27 March 2020
ESG implications for oil & gas water management
Water services providers have a role to play in reducing the environmental impact of oil & gas development.
Environmental, social and governance (ESG) metrics are gaining relevance among investors as climate change concerns deepen across the globe. The world’s largest asset management firm, BlackRock, told clients in January that sustainability would be central to its investment strategy moving forward because “climate risk is investment risk.” The move has prompted other investors, including private equity firms engaged in the energy industry, to elevate ESG’s role in investment decisions.
“There is money associated with sustainability. Investors see it as a big market,” Paola Perez Pena, a principal research analyst at IHS Markit, told Water in Oil.
The growing focus on sustainability will help shape the water midstream sector, with new investments likelier to go to players with clear plans to meet ESG targets. This is especially true of players operating in the Permian Basin, where freshwater is limited and high produced water volumes necessitate costly infrastructure development.
“ESG metrics are going to force more companies to transport water using pipelines,” Perez explained. “It will be good for business because if companies have the capital to invest in infrastructure, there will be a means of transporting water more reliably and at a cheaper cost.”
Companies can also leverage their water recycling services to attract investors and raise more capital. Perez said that this is exactly what WaterBridge Resources had in mind earlier this month when it became the first water midstream player to launch a formal 2020 ESG program. The initiative emphasizes both freshwater conservation through expanded recycling and carbon emissions reductions through the replacement of water-hauling trucks with permanent pipelines.
More companies are expected to follow in WaterBridge’s footsteps before the end of the year, as increasing transparency on water recycling and piping activities requires minimal effort and can position them as stronger assets for investors.
Oil & gas operators, which are also being pressured by investors, can improve their own sustainability ratings by partnering with verified ESG-focused services providers. As such, ESG performance is expected to play a progressively larger role in determining which water midstream companies can win new service contracts.
Despite the benefits that ESG initiatives can bring, some have been deterred by its scattered format. Two of the most widely used ratings companies – Bloomberg and Sustainalytics – employ distinct systems to rate companies, making it difficult for investors, CEOs and analysts to reliably compare different companies’ ESG performances. With no standard in place, it is possible for a company to receive different ratings depending on the metrics used.
Nevertheless, Perez says the growing relevance of ESG will lead to a resolution of discrepancies for key topics such as water use and carbon footprints.