On Jan. 31 Corri Feige, commissioner of the Alaska Department of Natural Resources, talked to the House Resources Committee about the negative impact ESG policies by capital providers were having on companies seeking investment or financing for oil and gas projects in Alaska.
Environmental, social and governance, or ESG, criteria are a set of standards that investors and lenders have begun using to screen projects in an attempt to be socially conscious. They are largely driven by climate change activists and federal policy.
The criteria are generally not applied broadly to energy corporations, but rather to specific projects or small companies focused on one region, especially Alaska and/or the Arctic. In other words a big corporation producing comparably dirty oil in South America, Africa or, say Russia, which spans Eastern Europe and Northern Asia, would likely (pre-Ukraine conflict) have no problem qualifying for investment or big bank financing.
While Feige and Alaska Department of Revenue Commissioner Lucinda Mahoney have been meeting with financial institutions, capital providers and oil companies since COP26 - i.e. the fall 2021 United Nations Climate Change Conference - Feige told committee members that we all have to become champions for Alaska.
“We just literally have to champion Alaska and talk until we’re blue in the face. And that’s what I think it is going to take for the next how many years until policies perhaps moderate or change direction,” she said.
It is a matter of education, she said, to explain how Alaska does things much better and cleaner than any other fossil-producing state or region of the world.
Some improvementIn an update requested by Petroleum News, Feige said March 1 that an attitude change might already be occurring.
“I would say that ESG policy implementation by financial institutions and capital providers has consolidated a bit in the past couple of months,” she said. “I was at NAPE two weeks ago and was hearing more about capital discipline and cash flow management, good operators with good regulatory compliance track records, and projects that have solid financials.”
This, Feige said in an email, “is very much a return to more traditional criteria, though the ESG overlay is now focused on companies taking tangible steps to improve the emissions profile of their operations. Things like fugitive gas emission controls and less methane venting in the L48.”
“Of course, Alaska still ticks all the boxes across environmental, social and governance criteria - it’s in our DNA and the way we do resource development here. Those financial firms that are still resistive to ‘Arctic’ investing object to project level (think drilling exploration wells) and have activist shareholders or Board proxies they are trying to balance,” Feige said.
DOR Commissioner Mahoney, she said, has continued to engage with lending institutions and is back in New York this week for a conference and to do more outreach.”
Feige is headed to CERA Week in Houston March 7-11 to continue the effort. This year’s conference, the 40th annual, is dubbed “Pace of Change: Energy, Climate, and Innovation” and addresses the challenges and opportunities of reducing emissions while supplying the needs of a growing global economy: What will be the impacts on energy investment, strategy, geopolitics, supply chains and industry structure? What are the most promising technology pathways, policies, and partnership models?
CERA Week brings together global energy, finance, policy and technology leaders at a critical time of change and uncertainty. And Feige will be among them.
Two slides, now half a dayGoing back to her Jan. 31 presentation to the House Resources Committee, Feige said the impact of the new policy direction for financing and capital providers is “perhaps the area with the greatest implication for the oil and gas industry in Alaska. And we’re seeing it in real time; seeing it impact small companies, big companies, Cook Inlet, North Slope, you name it.”
She and Mahoney have spent a great deal of time since late October, talking with financial institutions, talking with capital providers, talking with companies, and learning about how banks are actually presenting these policies, which gets down to the granular level of saying they will not finance a well in the 1002 area of ANWR, or they will not provide capital for drilling a well in the Arctic, or they will not finance a hydrocarbon energy development in the Arctic.
“Two years ago, guaranteed, your … ESG reporting was maybe one or two slides in your quarterly report to the market. Now we see companies taking half days to present their ESG. So, it’s a rapidly evolving space but it’s specifically tied to the amount of money, capital they can get to underwrite their activities,” Feige said.
“I had the opportunity to ask some of the very large financial institutions who have very specific policies about the Arctic. I said first of all define for me the word Arctic. One individual actually said, ‘Well, you know, all of Alaska.’ And I said, ‘well actually no, not all of Alaska. There’s the Arctic Circle north.’”
And there is a “disconnect in understanding between where they wish to go from a standpoint of making their shareholders and their investors happy and also balancing that against the new political policy direction, which is to do away with hydrocarbons and to lean more heavily into a transition to renewable energies,” Feige told committee members.
“At this point they’re trying to figure all of this out. They’re trying to determine how they still support companies they have done business with and frankly made a lot of money off of in the years past. They don’t want to divest of those but they have a lot of pressure coming from their own boards and their own shareholders to do so,” she said.
Today “we’re seeing the very real implications of (new federal policies) with natural gas prices and power prices at home and certainly in Europe, have gone very, very high. Places in Germany they are back to burning peat because they can’t get natural gas or they can’t afford natural gas,” Feige said.
“So there is now becoming a dawning you can’t just flip a switch and transition. Energy transition is going to take time and it’s going to take technologies that don’t yet exist today.
“So the financial community is wrapping all of this into what they call their ESG policy. … They hear a lot from folks who want to drive their policies, but they weren’t armed with the information they needed to respond,” Feige said.
Alaska first to sit downFeige told committee members she found it interesting that when she and Mahoney first met with the financial institutions, they were the first state to do so.
They sat down and talked to the lenders about how business in Alaska was done, “and how our system works.”
As for what the commissioners told the financial institutions: “For Alaska, ESG has been in our DNA since Day 1. It is absolutely how we undertake our business. We have rigorous and comprehensive science based environmental and permitting programs that apply to all operators. It applies whether you’re in Cook Inlet, (drilling) a wild cat well in the Interior or whether you’re producing on the North Slope.
“Alaska’s operators are continually improving the technology and the operational capabilities so that they can drive costs down in the environment in which they work here, which is considerably more adverse than in the Lower 48. And through that all we have consistently seen a decrease in greenhouse gas emissions because the technology is getting better and we’re getting more efficient at the way we do our business,” Feige told them.
“And then Alaska’s anti-wasting laws actually legally prohibit venting of natural gas and wasting of oil. That’s very, very different from what it is in places like Texas and Oklahoma or Pennsylvania which allow, especially in shale operations, for the venting of natural gas because it’s too high of a cost to capture it and still produce the oil.
“On the social side, since the inception of the Permanent Fund (enacted 1976, first deposit 1977, first dividend paid 1982) we have taken oil royalty revenues and driven those back to Alaskans through a dividend that goes to everyone. And we have the royalty revenues driving state government, supporting education and health programs, community and infrastructure.”
Feige also shares the fact Alaska ranks in the lower 25% when it comes to carbon intensity for oil and gas operations.
And Alaska is lowest in carbon emissions of all fossil fuel producing states.
Feige said “these are all metrics that banks are now looking for in jurisdictions where companies work. They are looking for them in the projects that the companies undertake.”
“In Alaska we have the benefit of ANCSA (Alaska Native Claims Settlement Act) corporations that own their lands and own their own resources and they determine whether there is development there or not. It’s not someone telling them what they have to do.
“And we have with the governments within the state what we would consider what I call a social license to operate. And you’ll hear that among European and Australian companies. They talk about their social license to operate and that is the underpinning of the value system in the corporate culture that a jurisdiction attracts.
“And in Alaska you have to be able to perform at a certain level. You have to be able to achieve and maintain your permits and operating compliance.
“And we require public input; public notice and comment required by our Constitution at each stage of development so nothing happens behind closed doors like it can in other jurisdictions in the world where there just isn’t that public process.
“So from an ESG perspective Alaska is absolutely in the right place,” Feige told the committee, noting that all financial institutions were now looking to a body of metrics called the equator principles, which Alaska meets or exceeds.
“There are about 14 equator principles. It’s a series of metrics that talks about exactly what we’ve been talking about here: Do revenues stay in local communities? Do they help indigenous communities or remote communities? Do we have social programs that are supportive? Is there environmental compliance and is there a rigorous permitting system? And then what is the general caliber and governance practice of the companies that operate in those jurisdictions?
“And so from Alaska’s perspective we are the leaders just like we are in environmental management, stewardship and development of our resources.”
Feige told committee members that she and Mahoney have continued their engagement with lenders and investors, averaging at least one meeting a week “in follow up or continuation of a conversation with banks or lending institutions or capital providers.”