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ESG Implications for Midstream Oil and Gas

Environmental issues take center stage.

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Investors are increasingly paying attention to environmental, social, and governance factors, and for midstream oil and gas companies, environmental concerns are paramount. Pipeline companies are “enablers” that encourage downstream consumption of fossil fuels, making them partially accountable for the greenhouse gas emissions that follow. Most midstream companies also emit waste gases directly, and the regular occurrence of pipeline spills creates a negative buzz around the industry, inviting further ESG scrutiny.

The direct financial burden associated with these issues is generally modest, as pipeline spill costs account for only a sliver of industry spending. If increased regulatory pressure eventually leads to a carbon tax, we would not expect major valuation changes, as companies would pass most of these costs to end consumers. However, the resulting reputational damage threatens relationships with stakeholders on pipeline projects, including local communities, indigenous populations, and government regulators. This often leads to lengthy project delays and increased construction costs, which can be meaningful.

Stephen Ellis does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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