Oil and Gas ESG Risks Extend Beyond Carbon Emissions

With oil and gas set to remain major multidecade contributors to our energy mix, the industry’s range of environmental, social, and governance risks will remain pertinent for energy sector investors in the long term.

The oil and gas industry is inherently exposed to various ESG risks by virtue of the range of activities conducted along its value chain, which seek to locate and extract crude hydrocarbons from the natural environment and then transport and refine them for delivery to global energy markets.

Certainly, the risk posed by carbon emissions—particularly scope 3—to oil and gas stocks deserves to be the central focus of the ESG discussion. But other risks are also pertinent and warrant attention from investors. These include non-greenhouse gas emissions, community relations, and occupational safety and health.

Key Takeaways

• Undoubtedly, scope 3 carbon emissions represent the largest ESG risk to the oil and gas value chain. Still, oil and gas will remain important contributors to our long-term energy mix despite the need to decarbonize the global economy.
• Oil demand from passenger cars and road freight vehicles is set to fall dramatically over the coming decades. However, robust demand from difficult-to-decarbonize sectors, including shipping, aviation, and petrochemicals, will provide a partial offset. Consequently, we expect oil demand in 2050 to be just 11% lower than in 2019.
• Oil and gas pipeline spills and leaks yield a significant amount of negative media attention for the industry’s midstream. While minor leaks and spills occur with relative frequency, their financial impact on oil and gas transportation stocks is largely immaterial.
• By contrast, large oil and gas spills—where costs exceed $100 million—are incredibly rare, accounting for 0.1% of pipeline incidents over the last 20 years. Still, investors wishing to minimize their exposure to a one-off large spill can focus on the location and hydrocarbon mix of a midstream company’s asset portfolio.
• The industry contributes to poor air quality, with many of its processes emitting significant volumes of non-greenhouse gases. Consequently, the oil and gas value chain is susceptible to a future tightening of air quality standards. Midstream transportation, drilling, refining and marketing, and petrochemical stocks are the most exposed.
• Not-in-my-backyard considerations are a key risk for new oil and gas projects, given the risk that exploration, transportation, and other downstream activities potentially pose to ecosystems and human health, as well as to Indigenous communities. The corresponding potential for escalating costs from delays or cancellations places return profiles of new oil and gas projects at risk.
• Occupational health and safety is a further source of ESG risk, exposing oil and gas stocks to potential increased costs and reputational damage. The industry’s upstream is most exposed, with the oil and gas extraction workforce facing an annual fatality rate 3.5 times greater on average than the broader U.S. workforce.
• We see compelling investment opportunities in our oil and gas coverage despite the industry’s exposure to ESG risks. In particular, we see pockets of value in oil and gas midstream, integrated oil, and oilfield-services stocks, while exploration and production and oil refining stocks offer less compelling valuations at the current juncture.