Eco-Minded Investors Have a New Problem. What to Know.

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Environmentally-minded investors have forced oil and gas companies to become more responsible about how they drill for oil, and convinced several to invest in new lines of business that produce less carbon. Major producers, including

Exxon Mobil

(XOM), have even announced net-zero emissions goals to eliminate carbon dioxide and methane emissions that contribute to climate change from their operations.

But the latest trends in oil and gas drilling threaten to derail some of that progress.

While publicly traded oil companies that answer to shareholders have slowed how much they’re drilling, private operators are quickly ramping up—meaning that an increasing amount of new oil production is coming from companies with less oversight and accountability.

Private operators account for about one-third of production, but have been adding more than half of the new rigs in the U.S., said Chris Wright, CEO of

Liberty Oilfield Services

(ticker: LBRT), the third-largest oilfield-services company in the U.S., in a recent interview.

In the Permian Basin, an oil-rich area of Texas and New Mexico, private operators are ramping up faster than public companies—even though those public companies include industry heavyweights such as Exxon and

Chevron

(CVX).

Schlumberger

(SLB), the world’s largest oil services company, also said in its latest earnings call that the rise in drilling lately has been “led by the private producers.”

Privately owned operators got 500 new horizontal drilling permits approved in the Permian in March, according to energy research firm Rystad Energy, which is “larger than the number of wells currently being drilled in the Permian in any given month by all operators.” Publicly traded producers got 410 permits, which was an uptick but still trailed the private companies, according to Rystad. 

“I think the private companies are this case study of what happens when no one is paying attention, including regulators,” said Andrew Logan, senior director of oil and gas at Ceres, an environment-focused shareholder advocacy organization. “There are no shareholders to pressure them.”

Some studies, including one on greenhouse gas emissions from Ceres, have already shown that private operators often cause environmental problems disproportionate to the amount of hydrocarbons they produce. Some flare all of their natural gas, meaning they burn gas they don’t intend to sell, releasing climate-damaging methane into the atmosphere, Logan notes.

While environmental policies vary at private companies, “at a high level, it’s certainly the case that private operators are dirtier operators,” Logan said. More data is needed, though, because “most of these companies operate really in the dark.”

Public company executives have expressed frustration at times that climate policies and shareholder resolutions attempt to reduce how much they drill. With demand continuing to rise, other companies will simply drill more—and some of those companies will operate under less-stringent environmental rules.

Asked about these trends in a recent interview with Barron’s,

Chevron

CFO Pierre Breber referred to

BlackRock

(BLK) CEO Larry Fink’s latest CEO letter. Fink warned that “simply passing carbon-intensive assets from public markets to private markets” wouldn’t get the world to net zero.

“One of the points he has made is that if we put pressure on responsible, transparent public companies who are leaders in the industry to reduce supply while demand is growing, that supply will only ship either to private companies perhaps, or foreign companies, or companies where shareholders cannot engage with the management at all,” Breber said.

Logan said that one way to make sure that private operators also have high environmental standards is to pass laws on the state and federal level that apply to all oil and gas producers. So far, he said that most large oil-producing states, such as Texas, have not passed legislation that would substantially curb greenhouse gas emissions.

“I think there is a growing divide in the industry around this,” Logan said. “But it really is going to take regulation, whether state or federal, to fix this.” 

Write to Avi Salzman at [email protected]