Environmentalists protesting against the development of the Cambo oil field northwest of the Shetland Islands can applaud Shell’s decision last week to pull out of the controversial project. To some extent, the pressure exerted by campaigners on the company and on the British government, which has not yet given the project the green light, worked. While Shell explained that he had come to the conclusion that the economy of the project no longer made sense, it was likely that an increasingly hostile atmosphere, especially in the run-up to Glasgow’s presentation of the COP26 climate summit, played a role. played in the oil company’s decision-making. But fighters should not be in a hurry: it may be a case of better the devil you know.
It is preferable for publicly listed companies, accountable to their shareholders and regulators, and subject to disclosure requirements, to hold brown assets rather than falling into the hands of private capital, which does not have such obligations. While Cambo’s depth and location make it a particularly challenging and expensive terrain, Shell’s departure does not in any way kill the project, especially while the government is caught between its promise to the UK to achieve carbon neutrality by 2050 on the one hand. , and energy security. and jobs on the other hand – unclear whether they need to be approved. Shell still holds only a 30 percent stake in Cambo, which is majority-owned and operated by Siccar Point, which is backed by private equity.
This reflects an unfortunate reality that there are many willing private capital investors in fossil fuels. Large oil companies that are under pressure to sell brown assets offer a buying opportunity at discounted prices, especially if oil and gas prices continue to beat. Governments’ failure to limit oil and gas consumption means that there are still years where healthy yields can be made.
There was 21 private equity transactions in the oil and gas sector in the first eight months of the year alone, according to S&P Global Market Intelligence. But it simply continues a trend that has been observed over the past decade, where private equity has invested $ 1.1tn in the energy sector since 2010; only 12 percent of that investment went into renewable energy projects, according to the Private Equity Stakeholder Project.
This means that there is an onus on the institutional investors – especially public pension funds and sovereign wealth funds that advocate ESG values - on which private capital relies to bring about change in the place of shareholders. US public pension funds alone allocate about 9 percent of their investments to private equity. Private pension funds’ investment in private equity, infrastructure and other alternative assets is will increase this year while attempting to offset the effects of historically low bond yields coupled with increased stock market valuations. This type of investment should have some serious strings attached. There is an economic reason to force private investors to find returns in cleaner energy, especially when new long-cycle oil and gas projects’ capital costs stand at 20 percent, compared to 5 percent for renewable energy.
Brown assets should not be the dirty secret of private capital: a degree of transparency can be brought, especially on the larger private equity firms that are publicly listed. Market regulators on both sides of the Atlantic need to be stricter with companies’ disclosure of their fossil fuel holdings. The Cambo case shows the road to carbon neutrality is far from smooth. And not every victory claimed by activists necessarily involves progress toward that goal.