How Big Oil sells off polluting assets in a bid to look green

An oil flare burns at Repsol’s oil refining complex in Cartagena, Spain. Repsol was one of the top sellers of assets between 2017 and 2021 in EDF’s analysis.

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Oil and gas giants are increasingly selling off dirty assets to private firms, amplifying concerns that the fossil fuel industry’s traditional dealmaking is not compatible with a net-zero world.

It comes at a time when oil and gas majors are under immense pressure to set short and medium-term targets in line with the goals of the landmark Paris Agreement. It is widely recognized that this accord is critically important to avoid the worst of what the climate crisis has in store.

Research published last week by the non-profit Environmental Defense Fund shows how oil and gas mergers and acquisitions, which may help energy giants execute their transition plans, do not help to cut global greenhouse gas emissions.

To be sure, the burning of fossil fuels, such as coal, oil and gas, is the chief driver of the climate crisis and researchers have repeatedly stressed that limiting global heating to 1.5 degrees Celsius will soon be beyond reach without immediate and deep emissions reductions across all sectors.

EDF’s analysis of over 3,000 deals between 2017 and 2021 shows how flaring and emissions commitments disappear when tens of thousands of wells are passed from publicly traded companies to private firms that have no oversight or reporting requirements to shareholders.

These transactions can make it look as though sellers have cut emissions, when in fact pollution is simply being shifted to companies with lower standards.

Andrew Baxter

Director of energy transition at EDF

These same often obscure private companies tend to disclose little about their operations and can be committed to ramping up fossil fuel production.

Such deals are growing in both number and scale, EDF’s research says, climbing to $192 billion in 2021 alone.

“These transactions can make it look as though sellers have cut emissions, when in fact pollution is simply being shifted to companies with lower standards,” said Andrew Baxter, director of energy transition at EDF.

“Regardless of the sellers’ intent, the result is that millions of tons of emissions effectively disappear from the public eye, likely forever. And as these wells and other assets age under diminished oversight, the environmental challenges only get worse,” he added.

The report says the surge in the number and scale of oil and gas dealmaking has coincided with growing fears among investors about losing the ability to assess company risk or hold operators accountable to their climate pledges.

It also suggests implications for some of the world’s largest banks, many of which have set net-zero financed emission targets. Since 2017, five of the six largest U.S. banks have advised on billions of dollars worth of upstream deals.

As a result, the analysis calls into question the integrity of Big Oil and Wall Street’s commitment to the planned energy transition, a shift that is vital to avoid a cataclysmic climate scenario.

What energy transition?

EDF says top sellers like Shell, for example, are well positioned to pilot climate-aligned asset transfers.

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Between 2013 and the point of transfer, almost no routine flaring had occurred under the stewardship of TotalEnergies, Eni and Shell, the top seller of assets from 2017 through to 2021, according to the EDF’s analysis.

Almost immediately thereafter, however, flaring dramatically increased. The case study was said to highlight the climate risks stemming from upstream oil and gas transactions.

Gas flaring is the burning of natural gas during oil production. This releases pollutants into the atmosphere, such as carbon dioxide, black carbon and methane — a potent greenhouse gas.

The World Bank has said ending this “wasteful and polluting” industry practice is central to the broader effort to decarbonize oil and gas production.

A spokesperson at Eni said the company does not consider asset sales as a tool to reduce emissions and the firm’s strategy to reach carbon neutrality by the middle of the century is based on a set of measures that includes zero flaring by 2025.

“Questions regarding specific asset sales should be directed to the operator,” they added. “In general terms, all asset sales contracts must comply with local regulations, they include clauses related to the respect of human rights, and they are subject to Government approval.”

CNBC has contacted Shell and TotalEnergies to comment on EDF’s analysis.

A ‘wink wink, nod nod approach’

In July 2021, some of the world’s largest oil and gas majors were ordered to pay hundreds of millions of dollars as part of a $7.2 billion environmental liabilities bill to retire aging oil and gas wells in the Gulf of Mexico that they used to own.

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Ceres’ Logan said that an important part of responsible asset transfer must be reckoning with the costs of shutting down wells at the end of their lives. In North America, for example, he highlighted the “huge problem” with so-called “orphan wells.”

These are oil and gas wells abandoned by fossil fuel extraction industries which can end up in the hands of companies with no ability or intention of cleaning them up.

“It is interesting to look at how different the asset sale process is in most of North America compared to the assets in the Gulf of Mexico because, in the Gulf of Mexico, there are federal rules that basically say if you sell an asset and the next company — or the next, next, next company doesn’t clean it up — that liability comes back to you,” Logan said. “So, you have a very strong interest in picking your partners wisely and making sure they have the money to clean the well.”

In July last year, some of the world’s largest corporate emitters were ordered to pay hundreds of millions of dollars as part of a $7.2 billion environmental liabilities bill to retire aging oil and gas wells in the Gulf of Mexico that they used to own. The case was thought to be a watershed moment for future legal battles over cleanup costs.

“I think we need something like that in the rest of the world where there’s an acknowledgment that that liability has to travel. It has to be paid for and we have to be aware of that at every stage of the process,” Logan said.

What can be done to tackle the problem?

Source: https://www.cnbc.com/2022/05/19/climate-how-big-oil-sells-off-polluting-assets-in-a-bid-to-look-green.html