Investing in oil and gas - a catch-22?
The science is clear: we need to phase out burning coal, oil and gas if we are to limit warming to 1.5C above pre-industrial levels successfully. And if we don’t? We risk an increase in droughts, sea-level rising, flooding, inequality and other damaging impacts. One obvious solution to hitting these ambitious targets is to stop investing in fossil fuels. Large banks are beginning to catch on; between 2016-2020, investment bank UBS decreased its fossil fuel financing by 73%.
But there’s a problem. Investor and activist pressure on publicly listed energy companies such as BP and Shell is causing more and more of the world’s oil and gas fields to move into the shadows. Preqin data shows private equity deals in oil and gas have risen from $30 billion to $38.5 billion in the last year. And according to Wood Mackenzie, ExxonMobil, BP, Chevron, Shell, Eni, and Total have sold $31.3 billion worth of assets to private equity in the last two years, with plans to sell a further $30.5 billion.
Going private can free oil and gas companies from having to explain their strategy to investors. Instead of dealing with the pressure of shareholder's returns, a business run by private equity is free to gamble on exploration, regardless of what this means for the environment or society. As Elizabeth Warren, former US presidential candidate, says, “private equity threatens to undermine our hard work to tackle the climate crisis and advance environmental justice”.
It begs the question, should we really restrict finance for publicly listed energy companies? “We need to invest in renewables – but we need to invest in oil and gas, too”, says Merryn Somerset Webb, Editor-in-Chief of Money Week. In 2021, the UK was still 78% reliant on fossil fuels - slashing investment into oil and gas either gives firms an incentive to go private or stop fossil-fuel exploration projects altogether. Both options create a supply problem, driving prices up and giving rise to the cost-of-living crisis that we are experiencing today.
The good news is that private equity giants are beginning to stop financing new oil and gas investments - Blackstone stopped in 2017. This could be because it is becoming increasingly difficult to find buyers when re-selling oil business on public markets. If this trend continues, more private money could be channelled into closing the $1 trillion gap needed to transition to renewables. Those oil and gas businesses already operating in the private equity sphere are likely to face greater pressure to reduce emissions, suggesting private equity might start to help limit hardships on the way to net zero.
Sources:
https://www.greenpeace.org/usa/research/8-reasons-why-we-need-to-phase-out-the-fossil-fuel-industry/
https://www.cnbc.com/2021/04/22/which-banks-are-increasing-decreasing-fossil-fuel-financing-.html
https://www.statista.com/statistics/418202/fossil-fuel-dependence-united-kingdom/
https://www.weforum.org/agenda/2022/09/renewable-energy-gap-solar-finance/
https://www.tortoisemedia.com/2022/12/06/pe-kit/
Written by Laura @theecostories