The consolidation of the oil and gas market puts climate actions are at risk of the industry. This is what emerges from the new Edf+Business report according to which, between 2017 and 2021, the number of operations that transferred polluting activities from a company with strong environmental objectives to others without such commitments doubled. Even though oil and gas companies sell assets for numerous financial reasons often not related to the net zero strategy, the transfer of assets can significantly impact environmental compliance and worsen emissions.
Four case studies illustrating the Edf report
“Financial transactions are an essential function of our markets and will remain an important tool for any business in any industry,” he said Mary Schapiro, Vice Chairman of the Glasgow Financial Alliance for Net Zero. “What markets need to understand with respect to these transactions is whether the new owners are establishing the governance needed to manage the climate in line with a net zero future. GFANZ supports efforts to finance emissions reductions across the economy, not just emissions transfer through divestiture alone. This report provides some insights into this challenge with innovative ideas to help solve them."
This insight comes on the heels of the latest report from the Intergovernmental Panel on Climate Change which the UN secretary-general calls “a litany of broken climate promises.” The report also noted that accelerating theabandonment of fossil fuels it is essential to limit global warming to 1,5ºC and protect people and the planet from dangerous changes in the climate. Since late 2020, 12 major public oil and gas companies have announced net zero pledges, but these pledges may lack impact without increased oversight of climate pollution from M&A activity.
Business flow from public to private
A significant amount of oil and gas dealmaking upstream has taken place in recent years. The value of transactions in 2021 totaled $192 billion, surpassing the annual value of previous years. The number of deals in 2021 was 498, exceeding the number of previous years.
Over the past five years, public-to-private transactions have made up the majority share, exceeding the number of private-to-public transfers by 64%. Traditionally, private markets have less transparency and have fewer environmental commitments than public ones.
To track changes in climate performance following asset sales, the Edf+Business report assessed pre- and post-sale climate performance based on both short- and long-term emissions risks, using performance indicators of flaring (short-term) and dormant (long-term) wells.
Case studies in the report include:
– July 2021 sale of Permian Basin, Texas assets from APA Corporation (Apache), a public company, to Slant Operating, a private equity-backed operator Analysis shows that Slant is likely to plug acquired dormant wells at a significant rate slower than Apache would have done.
– March 2021 sale of Delaware Basin, Texas, assets by Oasis Petroleum, a public company, to Percussion Petroleum II, a private equity-backed operator. Since the sale, Percussion has completed seven new wells and has maintained the flaring-intensive asset, although flaring in the Delaware Basin has decreased.
– January 2020 sale of assets in the Gulf of Suez, Egypt, by bp, a public company, to Dragon Oil, a subsidiary of the national oil company. A marked increase in flaring has occurred post-sale – with flaring more than four times higher than pre-sale levels.
– January 2021 sale of the Niger Delta assets, Nigeria, by Shell and Total Energies, public companies, to Trans-Niger Oil & Gas, a private equity-backed operator. Trans-Niger Oil & Gas expects to triple oil production in this area, and a dramatic increase in flaring has been recorded after the sale.
Investors back M&A management for climate
"This important analysis suggests that, either inadvertently or as part of a deliberate strategy to reduce environmental surveillance, oil and gas M&A is causing increased emissions that delay the energy transition," he said. Dan Gardiner, climate change specialist at the Institutional Investors Group on Climate Change. “Institutional investors committed to hitting net zero in their portfolios, and in the real world, will want to scrutinize these results. Encouraging good governance and closing this loophole may ultimately require improved insight into the parties who buy, sell and finance,” Gardiner concluded.
Since 2017, five of the six largest US banks – all of which are members of the Net Zero Banking AlliaFrance – have collected more than $177 billion in fees from upstream operations. "Climate-aligned energy companies have a responsibility to make sure that when they sell assets, their environmental commitments continue to be honored by the new owners," he said. Patrick o'connell, senior vice president and research director of responsible fixed income investing at AllianceBernstein. “Adequate and consistent disclosure will be key to ensuring asset emissions are managed after a sale.”
