Big Oil’s sales spree to cut emissions may leave fossil fuel assets in weaker hands

The 2010 Deepwater Horizon disaster spilled more than three million barrels of oil and would eventually cost operator BP and its partners more than $ 70 billion in redevelopment costs.

What would have happened if the Deepwater partners were not financially robust companies, but rather leveraged independent businesses backed by private equity? Who would have picked up the tab despite a disaster?

As the energy transition develops, companies in the oil, gas and electricity sectors are under pressure to commit to becoming “Net Zero” carbon emissions on dates within many lifetimes of many of their assets. Environmental, social and management criteria, high-profile court cases and disinvestment campaigns lead to the largest companies restructuring to meet a zero-carbon consensus.

But much of the restructuring will involve sale of assets rather than closures. Leading businesses sell oil and gas assets to smaller businesses, which may not have the financial strength to meet the challenges that catastrophic failures can pose.

A leading US utility, Exelon Corp., announced in February that it would expand its production and electricity supply business, of which about 27 percent is powered by natural gas, into a new, ‘competitive’ company while retaining regulated transmission and distribution assets. . .

In the US oil sector, the sale of Royal Dutch Shell of a 50 percent stake in its 340,000 barrel per day Deer Park refinery – to Pemex in Mexico – is an asset transfer to a state-subsidized oil company struggling to build its existing refineries to manage. .

In Europe, Engie was a leader in the sale of fossil assets, and in 2019, BP sold its Alaska assets to privately owned Hilcorp Energy, which within a few months allowed their greenhouse gas emissions to rise by 8.7 percent, according to Bloomberg. Allegedly, Shell is considering selling its significant position in the Perm basin.

Such transactions may enable sellers to reduce their direct emissions figures, but may leave the assets in weaker hands, and may not meet the liabilities arising from a catastrophic failure. Such transactions raise fundamental questions about who are the best owners of assets in the long run.

As the energy transition progresses, they face several risks. Asset owners can be called upon to confront unexpected liabilities that test their balance sheets.

In the event of bankruptcy, it is likely that smaller, less heavily capitalized companies will simply walk away. This could allow host governments – local, regional and national – to clear up the mess, with heavy pressure on the public purse, lower tax revenues and potentially significant social consequences.

Current asset sales are probably not the last round. As the pressure to reduce emissions increases, asset buyers such as thermal power companies themselves may be put under pressure to meet ESG criteria.

They may also find that the easiest way to reduce direct ESG risk is to sell assets to others. This is a risky cascade of ownership.

Although the direct consequences of disasters in the oil and gas sector may be primarily environmental health, gas has been linked to power and to keeping the lights on.

Failures in the power sector can cause major disruptions in large areas, resulting in economic damage and fines. Brazos Electric Power Cooperative, the largest in Texas with more than 1.5 million customers, has filed for bankruptcy protection after the February eclipse. Brazos said it acted to protect its members at $ 2.1 billion in costs charged by Texas network operator Ercot during the eclipse.

As climate uncertainty intersects with electrification, such risks will increase. A power asset can be marginal today, but important tomorrow, as the system shifts over to accommodate new load or more alternating renewable generation.

Failure of the asset at a critical moment can lead to enormous burdens that the surety’s balance sheet cannot bear. This in turn could force governments to compensate those affected, increasing costs for taxpayers and taxpayers.

Climate change is a systemic risk, but the shifts needed to mitigate it can pose specific risks. Energy asset sellers and their regulators need to carefully consider whether, in an effort to reduce the risk of ESG-related damage, they are simply shifting the liability to others who are less able to bear the burden.

Bill Barnes is the founder of Pisgah Partners, an energy projects consulting firm

The trading note is an online commentary on the operation of the Financial Times

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