Biweekly, we highlight three things going on in the energy industry that we think you should know about. Efforts around environmental, social and governance issues are a major theme in this week’s roundup. Here’s the latest.
1. The rise of ESG and sustainable financing
Financial institutions are facing increasing pressure from investors to escalate ESG lending criteria, which are viewed as one of the most effective ways to drive advancements in carbon-intensive industries outside of regulation. This is not lost on the energy industry.
On April 19, Calgary-based Gibson Energy Inc. announced that it would be the first public energy company in North America to transition its existing revolving credit facility to a sustainability-linked revolving credit facility. The new $750 million revolving credit facility will see borrowing costs to the midstream company reduced or increased depending on whether ESG targets are met or missed over the next five years.
Targets include reducing greenhouse gas emissions intensity by 15% by 2025 and increasing the representation of women in the company’s workforce to 42% by 2025 (for context, that figure was 31% in 2019). For many businesses operating in carbon-intensive industries, tying ESG key performance indicators with sustainable financing is the best way to achieve favorable lending rates today.
The adoption of sustainability-linked revolving credit facilities, which is a newer product, has surged in 2021. In the extractive industry, mining company Newmont Corporation announced an industry-leading $3 billion sustainability-linked revolving credit facility on March 30. General Mills made a similar $2.7 billion announcement on April 15, and in February of this year, Anheuser-Busch InBev made the largest such announcement to date with a $10.1 billion sustainability-linked revolving credit facility.
Within the energy industry, the rising importance of ESG is well-recognized. Bloomberg reports that of the 23 companies in the S&P 500 Energy Index, the terms “ESG” and “sustainability” were cited almost 300 times in transcripts of quarterly earnings for the first quarter of 2021; they were only mentioned 36 times the year prior. But energy companies will need to do more than talk about sustainability; they will need to demonstrate commitments to meeting ESG targets going forward, or they may see lending options from financial institutions evaporate as global expectations change.
2. Greenhouse gas reduction goals
At the April 23 U.S.-hosted leaders’ summit on climate (attended by 40 world leaders), the Biden administration announced an aggressive nationally determined contribution of reducing U.S. net greenhouse gas pollution 50-52% from 2005 levels by 2030. These contributions, known as NDCs, are a key part of the framework of the Paris Agreement.
To put Biden’s announcement in perspective, the first NDC commitment was made in 2015 under President Obama to reduce U.S. emissions 26-28% below 2005 levels by 2025. To further illustrate how ambitious Biden’s new target is, Bloomberg estimates that had the U.S. extended the level of ambition of its initial goal to 2030 from 2025, the new NDC target would have been 38%, still well below the new 50% goal.
This goal represents the administration’s commitment to making the United States a leader in the fight against climate change and its pledge to achieving the goals of the Paris Agreement. However, targets are useless without an action plan to achieve them. Additionally, many wonder if the target is achievable. To date, decarbonization efforts have been heavily focused on the power sector (such as the shift from coal to natural gas). In order to meet the 50% target, massive changes will need to happen in nonpower industries which have been historically slow to change.
As a start, the administration has outlined its intent to transform other industries including transportation and agriculture. Additionally, Biden’s recently released infrastructure plan proposal touches on many of the measures that will be necessary to meet the NDC target. However, Congress has yet to vote on the plan, which could change considerably in the process of negotiations. With or without the currently proposed infrastructure plan, the aggressive target suggests that the administration will have to implement rigorous policies across industries in order to be successful.
An important next step for countries determining their emissions targets will be for world leaders to meet at the United Nations Climate Change Conference (COP26) this November in Glasgow, Scotland. This will be the first formal opportunity for leaders to discuss their goals following a 2020 deadline for involved parties to submit their NDCs for the next decade, according to Bloomberg. This will be a pivotal meeting in the evolution of the path to net zero.
3. ExxonMobil proposes $100 billion carbon storage project
Last week, ExxonMobil announced a proposed project to store CO2 in reservoirs beneath the sea floor in the Gulf of Mexico. The plan calls for $100 billion or more of investment from peers/competitors and government agencies, in addition to government incentives and a reliable/predictable regulatory framework to create a carbon capture and storage zone to capture CO2 from refineries and chemical plants located along the Houston Ship Channel. The project could capture 50 million metric tons of CO2 annually and transport it via pipeline to storage reservoirs deep beneath the ocean floor by 2030. Within 10 years, capture and storage could rise to 100 million metric tons annually.
According to the company, “ExxonMobil has more than 30 years of experience in CCS technology and was the first company to capture more than 120 million tonnes of CO2, which is equivalent to the emissions of more than 25 million cars for one year. The company has an equity share in about one-fifth of global CO2 capture capacity and has captured approximately 40 percent of all the captured anthropogenic CO2 in the world.”
In February, the company announced the creation of ExxonMobil Low Carbon Solutions, a new business unit created “to commercialize and deploy emission-reduction technologies. It will initially focus on carbon capture and storage, one of the critical technologies required to achieve net zero emissions and the climate goals outlined in the Paris Agreement.”
These sizeable efforts from one of the largest energy companies signals the growing visibility and importance of ESG-related efforts, and the pressure energy companies face from investors and the public at large. Historically, ExxonMobil has directed investment in green(er) technologies that were more likely to generate attractive returns on investment, but recently expanded 45Q tax credits, carbon tax and/or other proposals from the Biden administration, and significant interest from venture and private equity funds make the technology more appealing and could dramatically boost the sector’s profitability.
