David Snow, Privcap: Your company, First Reserve, is a big advocate for ESG [environmental, social and governance] in private-equity investing. Can you talk about the way that your portfolio companies are thinking about incorporating ESG into their platforms?

Alex Krueger, First Reserve: Being in an industry where, every day, your employees go out to work and put their life in harm’s way in one form or another in explosive environments and hazardous work conditions, all of our portfolio companies start board meetings with health-safety-environment.

And it comes down to monitoring every aspect of work. When we start to change out suppliers because we get new, competitive bids from people who are trying to defend their market position or whatever the case may be, making sure they’re vetted as well as the previous people you worked with. Bringing those people onto your system, making sure they share the same safety culture that you do as an operator.

But it’s really just being tenacious around making sure that you’re trying to close out every incremental risk as you start to change the system to cut costs. Luckily, we’ve been very fortunate in managing very successfully through this downturn to cut a lot of costs out, while maintaining a very safe workplace almost uniformly across the portfolio.

Snow: I would imagine that paying attention to, and spending money on these safety procedures and environmental safeguards, is expensive. Is it simply the case that companies such as the ones you invest in are going to have to spend more and more on ESG and safety and environmental initiatives?

Krueger: I think on the safety side, the industry—and we as investors—come at it from a standpoint that safety pays for itself. Having a culture that returns employees home safely, that’s focused upon no harm to your employees, pays for itself through better productivity and fewer accidents, etc.. I think on the environmental side, there’s definitely a trend towards increased spend. The regulatory environment is one where focus on, obviously, hydrocarbon emissions, fugitive emissions gets increasing attention.

There are some increased standards which have to be complied with that require—at the margin—incremental spend. I think to date, a combination of using best practices and adhering to regulations is well within the means of what any sound company can and should do.

Snow: The energy industry is one in which, unfortunately from time to time, there are catastrophic losses that result in not only loss of property, but loss of life. When you see situations like that, what goes through your head as an investor in many oil and gas properties?

Krueger: Wow. There’s several—to me, there are several—key things. Usually it’s understanding the root cause of what went wrong. To see where there was a problem, and then importantly, what’s the read-across to “how do we avoid that in other situations?” “How do we avoid that in our portfolio?” And from a director’s and owner’s standpoint, what lessons learned are there to apply to preventively get ahead of those types of situations-- whether it was a pipeline explosion due to lack of routine maintenance and inspectionor it was a procedural issue. It’s really about [what are] the lessons learned, and how do you prevent those things from happening.