ESG becoming integrated into oil and gas supply chains

Image: Marquee Energy Ltd.

Oil and gas operators want to work with suppliers that share their corporate values and commitment to ESG principles, according to the results of the Daily Oil Bulletin’s survey of executives and ESG professionals completed late in 2020.

Over 35 per cent of survey respondents said their organization often or always considers ESG performance when selecting suppliers or partners. Another 35 per cent said they sometimes integrate ESG performance into their procurement process, while a little below 30 per cent said ESG performance is seldom or never part of their procurement considerations.

“Operators are primarily focused on costs but ESG is a growing concern,” says Bemal Mehta, senior vice-president, Energy Intelligence, JWN Energy. “They are interested in working with suppliers who share the vision. Suppliers who have technologies in this area are well positioned and are already leveraging their position. For other suppliers, there is a need to align with their customers on these issues.” 

Bringing the supply chain on board is key to oil and gas operators meeting their ESG goals as their service and supply partners are in the field doing the physical work and interacting with local communities.

 “The oil and gas industry is kind of unique in its reliance on contractors to execute most work,” Mehta says. “While this structure makes financial sense, it can create challenges in managing non-financial environmental and social risks as operators have less control in how that work is completed.”

However, contractual relationships between operators and oilfield services have been changing as the industry has retrenched to manage lower and often volatile commodity prices. These ongoing discussions provide an opportunity to bring ESG issues to the table.

“With the difficult financial situation industry has faced the last five years there has been a lot of effort to shift risk up and down the supply chain. We’ve also seen efforts to better share risk and reward through collaborative contracting and different types of performance-based contracting,” Mehta adds. “Now ESG risks are being integrated into this ongoing process.”

"In the context of climate change and carbon credit generation in particular, there are traps for the unwary, as many of the goods and services provided by contractors can form the basis to claim carbon credit generation," says Thomas McInerney, Partner and Co-Head of Bennett Jones' Climate Change and Emissions Trading practice. "Accordingly, supply chains need to understand their company's broader climate change compliance posture and have that reflected in their contracting strategy to ensure that there is no ambiguity as between service provider and customer, as to who is entitled to any such claims."

Efforts to integrate Indigenous businesses into supply chains are also gaining steam, with almost 60 per cent of survey respondents saying they actively seek out and support Indigenous suppliers. Around half of this group go the extra mile in seeking out Indigenous business outside their operating areas to bid on contracts.

Around one-third of survey respondents said they only deal with Indigenous suppliers in their operating areas when they meet company expectations.

“What this tells us is more effort is needed to improve skills and build capacity in Indigenous communities,” says Mehta. “It’s reasonable for operators to expect Indigenous suppliers meet expectations when contracting out work.”

In an effort to create more opportunity for Indigenous companies many operators are breaking contracts into smaller packages more suitable to the scale of smaller businesses.  Another trend is for Indigenous companies to partner with larger, more experienced, service providers.

“This makes sense from a number of different perspectives,” says Mehta. “It helps manage financial risks for Indigenous businesses in their early stages of development. It enables them to take part in projects they may lack the scale to tackle on their own. But in listening to Indigenous business leaders, this is only a transitional solution. Ultimately, the goal is to be treated like any other service company in the procurement process.”

The Daily Oil Bulletin ESG Executive & Professional Survey was sponsored by Bennett Jones and completed from Oct 15 to Nov. 20, 2020. There were over 150 responses, with 35 per cent executives/board members; 30 per cent senior managers/managers; 25 per cent ESG professionals and specialists; and the remainder consultants and related occupations.

Fact Box: What industry said

  • We lack a cohesive industry vision, even among any single industry sub-segment. Industry alignment is needed.
  • They key issue is how the supply chain is paid. If companies can achieve and maintain healthy balance sheets they can do the important safety, environment, climate change, Indigenous and other community-building work. These are outcomes of a healthy industry.
  • There needs to be a commitment of industry to rapid transformation of our technologies. The technologies are there but there is a lot of risk aversion.
  • Partners are needed to excel in the energy transition.

Want to learn more about ESG?

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Environmental, social and governance (ESG) risks are coming to the forefront in the oil and gas industry as companies across the supply chain work to successfully navigate the changing energy landscape. In late 2020 the Daily Oil Bulletin, in partnership with law firm Bennett Jones, surveyed executives and ESG professionals to understand the progress being made in integrating ESG into business operations, and what is needed to push ESG forward. This five-part series outlines those survey results.

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