A strategic approach within the African oil and gas industry that considers Environmental, Social and Governance (ESG) as a tool to enhance operational effectiveness at a community level can provide value to investors, natural resource companies and communities in project areas.
This was a significant takeaway among many others from a panel discussion I moderated at Africa Oil Week 2024 in Cape Town at the beginning of October. The stellar panel guided the discussion included Eleanor Adaralegbe (CFO, Seplat Energy), Jingjing Pan (Investment Analyst, Federated Hermes), Dr Marion de Wet (Postdoctoral Academic Researcher & Industry Professional at the Strategic Fuel Fund), and Kike Fajemirokun (GM Human Resources, Lekoil).
ESG is often seen as a blunt instrument, but it is highly nuanced once you begin exploring its nuts and bolts, especially in an African context. Where oil and gas projects on the continent are concerned, ESG should be built into project operations and administration.
For instance, as Dr De Wet highlighted, there are economic and social benefits African countries can accrue from their oil and natural gas reserves. However, these industries, continent-wide, continue to face significant environmental and social problems. ESG in oil and gas does not stand alone and has strong links with the United Nations Sustainable Development Goals, especially Goals 1 (poverty alleviation), 8 (decent work and economic growth), and 13 (climate action).
As a case in point, Nigeria has struggled with managing its natural oil and gas resources, a "resource curse" in the most classic sense. Yet, as touched on by Fajemirokun, progress is being made on ESG, with flaring regulations becoming tighter in recent years and gas recognised as a bridge between fossil fuels and zero-carbon options such as wind and solar energy.
ESG and community-company relations influence project success and reliability
An enabling policy and regulatory environment that supports successful oil and gas projects on the continent is one piece of the puzzle, but it's at a community level where a significant dividend exists. ESG-focused strategies are arguably the best way to bring that dividend to market. The benefits for the community include job creation and the catalytic effects of more wealth in a community.
Depending on their relationship with the rights owner, it could also mean access or upgrades to services, including roads, education, and electricity. For rights owners, benefits include, most critically, gaining a social license to operate, plus production stability, improved security, and enhanced productivity.
As Adaralegbe highlighted, achieving these benefits means leveraging ESG-focused strategies that enhance community engagement and stakeholder relations. This is a highly complex process, but best practice offers a clear path to realising meaningful social impact from the project's outset.
Best practices include meaningfully engaging with the community, a commitment to inclusive decision-making, transparency and reporting, social investment programmes that target areas of need and employment and taking advantage of local content where possible. Community needs assessments, stakeholder engagement plans, and dispute settlement mechanisms are all elements that contribute to best practices.
It should be noted that community-rights-holder relationships should not be so deep as to create unhealthy dependencies that lead to patronage networks or key-man-type scenarios that distort power dynamics in communities beyond an operational level.
A process to embracing ESG in a competitive marketplace
Executing ESG best practices, beyond the remit of ESG, can provide a competitive advantage to rights holders and firms. Given how competitive the oil and gas sector is, and the changing nature of the world's energy mix, it's pertinent to ask how operators and asset owners can better embrace ESG standards and frameworks to be competitive in today's market, and what can be expected from ESG-based stakeholder engagements. This was the exact question I posed to the panel.
Dr. De Wet took up the challenge, breaking down the process in the following way:
- First, identify the various activities and the respective associated environmental and social risks across the exploration and production value chain.
- Establish ESG guidelines on critical limits and standards by international best practices in addition to relevant legislative and governance instruments.
- Stakeholder engagements do not end with the operators, governments and investors, but include civil society and the communities they will operate in.
- Taking it further to the government level, inclusive, transparent, and active engagements and dialogue with key stakeholders are significant considerations in shaping the policy and regulatory framework of sustainable extraction practices.
Oil and gas operators who adopt ESG strategies gain a competitive edge and create value
For investors, it is wise to consider ESG from a strategic perspective; a topic touched on during the panel by Fajemirokun.
"On the community side, gas can be used to power streetlights or a community building. These are the types of sustainable operations, projects, and strategies that will bring in investors. It shows that a company is thinking and practising some form of a sustainable business," she said towards the panel's conclusion.
"Investors are looking for oil and gas projects that meet today's ESG criteria and have a roadmap for reducing carbon footprints and increasing positive social impact over time – longer-term strategies over a shorter term. Everyone has a part to play in creating a sustainable environment and operation. Train your board, employees, [and] think long-term effects and strategies".
The way operators and rights holders pivot between strategic and tactical decision-making is a direct influence on how integrated ESG is into their investment-making decisions. Dr De Wet cited the example of Seplat in Nigeria, where commitment from the company's board is coupled with a special board committee that focuses specifically on ESG matters plus the CEO chairing a sustainability management committee.
Overall, it is imperative for oil and gas companies operating in Africa to integrate ESG frameworks in their operations. Those who approach ESG strategically and with a clear understanding of what best practice is and how to execute it can create a discernible difference between themselves and their competitors at a level that positively influences operational sustainability.
