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ESG comes into focus for some pipeline firms seeking new investors

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ESG comes into focus for some pipeline firms seeking new investors

CEOs of some mid-sized U.S. pipeline companies said attracting new money to the midstream sector requires a bigger emphasis on environmental, social and governance issues as investors increasingly scrutinize energy companies' employee diversity and sustainability practices.

Pipeline firms were already struggling to attract capital before the COVID-19 pandemic and low oil prices forced several management teams to slash spending and investor payouts. While stock prices have moderately recovered, the prospect of further coronavirus outbreaks and anticipated production declines next year overshadows any recent operational gains, particularly as investors wait for second-quarter earnings reports to reveal the oil price shock's impact. Any incremental shareholders midstream companies can cultivate in the immediate term are key.

"Just based on the number of one-on-ones we do around the country throughout the year we've seen a big increase in [environmental, social and governance] questions [and] ESG-focused investors," Crestwood Equity Partners LP Chairman, President and CEO Robert Phillips said during a July 7 virtual panel hosted by the Energy Infrastructure Council. "We probably lost the fracking debate years ago and there are certainly new regulatory and legislative challenges that are facing the industry today, but ESG is something that we can all embrace."

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Those challenges include recent legal setbacks for the Energy Transfer LP-led Dakota Access LLC crude oil pipeline, which began commercial service in 2017, and TC Energy Corp.'s Keystone XL oil sands pipeline under construction. Dominion Energy Inc. and Duke Energy Corp. meanwhile, canceled the Atlantic Coast pipeline project even after a favorable U.S. Supreme Court victory due to what Dominion Chairman, President and CEO Thomas Farrell II called an "increasingly litigious, uncertain and costly" permitting process.

Both Crestwood's Phillips and EnLink Midstream LLC Chairman and CEO Barry Davis also acknowledged during panel that there is room for improvement in the "S" component of ESG as the death of George Floyd and subsequent nationwide protests pressure Corporate America to pledge support for the Black community.

"I think we have always been extremely neutral on the topic of everybody matters and everybody is looked at the same, but I think we have to go beyond that ... so we're working extremely hard right now on on how we can do that, how we can become part of the solution," Davis said during the panel.

As systemic racism comes into sharp focus, Phillips added that diversity and inclusion have become "a permanent part of the way Crestwood's going to operate as a company going forward."

When it comes to employee diversity numbers, EnLink's 2019 sustainability report referenced only the 43% of positions at corporate offices in Dallas and Houston occupied by women. According to its most recent report, 16% of Crestwood's employees came from "minority populations," as did 14% of management in 2019, but there were no details about ethnic diversity.

There is no standardized method for reporting environmental disclosures, either. During the panel DCP Midstream LP Chairman, President and CEO Wouter van Kempen referenced the company's recently launched methane management initiative to curb emissions in Texas, New Mexico and Colorado, but those kinds of programs do not necessarily translate into statistics that can be applied across the midstream sector to weigh individual companies against each other.

"There's no common metric that we've all agreed on matters and is being tracked and calculated the same way," Jefferies LLC Managing Director Christopher Sighinolfi said in an interview. "Bespoke metrics can be manipulated."

Analysts at Sanford C. Bernstein & Co. agreed in a June report that "there is not enough consistent reporting at present to accurately rank companies" and noted that even categorizing CO2 emissions by scope can be tricky given how different kinds of pipelines are powered.

"Gas pipelines usually run on gas compressors, which are Scope 1 emissions, while crude and NGL pipelines run on electricity, which is Scope 2," the Bernstein analysts wrote. "Since midstream companies tend to favor reporting only Scope 1, this actually makes gas pipelines appear to be big emitters, and crude and [natural gas liquids] pipelines as negligible. Once you add in Scope 2, they get a little closer, but gas still 'looks' worse, as it simply seems to take more effort/emissions to move gas around than oil and liquids."