“Sustainability”-focused investors contribute to additional decades of methane emissions
Imagine you’re a parent. Your teenager's bedroom is a disaster. There are flies buzzing around from some long-forgotten snack left to fester in a corner. You haven’t seen your favorite sweatshirt in weeks, and suspect it’s at the bottom of one of the many piles littering the floor. You tell your kid it’s time to clean up the mess. Your teenager responds brightly: “Great news! My friend Marty has agreed to clean my room for me. It’s all taken care of!” You appreciate the entrepreneurial initiative, and are curious to see where this goes. But when you call up Marty to see when the cleaning will take place, Marty says “Business is booming! I’ve agreed to clean up all the kids’ bedrooms in the neighborhood. But there’s a bit of a backlog. I’ve got your kids’ room scheduled for . . . seven months from now.” You wouldn’t see this as a viable solution to your messy room problem. And you certainly wouldn’t celebrate Marty as some sort of hero of teenage-bedroom-cleanliness.
A similar dynamic is playing out in the world of oil and gas wells. But rather than rotting apple cores and stinky socks, the spent wells are emitting significant quantities of potent greenhouse gasses and volatile organic compounds harmful to the health of nearby communities. The “Marty” in this scenario is a company called Diversified Energy. Diversified is now the largest owner of oil and gas wells in the United States, mostly in Appalachia. Diversified doesn’t drill new wells. Instead, Diversified’s business model is to acquire old wells from the companies who drilled them and who profited from the initial well production. Once the wells slow down to a trickle, Diversified steps in. So how does Diversified make money off of low-production wells? It does sell some of the gas it collects from its wells. But overwhelmingly, the profit Diversified shows on paper is merely the result of pushing back the deadlines for well cleanup and capping, and using the accounting trick of “discounting” to book those avoided costs as income. In order to keep the gambit going, Diversified must acquire more and more wells, and then push out those cleanup dates, as well.
Rather than view this rickety business model with skepticism, the investment community has celebrated it. There are two explanations for this counterintuitive response: regulators who are complicit in Diversified’s poor behavior, and investors who are eager to engage in—or just blind to—greenwashing.
First, Diversified has proven effective at using the enormous leverage it has over regulators to compel them to formally extend its well-capping deadlines. Diversified has not been quiet about its inability to meet the deadlines imposed by state regulations for oil and gas wells. Instead, Diversified has used its status as the largest owner of wells to convince regulators to enter into special compliance agreements that push back those deadlines in exchange for Diversified’s promise to cap a certain number of wells per year. In some cases, deadlines are pushed back decades. Investors like this approach, because the compliance agreement deadlines are seen as a reliable defense against legal actions to compel faster clean-up. All the while, Diversified’s uncapped wells continue to emit the powerful greenhouse gas methane.
Second, investors who are aware of how public sentiment has turned against fossil fuel producers see Diversified as an opportunity to keep investing in gas while touting Diversified’s sheen of good behavior from the small percentage of wells it closes each year. Those investors of course have to ignore Diversified’s ongoing gas production, and the company’s active role in delaying, rather than speeding, the closure of damaging oil and gas wells: delayed capping locks in additional years of dangerous greenhouse gas emissions. Despite what we might think would be disqualifiers from any sustainability claim, investors list Diversified as part of their ESG portfolios, which is a form of sustainable investing that considers environmental, social and governance factors. For example, Diversified and its bankers KeyBank, CIBC, and DNB recently announced conversion of their revolving credit facility into a “sustainability-linked loan.” Other banks who tout their commitment to sustainability, such as Credit Suisse, have similarly increased their financing for Diversified in recent years. By providing capital to allow Diversified to acquire more wells, these “sustainable” financers also indirectly benefit the initial well drillers who are all too happy to offload their costly “asset retirement obligations” for those wells.
Diversified’s behavior isn’t just bad on paper - it legitimately harms the climate and communities. Diversified’s uncapped wells spew copious amounts of the potent greenhouse gas methane, which causes more than 80 times more warming over a 20 year period than an equivalent amount of carbon dioxide. In fact, a recent study in Nature estimated that low-production wells in Appalachia, where Diversified owns a large fraction of the marginal wells, leak more than a quarter of all the methane they produce. Over 20 years, Appalachian low production wells, many of which are now owned by Diversified, emit nearly 100 million tons of carbon dioxide equivalent, or as much as 21 million gas engine cars.
Diversified’s approach to managing its enormous inventory of over 70,000 oil and gas wells must be called out for what it is: a delay tactic that’s locking in additional decades’ worth of potent greenhouse gas emissions. Just as regulators must hold Diversified to the same well closure requirements as apply to other owners, the investment community must stop rewarding Diversified’s delay tactics and stop engaging in greenwashing that misleadingly paints ongoing emissions as sustainability.