Evaluation of ESG-Strategies of Oil and Gas Companies

One of the most critical factors in transforming the economy and society toward a low-carbon economy, equal opportunities, and long-term sustainable development is the alignment of energy companies’ activities with ESG principles. The ESG agenda is attracting increasing attention from investors, governments, central banks, and many of the leading global companies. As a result, studying ESG principles and implementing proprietary ESG strategies by oil and gas companies not only benefits the environment and society but is also essential for maintaining and enhancing competitiveness. This article examines the concept of ESG and its principles, analyzes the best international practices in implementing relevant strategies in the oil and gas sector (using Equinor, BP, EOG Resources, and leading Russian companies as examples). In conclusion, general recommendations for improving the ESG transformation of the oil and gas sector are provided.

Introduction

The term ESG is based on three key components [1]:

• “E” (Environmental) includes a responsible attitude toward the environment, increasing the “environmental friendliness” of an organization, and reducing its negative impact on nature.

• “S” (Social) implies the presence of social policy and responsibility: creating comfortable working conditions, opportunities for education and professional development, and ensuring the absence of discrimination.

• “G” (Governance) refers to high-quality corporate governance, transparent reporting, and compliance with all local and international regulatory documents.

The ESG principles were first institutionalized by the Secretary-General of the United Nations, Kofi Annan, in 2004. In his report, “Who Cares Wins,” he urged large companies to join the initiative and incorporate ESG principles into their development strategies, primarily to address impending global threats [2].

One of the main drivers of ESG standards development and the adoption of ESG principles is financial institutions and institutional investors. Many large banks and investment companies, including JP Morgan, Wells Fargo, and BlackRock, have integrated ESG criteria into the process of evaluating investment decisions and providing their services. According to experts, by 2025, ESG criteria will influence 50% of investment decisions made by professional investment funds, amounting to over $35 trillion USD [3].

The basis for comparing the ESG characteristics of oil and gas companies within this study is the Morgan Stanley Capital International (MSCI) ESG Rating, one of the leading ratings in the field. MSCI assesses the ESG risks a company faces and their potential impact on investment decisions by stakeholders, as well as the company’s management decisions.

Best International Practices in Implementing ESG Strategies

Statistical data provided by the MSCI rating agency regarding the ESG transformation of oil and gas companies indicate a relatively high level of development of relevant practices in the industry. Of the 22 companies analyzed in 2023, only 14% fell into the “laggard” category, while 28% were classified as “leaders” [4].

It is worth noting that many oil and gas companies set not only long-term goals for reducing their hydrocarbon footprints (by 2050–2060) but also medium-term objectives. For example, ExxonMobil aims to reduce greenhouse gas emissions by 15% from 2016 levels by 2025 [5].

According to MSCI, the greatest difficulties for oil and gas companies in decarbonization relate to greenhouse gas emissions. Specifically, the actual dynamics and plans for emissions reductions do not align with global goals to limit temperature increases to within 1.5°C. One exception is the Norwegian company Equinor, which strives to achieve a 100% reduction in greenhouse gas emissions by 2050, fully aligning with the global goal set within the framework of the Paris Agreement.

Measures Traditionally Implemented by Oil and Gas Companies for Reducing Greenhouse Gas Emissions Include (their implementation leave a great deal to be desired):

1. Improving energy efficiency in operations.

2. Introducing continuous monitoring systems for oil spills.

3. Transitioning maritime vessels to low-carbon fuels.

4. Implementing carbon capture and storage (CCS) technologies.

5. Diversifying asset portfolios by developing renewable energy sources.

Below, the key ESG principles of several oil and gas companies are reviewed.

Equinor

Equinor is actively developing renewable energy sources (RES). As of 2023, the installed renewable energy capacity of Equinor was approximately 0.7 GW, with another 16 GW under construction. Over 50% of Equinor’s capital expenditures are directed toward RES and technologies aimed at reducing the company’s carbon footprint. By 2030, the installed capacity will enable the company to produce 35–60 TWh, with about 60% of electricity generated from wind power [6].

In addition to RES, the company actively develops carbon footprint reduction technologies, including carbon dioxide capture and storage (CCS), as well as systems for the production and storage of blue and green hydrogen.

The Russian-Ukrainian conflict has influenced Equinor’s intentions to reduce oil and gas production (in 2021–2022, production decreased by 2% in line with decarbonization plans). However, with Europe’s near-complete rejection of Russian energy resources, the Norwegian company has become one of the main suppliers of hydrocarbons to the European market [7].

BP

In August 2020, BP embarked on a path to “transition from an international oil company focused on resource extraction to an integrated energy company focused on providing solutions for customers,” representing a fundamental transformation of its existing business model [8].

In its decarbonization efforts, BP focuses on developing alternative energy through several key areas [9]:

1. Wind Power: As of 2023, BP operates nine onshore wind farms with a total capacity of 1.7 GW. The capacity of offshore wind farms amounts to 4.4 GW [10],

2. Solar Energy: BP’s subsidiary, Lightsource BP, acquired in 2017, operates 16 solar farms with a total capacity of 8.4 GW as of 2023 [11],

3. Biofuels: BP is increasing investments in biofuel production projects, aiming to produce 100,000 barrels of biofuel per day by 2030 [12]. Notable initiatives include the BP Bunge Bioenergia project in Brazil, a joint venture producing bioenergy and ethanol from sugarcane [9]. Additionally, BP conducted successful tests of ship fuel blended with biofuel in partnership with Maersk Tankers, demonstrating that environmentally friendly biofuel can reduce CO₂ emissions in maritime transport [13].

4. Green and Blue Hydrogen: BP, together with the Abu Dhabi National Oil Company, is implementing the H2Teesside initiative, the UK’s largest blue hydrogen production project. By 2030, the project’s capacity is expected to reach 1 GW, accounting for 10% of the UK government’s target for 2030 (10 GW) [12].

EOG Resources

As part of its ESG strategy, the American company EOG Resources places significant emphasis on reducing costs and increasing the profitability of invested capital. In the context of transitioning to a low-carbon economy, it is expected that demand for oil will decrease, leading to a gradual decline in oil prices. Under such conditions, companies need to ensure an optimal level of costs to maintain profitability.

In this regard, EOG Resources has developed a new strict standard for acceptable investment returns called “The Premium Well Investment Standard”. According to this standard, only those well development investment projects with a post-tax return exceeding 30% over their lifecycle are implemented.

According to the company’s estimates, this method is effective and leads to improved financial performance. Over the five years of applying the standard, DPS (Dividends Per Share) increased fourfold, while ROCE (Return on Capital Employed) rose from 4% to 23% [14].

ESG Strategies of Russian Oil and Gas Companies

Despite sanctions, Russian oil and gas companies continue to play a key role in the global market. At the same time, according to MSCI data, from 2020 to 2023, there was a consistent decline in the ESG ratings of major Russian players. For instance, they were downgraded to the “laggard” category in relation to economic operators such as Lukoil, Rosneft, Novatek, and Gazprom.

An analysis of the latest available ESG strategies of leading Russian oil and gas companies revealed the following trends:

1. Non-financial reporting generally complies with international TCFD standards, as well as the guidelines developed by Moscow Exchange PJSC, titled “Issuer Guidance: How to Meet Best Practices of Sustainable Development.”

2. To ensure data comparability, most key indicators were presented in dynamics, which corresponds to the level of ESG practices of leading foreign companies. However, statistical data were often presented for only three years (2019–2021) instead of five years. The level of information disclosure also aligns with foreign practices and includes:

• Environmental indicators (pertaining to water usage, waste, associated petroleum gas, land resources, energy conservation, and energy efficiency),

• Corporate governance indicators (concerning the board of directors, executive management, and corporate documents),

• Social responsibility indicators (relating to personnel, industrial safety, and local communities).

3. Reports provided detailed coverage of the company’s procurement management system, including the following elements:

• Principles underlying the procurement system,

• The body responsible for managing procurement activities within the company,

• Utilization of an automated electronic procurement system,

• Justification of the company’s procurement ethics,

• Key indicators related to procurement (e.g., the economic impact of import substitution and the share of SMEs in the total number of contractors).

4. Companies actively implemented measures to reduce emissions, which included:

• Gas pumping using mobile compressor stations,

• The application of “pressure cutting” technology,

• Redirecting portions of gas from pipeline sections under repair to adjacent sections,

• Technological well research without releasing natural gas into the atmosphere,

• Reducing flaring of associated petroleum gas, among other initiatives.

Even amid turbulence in the global oil and gas market and the significant sanction pressure on the Russian economy, major Russian oil and gas companies declare their commitment to ESG principles. However, data confirming this commitment have become less frequently published in the public domain.

Recommendations for Oil and Gas Companies for More Effective ESG Transformation

Based on the analysis of ESG strategies of several international oil and gas companies, the following recommendations were developed to achieve a more progressive “focused” transformation:

• Expand the base of international standards that the company relies on when creating an ESG strategy. It is crucial to implement the Oil, Gas, and Coal Sector Standard by relevant companies.

• Reflect stakeholder opinions and feedback in public non-financial reports based on results shared and received through feedback channels.

• Ensure continuity of formal attributes (structure, content) in non-financial reporting, enabling stakeholders to trace the company’s chosen ESG policy directions and properly assess the fulfillment of its commitments over time.

• Provide higher-quality development of the greenhouse gas emissions management system.

• Strive to reduce the company’s carbon footprint by setting clear goals to lower greenhouse gas emissions and more actively implementing carbon capture and storage technologies. In this context, a promising direction appears to be the development of tertiary oil recovery methods, where the productivity of an oil well is increased through the injection of captured carbon dioxide into the reservoir.

• Implement a policy of accounting for and reducing greenhouse gas volumes in an expanded format and conduct regular independent assessments of the company’s carbon footprint. Introduce a continuous emissions monitoring system.

• Improve the system of cost optimization to enhance the profitability of projects, maintaining competitive advantages in future scenarios of declining demand and, consequently, reduced prices for fossil fuels.

• Implement initiatives to promote energy conservation and improve energy efficiency.

• Diversify the asset portfolio by developing renewable energy sources (e.g., through financing related projects, establishing proprietary renewable energy capacities, or acquiring specialized subsidiaries). Conduct research and projects in solar energy, wind power, biofuels, and green and blue hydrogen.

• Use cleaner fuels in the production process.

• When identifying material issues that define the direction of an ESG strategy, companies should create their own so-called materiality matrix. The experience of international rating agencies can serve as a foundation for this. For instance, S&P Global Ratings develops materiality matrices for companies in the coal industry, oil and gas sector, and electric power industry. An example of such a matrix is shown in Fig. 1.

Fig. 1. Materiality matrix for the oil and gas sector by S&P global ratings, 2022. Source: ESG materiality map for the oil and gas sector [15].

• Companies are also advised to develop cooperation in the ESG field by forming and deepening interactions within associations, unions, and other forms of non-commercial cooperation. Significant progress in this regard was marked by the creation of the National ESG Alliance in Russia in December 2021. Thanks to its “open door policy,” any company, regardless of its ESG strategy level, can join the partnership. The alliance aims to develop an extensive infrastructure for navigating the Russian and international ESG space, which will include the “Atlas of Key Players and Roadmap of Key Events,” “Standards, Norms, Regulations, Glossary,” “Library of Best Practices,” and more.

Conflict of Interest

Conflict of Interest: Authors declare that we do not have any conflict of interest.