Oil & Gas News

ESG Components Now In Oil Deals


By: Midland Reporter-Telegram – There are many moving parts in putting together an oilfield deal. A new part added in recent years is the environmental performance of the assets being acquired.

Diamondback Energy’s recent acquisition of Firebird Energy and its pending purchase of Lario Permian’s assets came under the scrutiny of ESG Dynamics, which helps clients manage and assess their environmental performance.

ESG Dynamics noted that as the new owner of Firebird’s assets, Diamondback faces extra effort to bring those properties in line with its stated ESG targets and reduce Firebird’s high flaring intensity and emissions.

With Lario Permian, ESG Dynamics said the picture remains unclear due to limited data on Lario’s performance metrics.

“This is common among small and private companies, with fewer public disclosure requirements. Yet measurement and reporting underpin ESG progress. Consolidation may improve both transparency and environmental footprint through new operational strategies,” the company wrote in its report.

“At Diamondback, we believe our operating standards are the highest in the industry. Our goal when acquiring new assets is to operate them with the same efficiency and excellence as we do all our assets. We factor in the cost of bringing new assets up to our environmental standards when we make acquisitions. We always believe in doing our best,” Clint Williamson, manager, of corporate affairs at Diamondback, told the Reporter-Telegram by email in response to the report.

Grant Swartzwelder, co-founder, and partner in ESG Dynamics, told the Reporter-Telegram by email there are two sides to this coin.

From the perspective of larger companies divesting their low-producing assets, he said this is a typical and important part of portfolio management but the assets being sold are also typically lower-performing from an environmental standpoint.

“So, when these lower-end properties are sold, it gives the appearance that the seller is trying to move its environmental issues,” he wrote. “In today’s world, this impression needs to be considered in deciding on a transaction and how to operate it going forward. The buying company also needs to think through its messaging so that the public understands what is going on.”

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Conversely, when smaller companies are sold to larger – and usually public – companies, he noted, those smaller companies are more interested in proving out acreage and increasing production. Not being under the same environmental scrutiny as the larger companies, the smaller companies may not make environmental performance a top priority due to the extra costs and regulatory burdens.

“This results in the buyer needing to address many of the open items and improve operations (which can) result in increased costs and time, but also requires a message to the public so they understand why the buyer’s performance is potentially brought down by the new assets,” Swartzwelder said.

Acquiring companies need to have an action plan on how to improve their new assets, he advised. This has to be included in the ultimate economics of the purchase and will also require significant time to focus on improvements, he wrote.

One of the best ways to address this issue is the use of data to show performance and show how the new owner is making the property better from an environmental standpoint, he wrote. An example is disclosing how many inactive wells are now owned, how many will be plugged, and how flaring will be improved.

“It’s one thing to say you are supportive of a better environment but having data to reflect that makes it more believable,” Swartzwelder wrote.

Data is also key in helping large public companies show improvement, trends, and what remains to be done as they come under more scrutiny from various sources – regulators, capital providers, environmental advocacy groups, and more, he added.

Though there is so much public ESG-related data out there, many companies are not reporting accurately or consistently among the various regulatory entities, he wrote. While that may not have mattered previously, with more companies publishing sustainability reports and having to attest to their environmental performance in regulatory filings, it’s important they understand what those filings say and ensure their accuracy, he added.

“Having accurate data and consistent filings will take some work, but it will ultimately help the industry and its reputation,” he wrote.

Right now, the focus is clearly on the larger companies, Swartzwelder observed, “but that will flow down to the very small. The government is already pushing regulations down to smaller companies. The rollout of Quad Ob and Quad Oc is an example of how higher-level regulation is now reaching the smaller producer.”

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