By Geoffrey Cann
ESG and digital transformation pressures are hammering the fortunes of oil and gas, but digital can also help accelerate the ESG agenda. I call it Digital ESG. (part 1)
This is part one of a two part article, written initially as a speech specifically for a webinar hosted by Finboot (a European blockchain middleware company), on how digital innovations can drive the ESG agenda.
If you’re not familiar with my work and my passion, I’m an author, professional speaker and instructor on the topic of digital innovation in oil and gas. In 2019, I published my first book, Bits, Bytes, and Barrels: The Digital Transformation of Oil and Gas, following a 30 year career as a management consultant. You can find me by name or by looking for Digital Oil and Gas on line somewhere.
It’s my mission to help the oil and gas industry embrace digital innovation as a means to improve its environmental and economic performance, and to buy time for a successful energy transition.
The Key Question
If you are raising money in capital markets today, you will be asked two questions:
- Number one: What is your commitment to ESG?
- Number two: How are you dealing with technology-driven change?
These are separate questions, for which you need clear answers. But I suggest you prepare to answer a third question:
- How are you leveraging digital innovations to meet your ESG objectives? The sweet spot.
The Energy Industry
Let’s begin with the Industry dimension.
I focus on the energy industry because once when I was young and really impressionable, I took photos of donkey carts delivering coal door to door in China.
That clinched it for me. Talk about opportunity. Imagine moving a billion people off an addiction to fuel delivery by donkey. What could possibly go wrong?
I personally don’t take credit for it, but fossil fuels are now pretty instrumental to our world and way of life. China is not going back to donkey carts anytime soon.
For my sins, I’ve worked in pipelines, oil refineries, oil ports, LNG, oil sands, fracking, drilling, field services, regulators, trading, retailing, wholesaling, in Canada, the US, Australia, Korea, China, Hong Kong, and Japan.
In addition to energy, I’ve also worked in cement manufacturing, auto making, the military, the public sector, utilities, retail, transportation, logistics. At one point I was pretty sure that I had some kind of industrial attention deficit disorder.
The challenges in many of these sectors are frequently the same. And all industries are fielding the same two questions.
- What is your commitment to ESG?
- How are you dealing with technology-driven change?
But what exactly is ESG?
Many people wonder what ESG stands for. I thought it was some kind of three syllable drug, like Tylenol or Aspirin or Viagra. But recently I heard of hy-droxy-chloro-quine.
The E is for environmental, S is for social and G is for governance. The concept is that companies will take into account ESG dimensions in their decision making, so that they consider broader criteria than just a profit motive.
Environmental includes the energy consumed and the waste produced, and the effects on all living things like water, the air, the soil, land, plants, animals, fish, and oceans.
Impacts can be both cumulative and absolute, overall balance, the ability of natural systems to repair and rejuvenate, recover and renew are all factors.
Social considerations can include the relationships and reputation of your enterprise, and includes people, labour, communities, indigenous populations, urban and rural settings, the disadvantaged and the developing.
Governance is your system of practice, control and procedures through which you take decisions, comply with the law, and meet the needs of regulators, capital, youth and others.
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 profit, or hitting earnings targets, or satisfying regulators, and not on these broader, longer stride factors.
I now believe that digital innovations are one of the very few tools available to industry, including both energy producers and consumers, to lower costs and improve productivity, and meet ESG objectives. And I’m not alone.
The IEA hinted at this possibility in their 2017 study on the impacts of digital on the energy industry where they noted how digital can help lower carbon impacts. But ESG is more than just carbon abatement. Much more.
The next generation of talent really get this. Millennials stand at the threshold of their peak saving years and maintain a strong belief that the companies in which they invest should go beyond money-making to become part of the solution. In a recent global survey conducted by the deVere Group, 77 percent of millennial investors said that environmental, social and governance (ESG) issues are their top priority when assessing investment opportunities.
Millennials are far more likely to want to work for companies that make strong ESG commitments. Surveys in 2019 by the G&A Institute show that 40% of millennials would take a pay cut to work for a responsible employer, and 40% already selected their employer on this basis, compared to just 17% of baby boomers.
The millennial generation experienced 9/11 as children, the 2008 recession, slow starts to their careers, high housing and education costs, and are surrounded by technology.
And me? I grew up with the Sony Walkman, ghetto blasters, pong, the arrival of colour TV, and the yellow pages. I became the man in that saying “stick it to the man”. ESG is the response to me.
Getting Schooled on ESG
It’s hard to get ESG right, particularly in the energy sector, as the elements are devilishly intertwined.
I was schooled on this several years ago when I was invited to Vancouver to meet with five local indigenous tribes.
There was a proposal at the time, to build an expanded oil export terminal in Vancouver harbour, their traditional territory, and a subject over which I had special expertise.
Each tribal leader took to the podium for a few minutes to make their opening remarks. Unfailingly, they called out their reverence for Mother Earth, their reliance on natural fisheries for food, and their role as stewards of the land. They decried pollution, the loss of habitat for hunting, and the threat to salmon from an oil spill.
One leader stated, and I’m quoting, “under no circumstances will a pipeline ever be built in our sacred waters”. I leaned over to the lawyer beside me and whispered “why are we here”.
At the break, I learned why. Each tribal leader quietly pulled us away from the others and had an entirely different speech.
- Can young people from my tribe find jobs on this pipeline?
- Are there jobs in construction and operation?
- What would it take for us to be an owner in this project?
- How do we negotiate a stake in the project?
- What is the approval process for new pipelines?
- Do pipelines make money? How much money do they make?
They talked about the crisis of unemployment on tribal lands, the anguish of substance abuse, their desire to break away from the chains of poverty, and their reliance on gasoline for snow machines, chainsaws, fishing boats and light.
That’s why we were having the meeting. To help them reconcile the conflicts among their own people. To balance conflicting tribal ESG goals.
ESG and Capital Markets
Capital markets are now worried about activist investors and youthful money. They note the rise of ESG and are exerting very real pressure on many industries, including energy, chemical, and resources, to declare their goals and intentions, with respect to the environment, society and governance.
Without that clarity, construction projects in energy can’t get insurance, and production of new oil and gas can’t get funding. An article on Dec 5 in the Economist sets out how even mighty Alberta, whose energy industry is among the most highly regulated, the biggest Canadian investor in clean technology, and the undisputed export engine of the country, has been halted in its tracks by Wall Street money and environmental worries in the US.
One way to see how capital markets view energy companies is through market indices. While not perfect (indices capture more than just ESG measures), the indices provide an important gauge about market sensitivity. For example, the S&P TSX 1 year oil index is down 26%, while the S&P TSX clean tech and renewable index is up 80%.
The former governor of the Bank of England, Mark Carney, has been sounding the alarm for two years, that the fossil fuel sector is at risk of stranding as much as 50% of its underground resources. That 50% is some 500b boe, worth some $22T.
In response, businesses in industry now have to make serious and binding commitments related to ESG to change their behaviour, access capital, secure their balance sheets, lower their exposure to looming risks, polish their brands, and attract talent.
Digital Innovation in Energy
Which brings us to the third element, digital, and the question:
- How are you dealing with technology-driven change?
For the past 2 years, I have been writing, speaking and teaching the impacts of digital in oil and gas.
In my book in 2019, I wrote about 12 case studies of digital innovation throughout oil and gas that were the earliest examples of new business models, dramatic cost and productivity shifts, and the impacts on reserves.
Unsurprisingly, the book is silent on the impacts of ESG on oil and gas — in 2016, when I was writing it, I did not believe anyone in oil and gas would be swayed by factors other than the hard economics of this most global of industries. In 2015, few significant oil companies even recognized climate change.
But I did note how capital markets, in just 15 years, had fundamentally shifted their valuations to favour of data-rich, asset-light, fast iteration digital businesses. Digital companies now command trillion dollar valuations, the sector features dozens of unicorns, and the leaders are shockingly youthful (a real talent draw), although I’m pretty sure young people don’t work for Facebook because Zuckerberg is so cute.
The energy industry, still king from a revenue and cash generation standpoint, is being left behind.
In 2002 the largest companies in the world by market capitalization were led by Microsoft, then Exxon, followed by GE, Walmart and Pfizer. The largest companies by revenue were Walmart, Exxon, GE, BP and Ford.
By 2019 the largest companies by market cap are all digital — Microsoft, Apple, Amazon, Alphabet, Facebook, Tencent, Alibaba. The largest companies by revenue are Walmart, followed by 4 energy companies — Sinopec, Shell, CNPC, StateGrid.
And in case you think capital shifts are only a concern for energy companies, think again. Tesla’s stock is up 800% in 2020. Tesla is the muscular offspring of an ESG mother and a digital father. GM and Ford shares are up 50%. BMW, Volkswagen are flat. Daimler is up 20%
Energy and COVID
It’s now a meme to point out that COVID has had more transformative impact on industry than CEOs, Boards, CFOs, and that is accurate, although COVID has been a true accelerant on a fire that was already burning. After some real forest fires in Canada’s oil district back in 2016, Imperial Oil decided to move one of its control rooms from the local site down to the relative safety of Calgary. This was pretty heretical thinking. Control rooms have always and only been on site. The project slowly worked its way through approvals, reviews, and tests, for two years, until the pandemic, and then it was rapidly deployed in 3 weeks.
These changes, once implemented, are permanent. There’s no going back. And the uncertainties of the virus and vaccination efficacy means that more changes will come.
Remember, the energy industry is amongst the slowest of all sectors to embrace change. This is a tough message to hear, but frankly, the industry is just getting started on its use of digital tools. It is still very much early innings in the adoption of these tools.
By my estimate, 85% of all oil and gas plant and equipment, from well heads to gasoline stations, predate the internet era, let alone digital. There’s a long way to go.
Which brings us here. To the central question. To where ESG, energy and digital all meet. And to the thrust of this article:
- How does digital support your ESG agenda.
To be continued…
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.