The ESG perspective

I’ve talked about the push and pull we have seen in this never-ending saga to not only establish ESG goals into public companies but also into our everyday lives, as well. I’m not going to argue about the benefits or dangers of these policies, because there are both, but just the direction of the ESG movement, as it relates to the oil and gas industry. And as we continue to see, there are forces pushing and pulling on the ESG movement. 

Liberty Energy vs the SEC. Liberty Energy recently filed a lawsuit against the U.S. Securities and Exchange Commission (SEC) over its new climate disclosure rules. Part of the suit claimed that the SEC was overreaching. Last year, the Supreme Court ruled that the EPA was overreaching in its changed definition of “Waters of the United States” (WOTUS). This precedent resulted in many other suits against government agencies for overreaching, including a multi-state action against the EPA for its new power plant rules.  

Back to Liberty Energy and their suit. As a result of their suit and the previous precedent against the EPA, the SEC climate disclosure rules were stayed. This, of course, is an oversimplification of the suit, as it also includes cost impacts and how it will increase energy costs, but I think the precedent set by the Supreme Court is what caused the stay. 

In fact, a new survey conducted by Bloomberg Law found the vast majority of attorneys are predicting the rule will be reduced, if not completely overturned. Over half the respondents expect the climate disclosure rules to only remain partially intact, with almost 30% thinking it will be overturned completely. And according to the survey, it is areas of emissions and climate disclosure where respondents expect the most change, as well as governance issues.  

This isn’t hard to imagine, as the scope of the climate disclosure rules goes way beyond financial reporting and into areas of emissions, carbon footprint and general policy issues that aren’t necessarily part of the SEC’s jurisdiction. This pull-back from the SEC, or likely pull-back, doesn’t necessarily stop or slow the broader ESG program, as many seem to believe or our predicting. 

Decarbonization continues to grow. The decarbonization portion of the ESG movement is still going full steam ahead, with every super-major investing billions toward the success of decarbonization. You see, decarbonization is becoming a for-profit endeavor for a combination of reasons. Many public companies are making carbon zero pledges, which require someone to go out and capture and sequester the carbon to provide the offset. You are getting a tax credit to create the offset while still having the right to sell the offset.  

This tax credit program (45Q) has been around since 2008 and has been used widely by the oil and gas industry in its waterflooding or enhanced oil recovery (EOR) projects. This growth is just a natural extension of the existing efforts already being made by oil and gas companies. With the growth of natural gas markets, we will continue to see more movement towards decarbonization. 

Natural gas market. We have touched previously on how the responsibly sourced gas standard is creating an incentive for emission reduction, more specifically methane reduction. Combine this with the new Methane Emission Reduction Plan (MERP) which includes a carbon tax, and the incentive is even greater.  

In the EU, they recently enacted new regulations that encourage low-carbon energy, which includes carbon-offset natural gas and hydrogen. We are seeing an emerging market for carbon-offset natural gas that will further drive the market for decarbonization. The only wrench in the works is the current administration’s restrictions and/or opposition to LNG, which will be needed, if we expect to export natural gas. I don’t expect this policy to remain in place, but what happens in the next election will be important. Regardless, natural gas trading can become an important tool in foreign policy and for this reason, I don’t believe the LNG restrictions will stay in place. 

In light of this demand, we are seeing projections for increased gas processing capacity, primarily in the Delaware basin. The Delaware basin has, on average, a much higher gas-to-oil ratio that makes it the much gassier play. RBN Energy is projecting a 1,300 MMcfgd increase for Loving County, Texas, alone in 2025. But 2023 and 2024 were the beginning of this increasing trend in both the Midland and Delaware basins.  

Four new plants, with a total processing capacity of 995 MMcfgd, were added in the Delaware during 2023. Six gas processing plants totaling 1,380 MMcfgd are scheduled or are already operating in 2024. In the Midland basin, five plants with a total gas processing capacity of 1,325 MMcfd started up last year, and six plants with another 1,275 MMcfgd are targeted to begin operating this year. 

Recently announced acquisitions of Pinnacle Midland Parent LLC and Durango Permian LLC, by Phillips 66 and Kinetik, respectively, are designed to increase their gas processing capacities. 

Natural gas impact on ESG. The planned increases in natural gas processing capacity point to a prediction of growth in the natural gas markets, and I believe this is a result of expected overseas demand, which again requires the LNG restrictions to be removed.  

So, how does this play into the ESG program? Well, increasing natural gas processing will lead to an increase in methane monitoring and reduction because of the new carbon tax, but offsetting CO2 emissions from gas processing will also be a major boost to decarbonization efforts. And as I mentioned previously, the 45Q tax credit program is developing into a for-profit venture, while demand for carbon offset gas in the EU will provide additional incentives for decarbonization. 

We will continue to see this push and pull within the greater ESG movement. So, while SEC reporting will likely be revised significantly, reduced and possibly rescinded, we also see decarbonization and methane monitoring and reduction increasing. It will likely take some time and continued push-and-pull before we settle into some sort of equilibrium in the ESG movement, but this may also take a few years. The Liberty Energy action did not kill ESG, but it brought some transparency and hopefully some logic to an emotionally charged subject. Remember, change can be exciting but also a source of new opportunities. Embrace the change. 

About the Authors

Mark Patton

Hydrozonix

Mark Patton is president of Hydrozonix and has more than 30 years of experience developing water and waste treatment systems for the oil and gas industry. This includes design, permitting and operation of commercial and private treatment systems, both nationally and internationally. He has seven produced water patents and two patents pending. He earned his B.S. in chemical engineering from the University of Southern California (USC) in 1985.