At the World Energy Capital Assembly (WECA) on November 29, 2021, a panel of experts gave their opinion on the ability of oil and gas companies to access and retain climate capital current economic and political. In this article, we build on that panel discussion and examine how exploration and production (“E&P”) companies balance their corporate image with the need to stay profitable and generate returns for investors.
As the exploration, development and production of hydrocarbons come under closer scrutiny, oil and gas companies are investing in the future. There is a need to transform the way the world’s people generate, source and use energy. Investors, financiers, customers, businesses, governments and other stakeholders agree that the oil and gas industry plays an important role in this energy transition and will continue to do so at least in the short to medium term. In order to even move closer to the commitments reflected in the Paris Agreement and the United Nations Framework Convention on Climate Change, it is imperative to shift from dependence on fossil fuels to renewable and sustainable energy sources. On the other hand, it is not realistic at present to completely eradicate the production and use of hydrocarbons, and there remains a conflict between the global demand for energy (as well as for refined products) and the need to meet net needs. zero commitment under the pressure of time. Until sustainable energy can be produced (and, in the case of renewable energy production, stored) at a scale that meets demand and at a price that everyone can afford, the world does not t is not yet ready to face major oil cuts. and investment and production of gas.
In addition, as we saw at the United Nations Climate Change Conference (COP 26) in 2021, the transition will not be happening at the same pace across the world. E&P companies operating in developed jurisdictions, most of which benefit from increasingly favorable government policies, must take the lead and accelerate their actions by moving towards clean and sustainable sources of energy. In contrast, developing countries are in a very different position – in many of these countries, oil and gas production is currently the main source of export income rather than just a local source of electricity, and many of these local populations still do not have access to affordable energy. in sufficient quantity to meet the demand of local populations. As there is pressure on these developing countries to switch to clean energy sources, such as solar and wind power, on a timeline equivalent to that set by developed countries, the question How these countries will generate much-needed export revenues (especially to finance the installation of renewable energy infrastructure in the first place) in a world without oil and gas production remains largely unanswered. Much work is therefore needed to put developing countries on an equal footing with developed countries before they can make any meaningful commitment to the energy transition.
There is an obvious conflict between the desire of investors for E&P companies to focus on low carbon production and alternative energy sources, and the need to increase short-term returns for investors. A major challenge for E&P companies seeking to access capital is how to deal with these competing pressures to reduce the carbon footprint while remaining profitable and meeting consumer demand. E&P entities should be advised in their investment planning to ensure that sufficient resources (and capital) are allocated to alternative energy generation strategies and to the diversification of asset portfolios. Large investments in expensive oil assets that will not come online in the near future are unlikely to be the norm as E&P companies and their investors seek to mitigate the risk of stranded assets and uncertain long-term returns. . Alignment among all stakeholders is vital – the discussion must be informed, and alternative energy sources must ultimately be affordable to all and able to meet demand before conventional hydrocarbon production is completely halted.
Companies wishing to maintain their dominant position in the energy sector invest massively in the energy transition and assume a leadership role in the conversation on alternative energies, in particular by deploying the benefits of their core activities in hydrocarbons in production. renewable energies and research and development. Particular attention is given to new technologies (aimed both at making hydrocarbon production more sustainable and at generating “green” energy) which are necessary in a low carbon economy. Investors have made it clear that E&P companies need to step up spending on these technologies, as evidenced by recent pressure from activist investors, including those who have positioned themselves on the boards of some of the supermajors. E&P companies that do not take environmental, social and governance (“ESG”) considerations into account will suffer their credibility and reputation as investors and financiers seek to deploy their capital elsewhere.
Disclosure and reporting of corporate environmental impacts have become increasingly important in the oil and gas industry, both at the micro and macro levels. This in a context in which there is no coherent set of ESG standards, resulting in a desire among E&P companies to implement parameters that apply universally to the sector in order to provide the industry the clarity it so badly needs. Financiers, in particular, want to work with their clients to help develop these ESG criteria and reporting requirements; an approach that also aims to manage the inherent climate and environmental risks faced by financial institutions. The real impact of Scope 3 disclosure requirements, UK climate-related mandatory disclosure regulations to be implemented during 2022, disclosure requirements set by the Financial Conduct Authority which are already applicable to companies LSE premium listed in the UK, and the accounting requirements of the International Sustainability Standards Board (among others) remain to be seen, including whether they help forge a more consistent approach to disclosure and reporting, but it It is undeniable that investors and financiers are increasingly focusing on implementing a set of minimum standards that must be met by E&P companies. In addition to regulations designed to control the impacts of companies on the environment, industry players are likely to rely heavily on government policies and regulations to enable them to advance the climate agenda – for example, through through state grants and other financial support. and incentives, which could help E&P companies maintain their competitive edge as they move forward in the energy transition.
As financial institutions seek to limit their exposure to oil and gas holdings, liquidity will also need to be sought from alternative funding sources, which may include private equity and private equity funds. The nature of the financial product available and the ability to access capital will depend on the size and financial health of the E&P company, as well as the quality and stage of production of the assets involved, but the market evolves and the ‘E&P companies will need to be more open-minded and consider a wider range of financial products from a range of financiers in order to close any funding gap.
As a result of pressure from investors and financiers, a number of large E&P companies are divesting secondary or high carbon / methane emitting assets, as well as acquiring and / or investing capital in the development of lower-cost, less carbon-intensive assets, as a means of diversifying their portfolios and / or returning liquidity to investors. There is a market appetite from hedge funds, small E&P players, and national oil companies from traditionally oil-dependent economies looking to take advantage of favorable returns from these oil and gas assets (especially relative to much lower returns generated by renewable projects). However, until ESG requirements are universally applied in the industry, there remains an inherent risk of long-term negative impact on the environment if E&P entities are forced to sell assets quickly, as these assets may ultimately be developed by entities less concerned with the environment. .
It is clear that at present, E&P companies are under pressure to maintain sufficient production to meet the current global demand for hydrocarbons, but are also required to continue to deliver significant returns to shareholders and investors. demonstrate credible long-term business models, while working towards a sustainable and clean program, with a view to lowering the production and supply of hydrocarbons once alternative energy sources can be produced on a large scale and at a lower cost cost. This will require significant resources and swift action, as well as close alignment between governments, policymakers, capital providers and other stakeholders. Failure to respond accordingly will limit the capital available to E&P entities, as investors and financiers will seek to deploy capital elsewhere. The ability to attract talent into the workforce will also be affected if a company does not actively seek to implement low carbon business models. Despite the tensions facing the industry, the oil and gas sector has weathered many storms and, among other events, the 2008 global financial crisis, the fall in oil prices in 2015/16 and the COVID-19 pandemic. have all demonstrated the resilience an industry is forced to adapt to ever-changing economic, political and market pressures. E&P companies that do not accept the net zero challenge simply risk being left behind.
