Environment

Leadership & Governance

General Issue Category
(industry agnostic)

Disclosure Topics (industry specific) for:
Oil & Gas – Exploration & Production

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GHG Emissions

Greenhouse Gas Emissions

Exploration & Production (E&P) activities generate significant direct greenhouse gas (GHG) emissions from a variety of sources. Emissions can be combusted, including those arising from flaring or power generation equipment, as well as uncombusted, including those emissions arising from gas processing equipment, venting, flaring, and fugitive methane. Regulatory efforts to reduce GHG emissions in response to the risks posed by climate change may result in additional regulatory compliance costs and risks for E&P companies. With natural gas production from shale resources expanding, the management of the emission of methane, a highly potent GHG, from oil and gas E&P systems has emerged as a major operational, reputational, and regulatory risk for companies. Furthermore, the development of unconventional hydrocarbon resources may be more or less GHG-intensive than conventional oil and gas, with associated impacts to regulatory risk. Energy efficiency, use of less carbon-intensive fuels, or process improvements to reduce fugitive emissions, venting, and flaring, can provide benefits to E&P companies in the form of climate risk mitigation, lower costs, or increased revenues.

Air Quality

Air Quality

Air emissions from E&P operations other than greenhouse gas emissions include hazardous air pollutants, criteria air pollutants, and volatile organic compounds (VOCs), which can have significant, localized human health and environmental impacts. Of particular concern are sulfur dioxide, nitrogen dioxide, and VOC emissions. The financial impacts on companies from air emissions will vary depending on the specific locations of operations and the prevailing air emissions regulations. As E&P operations expand close to population centers, the impacts on human health are likely to be exacerbated if air emissions limits are breached. Active management of the issue—through technological and process improvements—could allow companies to limit the impact of regulations in an environment of increasing regulatory and public concerns about air quality. Companies could benefit from operational efficiencies that may lead to a lower cost structure over time.

Water & Wastewater Management

Water Management

Depending on the extraction technique, exploration and production operations may consume significant quantities of water, which may expose companies to the risk of reduced water availability, regulations limiting usage, or related cost increases, particularly in water-stressed regions. Contamination of local water resources can result from incidents involving produced water, flowback water, hydraulic fracturing fluids, and other well fluids. Historically, there has been concern regarding the impacts of hydraulic fracturing operations on the contamination of groundwater supplies. In the U.S., concerns about chemicals used in hydraulic fracturing fluids have led to increased disclosure by companies through a voluntary industry registry, FracFocus. There have also been related state regulations, as well as legislative proposals to repeal federal exemptions for hydraulic fracturing operations. Reducing water use and contamination through recycling, other water management strategies, and use of non-toxic fracturing fluids could create operational efficiency for companies and lower their operating costs. Such strategies could also minimize the impacts that regulations, water supply shortages, and community-related disruptions have on operations.

Ecological Impacts

Biodiversity Impacts

The exploration and production (E&P) industry’s activities can have significant impacts on biodiversity. Examples include habitat loss and alteration through land use for exploration, production, disposing of drilling and associated wastes, and decommissioning of onshore and offshore wells. Oil spills and leaks are a threat to species and habitats impacted by hydrocarbon contamination. Biodiversity impacts of E&P operations can affect the valuation of oil and gas reserves and create operational risks. The environmental characteristics of the land where reserves are located could increase extraction costs as a result of increasing awareness and protection of ecosystems, making such reserves uneconomical to extract. Companies could also face regulatory or reputational barriers to accessing reserves in ecologically sensitive areas. This may include new protection statuses afforded to areas where reserves are located. Areas such as the Arctic and certain shorelines with mangroves and swamps are not only extremely ecologically sensitive, but also entail more complex and expensive cleanup operations if hydrocarbon spills or leaks occur there. Negative future impacts on the value of reserves could be mitigated by taking into consideration the location of reserves in or near protected areas when making investment or capital expenditure decisions. Companies with a good track record of minimizing biodiversity impacts could gain a competitive advantage in accessing new reserves in or near protected areas. Ongoing E&P operations could be at risk in the absence of effective environmental management plans for different stages of the project lifecycle, due to regulatory penalties, litigation, community protests, and associated costs.

Human Rights & Community Relations

Security, Human Rights & Rights of Indigenous Peoples

Exploration and production (E&P) companies face additional community-related risks when operating in conflict zones; in areas with weak or absent governance institutions, rule of law, and legislation to protect human rights; or in areas with vulnerable communities such as indigenous peoples. Companies using private or government security forces to protect their workers and assets may knowingly or unknowingly contribute to human rights violations, including use of excessive force. Indigenous people are often the most vulnerable sections of the population, with limited capacity to defend their unique rights and interests. Companies perceived as contributing to human rights violations or failing to account for indigenous peoples’ rights may be affected due to protests, riots, or suspension of permits. They could face substantial costs related to compensation or settlement payments and write-downs in the value of their reserves in such areas. In the absence of country laws to address such cases, several international instruments have emerged to provide guidelines for companies, including obtaining the free, prior, and informed consent of indigenous peoples for decisions that affect them. With greater awareness, several countries are also beginning to implement specific laws protecting indigenous peoples’ rights, creating increasing regulatory risk for companies.

Community Relations

Exploration and production (E&P) activities take place over a number of years, and companies may be involved in multiple projects in a region that can have a wide range of community impacts. Community rights and interests may be affected by environmental and social impacts of E&P operations, such as competition for access to local energy or water resources, air and water emissions, and waste from operations. E&P companies frequently need support from local communities to be able to obtain permits and leases and conduct their activities without disruptions. Companies may experience adverse financial impacts if the community interferes, or lobbies its government to interfere, with the rights of an E&P company in relation to their ability to access, develop, and produce reserves. In addition to community concerns about the direct impacts of projects, the presence of E&P activities may result in associated socioeconomic impacts related to education, health, livelihoods, and food security for the community. E&P companies that are perceived as engaging in rent-seeking and exploiting a country or community’s resources without providing any socioeconomic benefits in return may be exposed to the risk of resource nationalism actions by host governments and communities. These could include imposition of ad hoc taxes and export restrictions. These risks may vary depending on the country, and could be higher in countries heavily reliant on oil and gas for their economic growth. Companies in the extractives industries can adopt various community engagement strategies in their global operations to manage risks and opportunities associated with community rights and interests, such as integrating community engagement into each phase of the project cycle. Companies are beginning to adopt a “shared value” approach to provide a key socioeconomic benefit to the community while allowing the company to profitably operate.

Employee Health & Safety

Workforce Health & Safety

Workers involved in exploration and production (E&P) activities face significant health and safety risks due to the harsh working environments and the hazards of handling oil and gas. In addition to acute impacts resulting from accidents, workers may develop chronic health conditions, including those caused by silica or dust inhalation, as well as mental health problems. A significant proportion of the workforce at oil and gas drilling sites consists of temporary workers and employees of Oil and Gas Services companies. Therefore, health impacts on, and the safety performance of, such workers also have impacts on E&P companies. Additional health and safety protocols may be needed to protect women and minorities, particularly when they operate in regions where they continue to face discrimination.

Business Model Resilience

Reserves Valuation & Capital Expenditures

Estimates suggest that exploration and production (E&P) companies may be unable to extract a significant proportion of their proved and probable oil and gas reserves if greenhouse gas (GHG) emissions are to be controlled to limit global temperature increases to two degrees Celsius as per the Paris Agreement. Companies with more carbon-intensive reserves and production and higher capital costs are likely to face greater risks. Regulatory limits on GHG emissions, together with improved competitiveness of alternative energy technologies, could lower or reduce the growth in global demand, and therefore reduce prices for oil and gas products. Extraction costs could increase with regulations that put a price on GHG emissions. These factors could affect the economic viability to extract oil and gas reserves. Regulatory actions that are more abrupt than anticipated, or those focusing on industries with high emissions, could impair asset values over a short period of time. Stewardship of capital resources and production decisions that take into account near- and long-term trends related to climate change mitigation actions can help prevent current asset impairment and maintain profitability and creditworthiness.

Business Ethics

Business Ethics & Transparency

Managing business ethics and maintaining an appropriate level of transparency in payments to governments or individuals are significant issues for the exploration and production (E&P) companies. This is due to the importance of government relations to companies’ ability to conduct business in this industry and to gain access to oil and gas reserves. The emergence of several anti-corruption, anti-bribery, and payments-transparency laws and initiatives globally create regulatory mechanisms to reduce certain risks. Violations of these could lead to significant one-time costs or higher ongoing compliance costs, whereas successful compliance with such regulations could provide risk mitigation opportunities and avoid adverse outcomes. Enforcement of these laws could lead to significant one-time costs or higher ongoing compliance costs and even affect a company’s social license to operate. Companies with significant reserves or operations in corruption-prone countries could face heightened risks. Companies are under pressure to ensure that their governance structures and business practices can address corruption and willful or unintentional participation in illegal or unethical payments or gifts to government officials or private persons.

Management of the Legal & Regulatory Environment

Management of the Legal & Regulatory Environment

The Oil & Gas – Exploration & Production industry is subject to numerous sustainability-related regulations and an often rapidly changing regulatory environment. Changes to the legal and regulatory environment may result in material impacts on shareholder value. Companies in the industry regularly participate in the regulatory and legislative process on a wide variety of environmental and societal issues, and may do so directly or through representation by an industry association. Such engagement can result from companies seeking to ensure industry views are represented in the development of regulations impacting the industry as well as to represent shareholder interests. At the same time, such engagement to influence environmental laws and regulations may adversely affect companies’ reputations with stakeholders and ultimately impact the company’s social license to operate. Companies that are able to balance these viewpoints may be better positioned to respond to medium- to long-term regulatory developments.

Critical Incident Risk Management

Critical Incident Risk Management

The exploration and production (E&P) industry faces significant hazards associated with exploration, development, and production activities. Releases of hydrocarbons or other hazardous substances as a result of accidents can also have significant consequences for a company’s workforce, as well as external social and environmental consequences. In addition to effective process safety management practices, companies frequently prioritize developing a culture of safety to reduce the probability that accidents and other health and safety incidents will occur. If accidents and other emergencies do occur, companies with a strong safety culture are often able to more effectively detect and respond to such incidents. A culture that engages and empowers employees and contractors to work with management to safeguard their own health, safety, and well-being and prevent accidents is likely to help companies reduce production downtime, mitigate costs, ensure workforce productivity, and maintain their license to operate.

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