The Deepwater Horizon disaster in 2010 spilled over three million barrels of oil and would ultimately cost operator BP and its partners more than $ 70 billion in cleanup costs.
What if Deepwater’s partners had not been financially sound companies but rather highly leveraged independents funded by private capital? Who would have footed the bill in the event of a disaster?
As the energy transition evolves, companies in the oil, gas and utilities sectors are under pressure to commit to becoming “net zero” carbon emitters at dates well within the lifespan of bon. number of their assets. Environmental, social and governance criteria, high profile court cases and divestment campaigns are leading the largest companies to restructure to comply with a zero carbon consensus.
But much of the restructuring will involve asset sales rather than closings. Large companies sell oil and gas assets to smaller companies, which may not have the financial strength to meet the challenges that catastrophic failures can present.
A major US utility, Exelon Corp announced in February that it would split its power generation and supply business, about 27 percent of which is natural gas-fired, into a new “competitor” company, while retaining the regulated transmission and distribution assets. .
In the US oil sector, the sale by Royal Dutch Shell of a 50% stake in its 340,000 barrels per day refinery in Deer Park – to Mexican Pemex – represents a transfer of assets to an oil company backed by the State struggling to manage its existing refineries. .
In Europe, Engie was a leader in the sale of fossil assets, and in 2019, BP sold its assets in Alaska to the private company Hilcorp Energy which, within months, allowed its greenhouse gas emissions to d ‘increase 8.7%, according to Bloomberg. Shell is reportedly considering selling its important position in the Permian Basin.
Such transactions can allow sellers to reduce their direct emissions, but can leave assets in weaker hands unable to meet obligations resulting from catastrophic default. Such transactions raise fundamental questions about who are the best owners of long-term assets.
As the energy transition progresses, they face multiple risks. Asset owners may be called upon to deal with unforeseen liabilities that test their balance sheets.
In the event of bankruptcy, smaller, less heavily capitalized companies are more likely to simply go out of business. This can leave host governments – local, regional and national – to clean up the mess, with increasing pressures on public funds, lower tax revenues and potentially significant social consequences.
Current asset sales are probably not the last round. As the pressure to reduce emissions intensifies, buyers of assets such as thermal power companies may themselves be forced to comply with ESG criteria.
They too may find that the easiest way to mitigate direct ESG risk is to sell assets to others. This is a risky property stunt.
While the direct consequences of disasters in the oil and gas sector may be primarily environmental, gas is linked to electricity and maintaining lighting.
Failures in the electricity sector can cause major blackouts over large areas, resulting in economic damage and penalties. Brazos Electric Power Cooperative, Texas’ largest with more than 1.5 million customers, has filed for bankruptcy following the state-wide February blackout. Brazos said it acted to protect its members from $ 2.1 billion in charges levied by Texas network operator Ercot during the outage.
As climate uncertainty intersects with electrification, these risks will increase. An electrical asset may be marginal today, but important tomorrow as the system around it shifts to accommodate a new load or more intermittent renewable production.
Failure of this asset at a critical time could result in huge liabilities that the promoter’s balance sheet is unable to support. This, in turn, can force governments to compensate those affected, increasing costs to taxpayers and taxpayers.
Climate change is a systemic risk, but the changes needed to mitigate it may raise specific risks. Sellers of energy assets and their regulators should carefully consider whether, in their attempt to reduce the risk of damage from ESG factors, they are only shifting the responsibility to others less able to shoulder the burden.
Bill Barnes is the founder of Pisgah Partners, an energy project development consultancy
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