One company’s transition away from fossil fuels is another’s opportunity to double down.
Under intense pressure from investors and activists to take more action on climate change, some of the world’s biggest oil and gas companies are putting billions of dollars’ worth of assets up for sale.
Watching from a distance are people like Brian Gilvary, the head of Ineos Energy, an arm of the private UK chemicals company. As many energy companies try to shift from oil to gas and lower carbon technologies, Ineos is buying up unwanted fossil fuel assets.
“We have an appetite to acquire,” says Gilvary, the former chief financial officer at UK energy major BP who joined Ineos in December. In March, the company announced it would acquire Hess Corporation’s oil and gas assets in Denmark for $150m.
The Danish government has said that it intends to halt oil production by 2050, but Gilvary is undeterred. “This deal was attractive to us. We know the fiscal regime under which we will be operating, he says. “We know what the endgame looks like.”
With a mounting cash pile as the company sold off some non-core assets of its own, Gilvary is ready to pounce again and is eyeing larger deals. “We can do ticket sizes much bigger at $1.5bn-2bn. We have the ability to do multibillion dollar deals.”
Energy consultancy Wood Mackenzie says ExxonMobil and Chevron in the US and BP, Royal Dutch Shell, Total and Eni in Europe have sold $28.1bn in assets since 2018 alone. Now they are targeting further disposals of more than $30bn in the coming years.
The total value of oil and gas assets up for sale across the industry stands at more than $140bn, according to the consultancy. The disposals come amid rising speculation about “stranded assets” — huge oil and gas reserves that might never be extracted if the world pursues the Paris climate goals.
Yet despite the intense spotlight on the energy sector, there are potential buyers for these assets — from smaller private players such as Ineos, independent operators who are backed by private equity, opaque energy traders and state oil companies. And while the listed oil majors are announcing net zero plans and a downsizing of their traditional businesses, some state-owned companies and producer economies, such as Saudi Arabia, are openly discussing plans to raise production.
The fact that there is, for now, a market for the assets being discarded by the majors points at the potential for unintended consequences in the pressure campaign on the oil industry.
The activists and government officials behind the campaigns believe they lead to reduced investment and production. But in the short term production could shift to private or state-owned companies which face much less scrutiny over their activities. Some of those new owners will use that relative obscurity to squeeze as much production as they can out of the oilfields they are acquiring without disclosing the environmental consequences.
“The quickest way to shrink emissions as a major company is to shed assets so you can hit climate-related targets,” said Biraj Borkhataria at RBC Capital Markets. “But asset sales do nothing for climate change, you’re just moving emissions from one hand to another.”
Gilvary acknowledges that his company is “a natural buyer” of some of the multinationals’ assets. But he also insists that even a private purchaser such as Ineos Energy is not immune to the same political pressures.
“We have the same drive as the majors to get efficient and reduce CO2 emissions and costs, particularly after coronavirus,” he says, adding that the Danish deal was being supported by a major carbon storage project.
“We’re a private company with private shareholders,” he says, “but we still have to operate in a way that is in line with what governments, banks and investors want to achieve.”
The oil majors have faced mounting pressure in recent years over their contribution to climate change from the burning of the fuels they produce. Directly and indirectly the oil and gas industry accounts for 42 per cent of global greenhouse gas emissions, according to analysis by McKinsey.
In recent months, that pressure has ramped up considerably. A May report by the International Energy Agency called for an end to all new oil and gas exploration and investment from this year if the world is to reach net-zero emissions by 2050. This has primed investors with more ammunition to battle oil companies over their spending plans.
At the same time, a Dutch legal ruling forcing Shell to cut absolute carbon dioxide emissions far quicker than the company had planned to as part of its energy transition strategy is forcing oil executives across the industry to think twice about which projects they pursue.
The Anglo-Dutch major had already said it would focus exploration and production on nine core areas in the pursuit of “value over volume”, priming the market for billions of dollars in asset sales. After the court order, chief executive Ben van Beurden said the company would be required to take “bold” steps to “accelerate” its emissions reductions plan, which some market analysts have taken to mean perhaps even more disposals.
The cash crunch triggered by the pandemic is creating further pressure to offload assets. Major companies have been forced to cut dividends, dramatically reduce capital spending and raise debt. When their share prices tanked last year, they diverted attention to streamlining operations and trimming costs.
These companies want to keep hold of assets that are the most profitable and ideally the least polluting, as they seek to make good on recently announced net-zero emissions pledges as pressure increases on them to take action on climate change.
“Net zero is not enough — it’s the pathway that matters,” says Mike Coffin, a senior analyst at think-tank Carbon Tracker, which published a report in May arguing that announcing vague long-term goals alone is inadequate. “It’s critical that companies demonstrate how their investment decisions are also aligned with the Paris goals, and do not sanction assets that could become stranded through the energy transition.”
David Knipe, at consultancy Oliver Wyman, says the extra cash could help companies invest in new technologies and lower carbon energies such as hydrogen and renewables. “Big oil and gas companies likely have greater wherewithal to rapidly scale these technologies, so this could be a knock-on benefit,” he said.
But as the oil majors pull back, others are stepping in.
In recent years, the UK’s North Sea oilfields have seen an influx of private capital. From Austria’s OMV selling its assets in 2016 to Siccar Point, backed by private equity groups Blackstone and Bluewater, to ExxonMobil agreeing to sell the non-operating stake in its UK exploration and production assets to HitecVision this year for more than $1bn.
But each geography is different. Sometimes local groups are stepping up when foreign operators want to exit, such as in Asia. In May Shell announced it had sold a stake in an offshore gasfield in the Philippines for $460m to a subsidiary of domestic conglomerate Udenna Group.
Some national oil companies have also been identifying attractive acquisition opportunities in the Middle East. Thailand’s PTT agreed in February to buy a 20 per cent stake in an Oman gas block from BP for $2.6bn.
In Latin America, asset sales by Brazil’s Petrobras are sparking a revival of the local energy sector.
The recent spate of deals has been helped by oil prices rising to more than $75 a barrel as lockdowns and travel bans are lifted. But despite this, securing buyers is not an easy task. The pool of buyers able to fill the gap is still relatively shallow and deals are not necessarily simple to execute.
“The list of assets is way higher than the number of buyers out there and particularly for some of the bigger deals,” says Greig Aitken, director of mergers and acquisitions research at Wood Mackenzie.
Not only are the selling companies having to be more flexible about which assets they dispose of, they are also having to concede on price given that they are prioritising cash buyers who will help to pay down debt and finance their push into cleaner forms of energy.
“If others come to us and say an asset is attractive, we will look at it,” says one oil executive. “It’s fair to say — there is definitely an increasing focusing of the portfolio, so you’re going to see more assets out there for sale.”
The pressure on the majors to divest assets has led some energy executives to argue that the focus on listed oil and gas companies by environmentalists and investors is misguided.
“We spend all this time focusing on BP and Shell . . . what about Saudi Aramco and Adnoc [Abu Dhabi National Oil Company],” says Angela Wilkinson, head of the World Energy Council. “We see pressure on a small subset of listed oil companies. But it’s not at all a realistic picture of the overall energy system.”
Publicly listed energy majors account for just 12 per cent of oil and gas reserves, 15 per cent of production and 10 per cent of estimated emissions from industry operations, says the IEA. In reality, national oil companies dominate the sector.
Removing the oil majors’ licence to operate, she adds, would not necessarily achieve the “shock” activists are after. The decarbonisation push is not helped by governments, energy executives, investors and the public taking binary positions either for or against fossil fuels, Wilkinson adds. “It’s as if both sides are religions and if you don’t pick one you’re a heretic.”
Some energy analysts believe that the transfer of projects away from the oil majors does little for the environment and in fact may only boost emissions as production likely shifts to players that operate in the shadows, answer to private shareholders and make few environmental disclosures.
Moreover, barely a handful of state oil companies, including PetroChina and Malaysia’s Petronas, have set net zero ambitions. Others have far less ambitious short-term targets, while companies such as Russia’s Gazprom refuse to set any corporate emissions targets at all.
As potential buyers of last resort, many producer countries only see the majors’ shift away from oil and gas as an opportunity to grow their own market share. Abdulaziz bin Salman, the kingdom’s energy minister, said Saudi Arabia planned to grow its production capacity.
The kingdom has already announced plans to boost its output capabilities to 13m barrels a day from 12m b/d. “Don’t be surprised if we come back with additional announcements” of further expansions, Prince Abdulaziz told journalists last month.
The oil majors are being pushed to turn away from potential cash generators at a time when demand for fossil fuel products is still robust and necessary to meet global energy needs. Even the IEA has conceded the world will need oil and gas for decades to come as renewable producers play catch-up.
“These operational assets will mint money like you have no idea over the next three to five years,” says Laurent Segalen, a clean energy investment banker and managing partner at Megawatt-X, a platform which aims to enable the funding of the energy transition. “Hedge funds, private equity, companies you have never heard of, will pick these assets off.”
Yet many activists believe that it still makes sense to target prominent oil companies, arguing that, over time, it will lead to less overall investment into oil and gas production. Their brands are easily recognised by the public, the world’s biggest investors are their shareholders and politicians can be mobilised more effectively, particularly in the west. Their joint ventures with foreign governments and national oil companies also means their global reach is greater.
“Sales of oil and gas assets can accelerate an energy transition to the extent they reflect decisions by oil and gas firms to reallocate capital toward clean energy technologies and thus help drive down the costs and expand the use of those technologies,” says Jason Bordoff, who heads Columbia University’s Climate School and Center on Global Energy Policy.
“But selling an oilfield does not reduce oil-related emissions if demand remains unchanged,” he adds. “Oil demand needs to fall sharply to meet our climate goals . . . but today climate ambition remains far ahead of reality”.
Bankers and energy traders are now warning that supply shortages could loom in the shorter term as a result of the aversion to new investment by major oil companies, meaning a potential escalation in oil prices. This in turn would hinder consumer nations — such as those in Asia and Africa — that cannot afford to pay higher costs for oil.
“You’re not addressing the demand side while you’re cutting supply. Economics 101 states that prices are going to go up,” says one banker.
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Even as oil executives slashed the value of their assets by tens of billions of dollars last year, as they revised lower longer-term oil prices, privately they are preparing for a short-term price surge and want to benefit from higher production for now.
This is prompting companies to consider alternative options for some controversial but lucrative fossil fuel assets — from forming joint ventures and spinning off certain oil and gas projects in a separate entity, to listing a parallel vehicle on the stock market.
“Why do you think these companies want to form these types of separate companies?” says one European oil executive. “Not only do you take the debt off the balance sheet, you remove the emissions from these projects too.”
Eni and BP, for instance, are considering combining their Angolan interests into new joint venture.
“For investors, climate folks, the public,” adds the executive, “the parent company looks more attractive to everyone. Simple.”