies and improved communication channels rather than increased funding. Ultimately the issue is not whether the Oil and Gas sector can afford to make significant changes to their current business model but rather, whether the sector will be able to retain crucial investment to support their commercial operations without a fundamental shift to a new business paradigm.
What would be the return of those investments? It is impossible to quantify exactly as there is a variety of situations and potential solutions. However, it can be said that those investments will have enough return as they will be playing in an evolving market where products or services that did not have a market 10 years ago will have one in the coming years.
This is not the end of the Oil and Gas companies but the end of the Oil and Gas companies as they have been known for decades. By changing our mindset and looking at their existing assets (infrastructure, knowledge, people, customers), it is possible to find creative solutions to challenges in this rapidly changing world. An example could be decommissioning – if businesses from completely different sectors collaborate and work together to find other uses for aging infrastructure, this could achieve a successful result for all involved.
In conclusion, Zero Environmental Impact is achievable in the medium term for Oil and Gas companies provided they transform their business model through some investments in existing key areas and the creation of new services or products by using their existing assets in collaboration with players from different sectors.
Advisian is providing support to companies in the transition with a variety of specific solutions that can be tailored to the needs of each customer. Fing more insights into how the oil and gas industry is adopting sustainable development goals here and here.
1. Coller Capital survey (2017), The Guardian
a. Poll included 110 limited partners, 40% from North America, 40% from Europe and 20% from Asia-Pacific
b. Total AUM: 26% - +$50 Bn, 16% - $20 Bn to $50 Bn, 10% $10 Bn to $20 Bn, 9% $5Bn to $10 Bn, 26% $1 Bn to $5Bn, 7% 500M to $1 Bn and 6% <$500M
2. Amel-Zadeh, Amir, and George Serafeim. "Why and How Investors Use ESG Information: Evidence from a Global Survey." Financial Analysts Journal (forthcoming).