Soon after Bayswater Exploration & Production installed Project Canary devices next to a few sites it was drilling for oil and gas, an alarm would go off at different times and at different locations. The alarms indicated there was a methane leak.
An alarm would stop but start up again, seemingly randomly. The old monitoring system, which would check air quality occasionally, never caught it.
“We were getting this repeated alarm and we couldn’t figure out what it was,” said Steve Struna, Bayswater’s president and CEO. “Then we finally pinned it down to (when) our water haulers were going out and visiting the site and hauling the water off. They weren’t properly connected to the vapor-recovery equipment.”
Bayswater, which shared its first annual sustainability report in November, is among thousands of companies adding environmental goals as a non-financial measure of the bottomline beyond pure profits. And ESG — short for environment, social and governance — is the label corporations are using to signify their effort to take on more social responsibility, improve corporate behavior or minimize their environmental footprint. Public companies with ESG goals get ranked or rated by organizations, like the S&P Global, that are building sustainability funds to attract investors.
Morningstar called 2021 a “landmark year” for sustainable fund assets, with the net flow of money moving in and out of U.S.-based ESG funds up 35% from the prior year and a record fund flow of $69.2 billion, which pales by comparison to Europe’s $472.5 billion or the global ESG flow of $650.8 billion last year.
“This extra step that we’ve taken and being a first mover is a benefit to us and it allows us to differentiate ourselves,” Struna said. “And maybe (it’ll) entice investors that would normally say, ‘I don’t want to invest in fossil fuels anymore but will under these circumstances because you’re putting air-emission monitoring and environmental performance at the top of the list.’”
By focusing on locations near a pipeline, Bayswater reduced 37,500 truck trips in Colorado and Texas in 2020. It installed instrument air pneumatic controllers to cut down on releasing methane, and that reduced methane emissions by the controllers by 50%.
But even as Bayswater reports the steps it has taken to reduce emissions, the company uses investor capital to buy underdeveloped assets and then drill for oil and natural gas. That’s not good enough for environmental advocates, who want oil and gas companies to stop it already.
There’s a sense that any company can slap on an ESG label for self-promotion. And there’s criticism that such labels enable greenwashing, especially by companies still involved in fossil fuels. In February, Morningstar removed ESG labels from more than 1,200 funds because of “ambiguous ESG language,” Bloomberg News reported.
“As long as oil and gas companies are expanding production of dangerous fossil fuels, their activities are directly in conflict with any stated commitment to ESG,” said Ben Cushing, campaign manager for the Sierra Club. “It’s long past time for investors to demand that companies align their businesses with environmental and social responsibility by stopping the expansion of fossil fuel development.”
There’s also concern that an ESG rating may not be all that it appears to be. An expose by Bloomberg analyzed S&P 500 public companies and found that almost 90% met criteria to qualify for ESG by sustainability rating provider MSCI. That included McDonald’s, which as the world’s largest beef purchaser “generated more greenhouse gas emissions in 2019 than Portugal or Hungary,” Bloomberg reported. MSCI upgraded McDonald’s rating last April because the ratings provider considered possible environmental harm to the company rather than the company’s harm to the planet.
The U.S. Securities and Exchange Commission has taken steps to address ESG by proposing new rules last month to standardize how public companies disclose their climate risks. As proposed, the rules would require companies to disclose the climate-related risks, how they’re being handled and whether the risks are likely to have a material impact. It would also require companies to disclose their direct and indirect greenhouse gas emissions.
Stephanie Gripne, founder and CEO of the Impact Finance Center in Denver, which teaches investors how to make a societal impact with their money, said the ESGs are currently doing a cha-cha dance — two steps forward, three steps back.
“In the long term, there can be movement,” Gripne said. “(But) it’s an imperfect report card that nobody’s required anybody to do.”
Civitas shares what’s behind its ESG scorecard
Here’s another perspective — that of Civitas Resources, a Denver-based energy company that formed last year with the merger of two energy companies, Extraction Oil & Gas Inc. and Bonanza Creek Energy.
Brian Cain, who was previously at Extraction Oil & Gas Inc, became Civitas’ chief sustainability officer. He realizes there’s a certain public sentiment when oil and gas goes green.
“When I talked to one of my industry peers about leading the sustainability group at Civitas, she said, ‘Are you going to grow a man bun?’” Cain recalled. “I said look, the thing that you need to understand is that whatever we do, whatever we produce, clean is better than dirty. And if we can all just use that as a starting point and jump off from there, if we can all make that process to produce whatever product it is we produce in whatever industry that much cleaner, then we’re capturing the heart of ESG.”
The starting point for Civitas, which touts itself as Colorado’s first carbon-neutral energy producer, is a scorecard to measure change. It used 2020 consolidated data for the companies that now make up Civitas. Some goals: Stop routine flaring and require new facilities to use electric or air pneumatic controllers and ambient air-monitoring technology. The company also plans to reduce its direct greenhouse gas emissions intensity by 2.5% a year, averaged over time.
The idea behind emission intensity is reducing greenhouse gases produced per barrel, cubic meter or other unit. But the intensity is a ratio. Critics say that intensity could decline but total emissions could still go up if a company increases oil production.
Civitas plans to release its new 2021 report in May.
“If you’re flaring natural gas while you’re drilling oil, as a matter of business, you’re doing it wrong,” Cain said. “Here in Colorado, that’s broadly understood and accepted. … But that’s what separates operators here in Colorado, from operators, for example, in Texas, or North Dakota or elsewhere.”
According to data compiled by Bloomberg, Civitas is also one of only 10 oil and gas companies in the U.S. that reports two out of three types of emissions. It reports the emissions produced by its direct business — like drilling, called Scope 1 — and its indirect emissions produced by others to power Civitas operations, like getting electricity from the grid, or Scope 2. It doesn’t report Scope 3, which are all the other emissions produced by vendors and customers.
“Our Scope 3 is also your Scope 1,” Cain explained. “If you’re idling your Escalade and it’s burning the products that we produce, that’s your Scope 1 emissions. … Our focus is on (our) Scope 1 and Scope 2 because those are the emissions we can control and make our product as clean as we possibly can knowing that it’s ultimately going to result in combustion.”
In Colorado, other oil and gas companies have various degrees of ESG reporting, though some seem to report nothing. PDC Energy reports its Scope 1 emissions and pledged to reduce its greenhouse gas intensity by 60% and methane intensity by 50% by 2025. Chevron USA, which ranks among Colorado’s largest oil producers, provides its own “portfolio carbon intensity” (PCI) metric that includes some Scope 3 emissions.
A report out this month by the environmental group Earthworks, however, contends that Chevron is overstating its emission reductions. Chevron’s intermediate goals do not provide enough information to accurately quantify what exactly it is promising. “All three of its intermediate goals are intensity based and therefore can’t be estimated without also knowing production levels,” the report said.
There are emissions standards, like the Greenhouse Gas Protocol, which sprung up in the late 1990s to help companies measure and set greenhouse gas emission reduction goals. But it’s largely voluntary, at least for corporations.
But that’s changing because of pressure from investors, said John McDougal, vice president of environmental products at Element Markets, an environmental commodities company that helps companies with environmental compliance and ESG goals.
“ESG has almost fundamentally moved that discussion from the sustainability desk to the CFO desk, the C suite, because of the downward pressure of investors and customers who are looking to decarbonize,” McDougal said. “That’s really what’s pushed groups to start making plans for mitigation.”
But for the emissions Civitas cannot eliminate — it is, afterall, still an oil company drilling in the Denver-Julesburg Basin — Civitas buys offsets and renewable energy credits from the Rocky subgrid region. Those, in turn, help other renewable-energy projects prosper, from solar and wind farms to projects to protect forests. (Bloomberg reported that Civitas had enough credits to cover 1 million tons of annual carbon emissions from its oilfield activities.)
That means Civitas gets to net zero by paying for it, which Cain acknowledges. But even so, moving to a cleaner operation faster helps Civitas’ bottom line because it reduces how many offsets Civitas must purchase to get to its net-zero pledge.
“We’re going to be further incentivized to go above and beyond because for each ton of emissions we don’t reduce, we’re going to pay the piper at the end of the year. And that’s really important. It changes the economics of your decision-making,” Cain said. “In West Texas, some operators may well say, ‘Well, $120 oil. I think I’m going to pull out this oil and flare this natural gas.’ But if I had to offset those emissions at the end of the year, the economics of that decision may not look as rosy.”
Lots of companies do this, which kind of peeves David Tong, global industry campaign manager for advocacy group Oil Change International and author of “Big Oil Reality Check.”
“Focusing only on Scope 1 and 2 emissions can lead to perverse outcomes, like companies outsourcing high emissions activities to reduce their … carbon pollution without changing what actually goes into the atmosphere,” Tong said. By not addressing Scope 3 emissions of their customers, it’s misleading to call oneself carbon neutral, he said.
But fossil fuels aren’t going away overnight. And McDougal said it’s still largely voluntary for companies to offset their carbon footprint.
“Civitas is definitely a pioneer within their sector,” said McDougal, whose company brokers credits and offsets between Civitas and vetted projects.
Cain didn’t say how much those offsets or renewable energy credits cost Civitas, but the idea is that next time he’s asked the question, it’ll be less.
“If we invest $6 million per year over the next three years (on such operations), we’re going to end up saving nearly $30 million versus doing nothing on a 10-year horizon,” Cain said. “We’re demonstrably incentivized to take on those emissions reduction projects, to tackle those retrofits faster and earlier and get them done more quickly, because the costs associated with offsetting those emissions will plummet once we reduce those operational emissions.”
Canary sniffs out gases
Back in 2014, under then-Gov. John Hickenlooper, Colorado became the first state to adopt regulations to reduce methane pollution from the state’s oil and gas industry. In 2019, the state passed Senate Bill 181, which had a very ESG-feel to it because it required the rule-making Colorado Oil and Gas Conservation Commission to prioritize protecting public safety, health, welfare and the environment.
In other words, local companies have reasons to watch their emissions other than just to attract ESG investors. The state, however, doesn’t track ESG statistics for oil and gas operators, according to a spokeswoman for the Colorado Oil & Gas Conservation Commission.
The intersection of environmentally minded investors and state regulations combined with oil and gas companies adding ESG goals has also provided more capital to companies involved in related services, like Project Canary, a 2-year-old Denver startup.
Project Canary doesn’t drill for oil and gas but monitors the methane emissions for customers that do. It uses technology and data to fine-tune monitoring of methane emissions more accurately than before. That’s how Bayswater was able to link the leaks to when its water-hauling vehicles were on site — a time when other monitoring wasn’t being done. It’s become a darling of the oil and gas industry, raising a $111 million venture investment this year.
“We have this unique circumstance in Colorado where we are a blue state, where we have oil and gas, and where our oil and gas happens to lie relatively near homes, structures, suburbs and schools,” said Project Canary CEO Chris Romer, a former state senator and a son of former Gov. Roy Romer.
“So, it’s not surprising that Colorado created the ecosystem where people were going to have to do things radically different,” he said. “And there were some early companies like Noble, now acquired by Chevron, which really leaned in and worked with then-governor and now Sen. Hickenlooper created the first continuous monitoring program and then, under Gov. Polis, the legislature codified that in a way that gave a rich ecosystem that then created Project Canary.”
At customer oil and gas production sites, Project Canary will install multiple sensors around the operation, say a drilling site. The device is a pole with a bunch of gadgets attached. There’s an ultrasonic anemometer to calculate wind speed and direction, pollutant sensors and a Summa canister to capture methane in parts-per-billion calculations. There’s a solar panel to keep it operating, plus a battery and cellular chip inside to send the data every second.
But it’s the continuous monitoring — a snapshot of methane in the air each second — that can help customers see spikes that may indicate leaks or areas where the air quality is suspect, said Will Foiles, the company’s chief operating officer.
“All other approaches really are about stationary monitoring or sampling approaches where you fly a plane over, a satellite passes over or a human goes out with a camera in a truck to look around the facility. And those are all great the first start,” Foiles said. “(But) we look all the time. You see a lot of these emission sources are very intermittent in nature, which is why it’s important to look frequently and we look every single second.”
The old way, or current way, uses thermographic cameras that can see methane. But to capture that, operators rely on either drones, satellites or people driving around trucks with the cameras, said Morgan Bazilian, director of the Payne Institute, which is housed at the Colorado School of Mines.
“And so you can imagine that while that is useful, these are huge geographic areas in some cases and so you miss things. And you only go to the same spot, say, once a month. So this continuous monitoring has a lot of advantages over that if you want to really get to it, but it’s relatively new,” said Bazilian, whose organization verifies and helps Project Canary data scientists analyze the massive amounts of data produced.
While no conclusions have yet been drawn by the Payne Institute, the data will ultimately help his organization and others understand methane emissions from oil and gas operations in other areas and countries that aren’t monitoring it, Bazilian said.
And Project Canary is popping up in more and more corporate earnings reports, though mostly as an ESG effort. Denver-based Antero Resources Corp. credited Project Canary in its latest quarterly report and said it’s now expanded ESG goals to tackle Scope 2 emissions.
“ESG reports used to be a document that would have a picture of Bambi next to a drilling rig. And then they talked about how much money they gave to the food bank,” Romer said. “The new ESG report is literally pad-level transparency on their methane intensity and how much water they’re using and were they responsible for their fracking fluid. There’s been a huge shift, because buyers of commodities and investors, thanks to people like Will who do this for a living.
“People have started to realize this information is highly predictive of who’s going to be successful in this new environment,” Romer said. “And so investors are really interested in this data. And companies are learning to use this data. And so the bottom line is (the company raised) $100 million because we think it’s going to take $100 million to solve the problem over several years.”
Mark Jaffe contributed to this report.