Oil & Gas Producers

Oil and gas producers face a number of sustainability challenges including employee health and safety issues, supply chain/contractor performance, bribery and corruption and impacts on local communities. Most significantly, as the producers of fossil fuels that contribute to climate change, the companies in this sector are at the center of national and international climate and energy policy debates. Increased energy demand from developing countries, growing resource nationalism and a shift towards operations in frontier or politically unstable regions of the world has led to companies in this sector searching for new sources of oil and gas. The has led to a boom in extraction of “unconventional” fuels from oil sands, shale and ultra deepwater locations, exposing oil and gas producers to both new and ongoing sustainability challenges.

Because the operations of companies in this sector pose significant environmental risks, they face significant stakeholder scrutiny. High profile incidents, such as the Deepwater Horizon spill in the Gulf of Mexico, have undermined public trust. Hydraulic fracturing operations, or “fracking,” have raised health and safety concerns in many communities. Though company awareness of stakeholder concerns has increased, sustainability performance and accountability remain an ongoing challenge. Yet alongside such challenges are substantial opportunities for sustainability leadership.

Thirty-two companies in the Oil & Gas Producer sector were analyzed, covering three sub-industries: coal and consumable fuel, oil and gas exploration and production, and integrated oil and gas.

The analysis that follows includes a summary of the sector’s progress within each of the four chapters of The Ceres Roadmap for Sustainability: Governance, Stakeholder Engagement, Disclosure and Performance. Within the Performance section—covering operations, supply chain, transportation and logistics, products and services and employees—those issues that are of greatest relevance to the sector have been highlighted.

GOVERNANCE FOR SUSTAINABILITY

Strong corporate governance structures, including board oversight of sustainability issues, are critical to risk mitigation and progress on sustainability goals. Oil and gas producers frequently operate in regions of the world that rank high on corruption indices, which makes strong governance practices essential. To meet the expectations set forth in The Ceres Roadmap, formal board and executive oversight of sustainability issues is needed. Forty-four percent (14 companies) of oil and gas producers have explicitly assigned board oversight for sustainability and 31 percent (10 companies) have executive management oversight in place. Linking executive compensation to sustainability performance is one way for companies to create accountability for sustainability performance. While one-third of the companies assessed in this sector link executive compensation to sustainability criteria, the metrics used are typically limited to safety and spills. Companies in this sector have an opportunity to expand upon these linkages to include a broader set of sustainability criteria, better recognizing the interconnectedness between social, environmental and financial business performance.

Most of the companies evaluated in this section have strong policies in place to ensure compliance on key environmental and social issues. All of the companies evaluated for this sector have basic compliance policies in place for issues such as bribery and corruption and whistleblowing. A notably high number, 87 percent of the companies assessed (28) have an environmental policy and 84 percent (27 companies) have an established environmental management system (EMS); however only nine percent (three companies) have some level of external certification of the EMS, such as ISO 14001.

Ninety-seven percent (31 companies) have a formal policy on the elimination of discrimination; however, only 19 percent (six companies) reference the relevant International Labor Organization (ILO) Conventions. In addition, despite its significant exposure to human rights violations, the majority of companies (75 percent) fail to disclose company-wide human rights policies. Hess Corporation is the only company to have joined the UN Global Compact, setting it apart from its peers in terms of its commitment to transparency and accountability on human rights.

STAKEHOLDER ENGAGEMENT

The operations of oil and gas producers can have serious impacts on local communities and the environment. The growth in production of unconventional sources of oil and gas heightens the need for comprehensive engagement of stakeholders, as the extractive techniques employed are less well understood and pose new types of risks for nearby communities. Stakeholder identification and engagement before, during and after a project is critical. Companies should also disclose the results of stakeholder dialogues, and in particular, communicate the results to those in communities surrounding their direct operations. With only 28 percent of companies (nine) disclosing participation in community engagement activities, oil and gas producers are missing a significant opportunity to gain valuable feedback and mitigate potential environmental, social and reputational risks.

DISCLOSURE

Timely and comprehensive sustainability reporting can contribute to a company’s credibility and helps stakeholders evaluate performance. Failure to disclose robust sustainability data can suggest a lack of systematic risk assessment and mitigation measures. Of the 32 companies tracked in this assessment, each company provides some level of disclosure on material sustainability risks in its annual 10-K filings. Yet, almost two-thirds (21) do not produce a separate sustainability report. Moreover, of the 23 companies asked to respond to the Carbon Disclosure Project (CDP) survey, only 57 percent (13 companies) did so. Overall, there is considerable room for improvement in the use of the Global Reporting Initiative (GRI) guidelines, external verification of reporting and response to the CDP.

PERFORMANCE

OPERATIONS

Oil and gas companies are major contributors to global greenhouse gas emissions (GHGs) and are responsible for the discharge of various pollutants into the air and water. These releases are associated with environmental threats, such as climate change, and pose potential hazards to communities, employees and the environment. Moreover, newer extraction processes such as hydraulic fracturing can result in even greater water use as well as require effective processes to manage disposal of wastewater. Concerns about these impacts have affected the public’s perception of the industry and has challenged its license to operate in certain locations. It has also led to new regulatory risks such as the EPA’s air quality rule for hydraulically fractured wells, which will go into effect in 2015.

Most companies assessed (23 of 32) have initiated some level of activity to reduce their GHG emissions. Yet only four of those companies – Chevron, Hess Corporation, Marathon Oil and Noble Energy – demonstrate leading practices through disclosure of programs, targets and timelines to reduce direct GHG emissions. More specifically, 41 percent (13 companies) are reporting on Scope 1 & 2 GHG emissions. Notably, in 2010, Hess achieved a 15 percent GHG intensity reduction against its baseline and an absolute GHG reduction of 1.8 million tons. The company also reached a flaring reduction target three years earlier than planned.

Water management strategies are becoming increasingly critical for oil and gas producers scaling up production of sources of unconventional, water-intensive fuels such as oil sands and shale gas. Most companies in this sector disclose some level of water-related risks for the business. However, this level of disclosure does not provide enough detail as to how the company is strategically managing water risks, including the impacts operations may have on local watersheds and community water resources. Apache, Hess Corporation and Occidental Petroleum stand out for having a robust water risk assessment framework and strong water-related risk disclosure. Anadarko is one of nine companies in the sector to disclose its worldwide water withdrawals, water recycled, and water intensity per barrel of oil produced.

SUPPLY CHAIN
Oil and gas producers are heavily reliant on large contractor workforces to conduct the majority of their high risk and high value activities. As such, oil and gas producers have a critical need for strong supply chain practices, including contractor management programs. ExxonMobil, Hess Corporation and Occidental Petroleum have addressed such exposure through their supply chain standards and monitoring programs. In particular, Hess suppliers are contractually required to comply with the company's environmental, health, safety and labor policies as well as the Foreign Corrupt Practices Act (FCPA). The same requirements apply to subcontractors of suppliers.

However, 84 percent of the companies in this sector are included in Tier 4 on supply chain expectations. Despite the importance of contractor monitoring programs, related disclosure is rare. Newfield Exploration is one company demonstrating leadership through its safety and environmental management program that includes related training for both new employees and contractors as well as a rig-auditing program to help upgrade rig fleets.

PRODUCTS & SERVICES
A low carbon future will require a significant global shift in fuel mix from high carbon sources, such as coal and oil, towards lower-carbon energy alternatives such as wind and solar power and advanced biofuels. When it comes to shifting their business model to supply low- or no-carbon energy, a number of companies including ConocoPhillips and Chevron have experimented with various business scenarios, including one that places a cost on carbon emissions. These scenarios should help prepare the company to understand the changes required to adjust to a lower carbon economy.

In addition, a few companies have made research and development commitments on lower carbon energy sources. ExxonMobil, for example, is partnering with academics and clean tech firms to advance next generation biofuels. Others, such as Chevron are involved in the advancement of solar photovoltaics and geothermal energy. Overall, however, the sector has not made a substantial commitment to integrate low carbon energy into its portfolio mix.

EMPLOYEES
The competition for labor among oil and gas producers is high and is expected to increase in the near future. Labor shortages are frequently cited as a risk to completing projects on time and on budget; and a robust sustainability culture, embedded company-wide, is likely to be a competitive advantage in the future. Currently, however, activity by the Oil & Gas Producer sector to engage and educate employees on sustainability initiatives is low. Many companies have internal newsletters or intranets that convey environmental and safety information, but strategic engagement—including training and education, employee feedback mechanisms, committees and working groups—is lacking. In fact, EOG Resources and Hess Corporation are the only companies to disclose sustainability-related training for employees.