How big oil companies are selling polluting assets to look greener
An oil flare burns at the Repsol refinery in Cartagena, Spain. According to EDF analysis, Repsol was one of the top asset sellers between 2017 and 2021.
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Oil and gas giants are increasingly selling dirty assets to private firms, fueling fears that traditional fossil fuel deals are incompatible with a zero-emissions world.
It comes at a time when major oil and gas companies are under tremendous pressure to set short and medium term targets in line with those of the landmark Paris Agreement. It is widely recognized that this agreement is critical to preventing the worst effects of the climate crisis.
Research published last week The nonprofit Environmental Defense Fund shows how oil and gas mergers and acquisitions, which could help energy giants meet their transition plans, don’t help cut global greenhouse gas emissions.
To be sure, the burning of fossil fuels such as coal, oil and gas is the main driver of the climate crisis, and researchers have repeatedly stressed that limiting global warming to 1.5 degrees Celsius will soon be unattainable without immediate and significant reductions in emissions. across all sectors.
EDF’s analysis of more than 3,000 transactions between 2017 and 2021 shows how flaring and emissions obligations disappear when tens of thousands of wells move from public companies to private firms with no oversight or reporting requirements to shareholders.
These deals can give the impression that the sellers have cut emissions, when in reality the pollution is simply passed on to companies with lower standards.
Energy Transition Director at EDF
These often obscure private companies also tend to make little disclosure about their activities and may be committed to increasing fossil fuel production.
The number and scale of such deals are on the rise, according to EDF research, reaching $192 billion in 2021 alone.
“These deals can give the impression that sellers have reduced emissions, when in reality, pollution is simply being passed on to companies with lower standards,” said Andrew Baxter, director of energy transition at EDF.
“Regardless of the intentions of the sellers, the result is that millions of tons of emissions are effectively out of the public eye, probably forever. And as these wells and other assets age under loose control, the environmental problems are only getting worse,” he added.
The surge in the number and size of deals in the oil and gas industry has coincided with growing investor concerns about losing the ability to assess company risks or hold operators accountable for meeting their climate commitments, the report says.
It also has implications for some of the world’s largest banks, many of which have set targets for zero net emissions financing. Since 2017, five of the six largest US banks have advised on billions of dollars of exploration and production deals.
The resulting analysis questions the commitment of Big Oil and Wall Street to the planned energy transition, a transition vital to averting a catastrophic climate scenario.
What energy transition?
The EDF analysis used industry and financial M&A data to track possible changes in post-sale emissions. For the first time, comprehensive data is believed to have been collected on how major oil and gas companies pass emissions on to private buyers.
In one example, British Shell, France’s TotalEnergies and Italy’s Eni – all publicly traded zero-target companies – last year sold their stakes in an onshore oil field in Nigeria to a privately-backed operator.
EDF says top sellers such as Shell, for example, are well positioned to pilot climate-focused asset transfers.
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From 2013 until the transfer of routine gas flaring led by TotalEnergies, Eni and Shell, the top sellers from 2017 to 2021, there were virtually no sales, according to EDF analysis.
However, almost immediately after that, burning increased dramatically. The case study was said to highlight the climate risks associated with oil and gas exploration and production operations.
Gas flaring is the combustion of natural gas during oil production. This releases pollutants into the atmosphere such as carbon dioxide, black carbon and methane, a powerful greenhouse gas.
The World Bank said Ending this “wasteful and polluting” industry practice is central to broader efforts to decarbonize oil and gas production.
CNBC contacted Shell, TotalEnergies and Eni for comment on the EDF analysis.
Wink, nod, wink
Andrew Logan, senior director of oil and gas at the non-profit organization Ceres, told CNBC that the EDF study shows that there is something of a wink, nod, nod approach to carry-forward emissions today, with big energy companies selling assets from high levels of pollution without worry. too much about whether the buyer is going to do what he is supposed to do.
“But what’s interesting is that these private equity firms tend to be backed by public money. You know, it is the state pension funds that are the partners of these firms, so there is leverage here,” he added.
Larry Fink, CEO and Chairman of BlackRock, the world’s largest property management company, sharply criticized oil and gas giants for selling to private firms during the COP26 climate conference in Glasgow, Scotland last year.
Fink said that the practice of public companies selling highly polluting assets to non-transparent private enterprises “doesn’t change the world at all. In fact, it makes the world even worse.”
In July 2021, some of the world’s largest oil and gas companies were ordered to pay hundreds of millions of dollars in a $7.2 billion environmental liability bill to decommission aging oil and gas wells in the Gulf of Mexico that they previously owned.
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Ceres’ Logan said an important part of a responsible asset transfer should be to account for the cost of shutting down wells at the end of their life. In North America, for example, he highlighted the “enormous problem” with so-called “orphan wells”.
These are oil and gas wells abandoned by fossil fuels that may end up in the hands of companies with no ability or intention to clean them up.
“It’s interesting to see how different the process of selling assets in most of North America is from assets in the Gulf of Mexico because there are federal regulations in the Gulf of Mexico that basically say if you sell an asset and the next company – or the next, next, next company doesn’t correct the situation – this responsibility will return to you, ”said Logan. “So you’re very interested in choosing your partners wisely and making sure they have the money to clear the well.”
Last July, some of the world’s largest corporate issuers were ordered to pay hundreds of millions of dollars under $7.2 billion environmental liability bill liquidate the aging oil and gas wells in the Gulf of Mexico that they previously owned. The case was thought to be a watershed for future legal battles over cleanup costs.
“I think we need something similar in the rest of the world where there is recognition that this responsibility needs to move. You have to pay for it, and we must be aware of this at every stage of the process, ”said Logan.
What can be done to solve the problem?
The EDF report says that coordinated action by asset managers, companies, banks, private equity firms and civil society groups can help reduce the risks associated with M&A in the oil and gas industry.
“It is important to do this research because when we engage with companies in this sector, it is definitely a topic on the agenda,” said Dror Elkayam, ESG Analyst at Legal & General Investment Management, a major global investor and one of the largest assets in Europe. managers.
Asked if the major oil and gas companies acknowledge that they should be at least partially responsible for asset transfers, Elkayam said: “So that’s the point of contention, right?”
“I think we will definitely benefit from a higher level of disclosure about these assets,” he told CNBC via video link. This may include the emissions associated with those assets, or the extent to which a firm’s climate goals will be met through asset disposals versus organic decline. “I would say this is an important area to explore,” Elkayam said.