ESG is an uber hot topic across industry and especially so in the energy world. Fortunately, digital innovations can help oil and gas companies meet their ESG commitments.
This week, I’m part of a panel discussion on the topic of ESG, and I bring my usual perspective of the role of digital innovation to the table. But what is ESG, and what is my perspective? This is a big topic to unpack, but hey, I’m up for that.
What exactly is ESG?
Many people wonder what ESG stands for. The letters are easy enough. E is for environmental, S is for sustainability and G is for governance. The concept is that companies will take into account ESG issues in their decision making, so that they consider the long term consequences of their choices.
I’m simplifying, but environmental considerations can include the impacts of enterprise on people, water resources, the air, the soil, land, plants, animals, fish, and oceans. Sustainability considerations can include cumulative and absolute impacts, overall balance, the ability of natural systems to repair and rejuvenate, recover and renew. Governance can include how decisions are taken, and whose views are considered (labour, indigenous people, communities, political systems, regulators, capital).
ESG thinking has come about because traditionally, the production and consumption decisions that countries, enterprises and individuals make typically place a priority on short term and narrow criteria, such as achieving the lowest price, or maximizing shareholder needs, or meeting capital market targets, or satisfying regulators, and not on satisfying these broader, longer stride societal factors.
Our Planet is Our Only Home
It might seem absurdly obvious, but our planet is our only home. We all have a stake in the planet, whether we are from rich countries, under developed nations, men, women, younger, older, black, white. Our planet is our collective accountability and responsibility, and not just a part of the planet, but all of it, from its plants and animals, its deserts and oceans, its air and water, its farms and factories. We do not have an alternative planet to move to, although I am appreciative for the billionaires keen to colonise Golgafrincham. It’s indeed a home, because it’s where we grow up, eat our meals, raise our kids, celebrate our successes and failures. A house is structure, but a home is an idea.
In this light, we should take decisions that help us keep the whole of the planet intact, safe and eternal. All things feature a steady level of degradation. My neighbour’s roof leaks and they need to replace it. But we can’t really replace the planet, so what we need to do instead is keep it from degrading to where it is no longer a home.
Ironically, our planet is structurally unsafe for us. There’s lots of visible danger on our planet, from wild storms, to searing heat, to destructive fires, to droughts, floods, earthquakes and tsunamis. We are routinely under threat, yet we have done exceptionally well to tame these dangers. We live much longer and healthier lives. But we are now pursued by some insidious new foes, from rising temperatures, to rising sea levels, to water shortages, to air pollution, which seem to be of our own making. We are threatening the intactness of our home and our own safety.
Until we find alternative planets to call home, we need the current one to last forever. Forever is a long time, for people who sometimes only think in terms of election cycles.
And so, our planet is our only home, and ESG is a means to helping us keep our home intact and safe so that it lasts us forever.
The ESG Connection
Absent any ESG influences, we have not been all that good or consistent in thinking about the planet as our only home, and taking decisions that help it stay intact, safe and eternal. In fact, there is ample evidence that suggests we have, for many decades, been rather shortsighted. To quote a comedian, if the planet was a car, we drive it like it’s stolen.
Fortunately, young people and some far-sighted governments have taken up the cause to provoke more attention to ESG in decision making. For example, the UK High Courts have rejected an application to expand Heathrow over climate concerns. Denmark has declared an end to exploiting its oil resources in the North Sea. The EU has declared its intent to be carbon neutral as a trading bloc by 2050. Even China has announced its intent to be carbon neutral as a country by 2060.
Capital markets have taken note of this tendency, and are now exerting very real pressure on the oil and gas industry to declare its goals and intentions regarding ESG. Without that clarity, construction projects can’t get insurance, and production can’t get funding. A recent article in the Economist sets out how even mighty Alberta, whose oil industry is among the most highly regulated, the biggest Canadian investor in clean technology, and the undisputed export engine of the country, has been brought to heel by Wall Street money.
The problem with oil and gas is that the resource is by definition not sustainable. Once extracted, the resource does not naturally replace itself, like a forest or a fishery. Upstream oil and gas is thus one of the few self-destructive business models. Oil and gas generally is a scale business, and carries a high physical footprint. It struggles with its environmental track record in light of its spills and emissions. Some of its legacy designs, such as gas wells that intentionally use methane under pressure to actuate the well mechanics, are fundamentally opposite ESG ideals.
In response, businesses in the industry now have to make serious and binding commitments related to ESG to improve their performance, access capital, polish their brands, and lower their exposure to looming risks.
It is the role of digital to help with them meet those commitments.
Oil and gas is now using some digital tools with enthusiasm. Thanks to the celebrity virus called COVID, oil and gas swiftly abandoned their downtown office towers and moved home. Paper processes were reconfigured in response. Digital projects were accelerated. But frankly we have not gone nearly far enough digitally in oil and gas.
I should point out that while some enterprises (AirBnB), will be asset-light, almost purely digital, not all businesses will have that option, and for now, not oil and gas. We still need fuel to grow food, energy to provide heat and light, power to manufacture clothing, and petroleum for transportation. Digital’s role is to help, not replace.
Digital and ESG
With oil and gas facing huge headwinds, and with little capital available, funding a transformation of the business to align fully with all possible ESG dimensions is impractical. ESG will be about making hard choices and trade offs. Beyond the bare minimum of compliance with existing regulations, here are three candidate areas for digital investments to improve ESG performance.
The majority of oil and gas infrastructure, from wells to gas stations, predate ESG concerns and the digital era. These assets now serve as a drag on the ability of companies to achieve much progress on their ESG commitments because they are so resistant to change. On the other hand, they can be data rich assets because of their connections to SCADA and other monitoring systems.
Where digital can help is by boosting analytic possibilities through machine learning and artificial intelligence. These tools can help improve the quality of legacy data so that it yields better analytic outcomes, as well as by conducting better analytics. Better analytics leads to better operations decisions that include ESG targets. In time brownfield assets can be managed more tightly and in conformance with ESG goals.
Brown field assets will continue to be carbon sources for the foreseeable future, which means the industry will need to track carefully its carbon position so that it can make appropriate positive offsets. Today, carbon measurements tend to be from engineering principles, whereby a given asset, designed to run at a certain level with a fuel of known characteristics, has an estimated carbon output.
However, assets leak, and valves decalibrate. Because of scale effects, minor variances in carbon measurement accuracy can add up to huge absolute differences from engineering estimates.
Digital tools can help by providing better monitoring of actual asset carbon impacts, by detecting vapours and recording measurement data with low latency in easy to access cloud databases. Cameras are now very good at directly measuring vapour emissions, and new satellite technologies are bringing satellite imagery boosted by artificial intelligence to improve carbon measurement.
SUPPLY CHAIN TRANSPARENCY
The supply chain for oil and gas is long and complex. Tracing products throughout the supply chain to provide the assurance that the products were sourced from ethical suppliers with meaningful ESG practices is fast becoming a requirement by global brands. This is already very pronounced in consumer goods, pharmaceuticals, and many food products, and has now come to chemicals.
Digital innovations provide better tracking and tracing of fluids, gases, and commodities throughout the supply chain, given the chain’s high level of fragmentation, multiple hand offs, discrete services, frequent changes in control, and high regulatory burden. Tools like blockchain are now very handy in helping to deliver the transparency that supply chain participants need to assert to their ESG metrics.
Our planet is our only home. ESG considerations help us make better long run choices about our enterprises, and digital tools can help energy companies meet and exceed their ESG commitments.
Check out my book, ‘Bits, Bytes, and Barrels: The Digital Transformation of Oil and Gas’, available on Amazon and other on-line bookshops.
Take Digital Oil and Gas, the one-day on-line digital oil and gas awareness course.