You would think that Royal Dutch Shell’s decision to eliminate its stake in the Nigerian Umuechem oil field would be a good thing, right? The announcement supported the company’s climate goals, after all. But selling oil wells has a dark side.
Many large fossil energy companies anticipate ridding themselves of more than $100 billion of oil fields and other polluting assets to cut their emissions and to gain headway toward their professed corporate climate goals. So far, so good.
The problem is that they typically don’t vet buyers to guarantee that the new owners will maintain pledges of emissions reduction and climate action. As a result, what looks like positive climate momentum when a major oil player is selling oil wells is little more than one oil producer exchanging fields for another.
The magnitude of investments and climate actions do not match the majors’ discourse, and climate targets and commitments begin to vanish. This phenomenon, where the production of emissions that drive climate change are transferred from one company to another, is also hindering the cleanup of fossil fuel infrastructure.
There is a significant risk of oil and gas emission reductions stalling in the near term as well as a potential growing trend of asset transfers becoming more central to companies’ emission reduction strategies.
Fossil Capital is Too Tempting: Walking Back Climate Pledges
The energy products of majors have contributed significantly to global greenhouse gas emissions and planetary warming over the past century. Decarbonizing the global economy cannot occur without a profound transformation of the fossil fuel-based business models of these majors. Those companies are ExxonMobil, BP, Shell, Total, Eni, Chevron, ConocoPhillips, and Equinor.
Annual reports from majors include numerous statements about company intentions to diminish contributions to climate change through low-carbon energy. Yet Carbon Brief data points to such a transition as simply “not occurring.” Top buyers in recent years have included state-owned oil and gas corporations such as Indonesia’s Pertamina, Qatar Energy, and China’s CNOOC — as well as Diversified Energy, an Alabama-based company that has amassed tens of thousands of aging oil and gas wells across Appalachia.
To adjust to the energy transition, the 8 majors would have needed to divest combined resources of up to 68 billion barrels of oil equivalent, with an estimated value of $111 billion and spending commitments in 2021 totaling $20 billion. That didn’t happen.
A study from the Environmental Defense Fund (EDF) Finds that oil and gas mergers and acquisitions, which may help industry oil and gas majors execute their energy transition plans, do not necessarily help cut global greenhouse gas emissions. EDF argues that asset transfer — and its associated climate impact — has long been overlooked by NGOs and investors alike in assessing corporate net zero planning.
By digging deep into specific high-risk transactions, the EDF unpacked the climate implications of oil and gas asset sales. Its findings indicate:
- A significant amount of upstream oil & gas dealmaking has taken place in recent years.
- Assets are flowing from public to private markets at a significant rate.
- Assets are moving away from companies with environmental commitments.
- Stewardship risk in upstream oil and gas appears to be rising.
For example, as reported by the New York Times, satellites had indicated no routine flaring when Shell controlled the Umuechem field for several years prior to the sale. Yet, after the private-equity backed firm took control, levels of flaring quadrupled, according to data from the VIIRS satellite collected by EDF.
New owner Trans-Niger has plans to triple production at the field. Increased production is likely to strain the oil field’s facilities and require significant amounts of flaring. That’s because rapidly increasing oil production often also releases more natural gas, overwhelming the field’s ability to collect the additional gas.
The Problem with Flare Gas
Gas flaring is the burning of natural gas associated with oil extraction. The practice has persisted from the beginning of oil production over 160 years ago and takes place due to a range of issues, from market and economic constraints, to a lack of appropriate regulation and political will.
Gas flaring is a major environmental concern facing the world today, as it generates a significant amount of carbon dioxide and methane emissions which contribute to the overall burden of global warming.
Five countries (Russia, Iraq, Iran, the US, and Algeria) accounted for more than half of all volumes flared globally in 2020. Many options are available to reduce flaring, but all include new gas monetization strategies, business models, and more stringent and enforced regulations.
The Net-Zero Emissions by 2050 Scenario approves no new oil and gas fields for development in their pathway and no new coal mines or mine extensions. The Scenario also requires all non-emergency flaring to be eliminated globally by 2030, resulting in a 90% reduction in flared volumes by 2030.
Globally, 142 bcm of natural gas was flared in 2020 — roughly equivalent to the natural gas demand of Central and South America. This resulted in around 265 Mt CO2, nearly 8 Mt of methane (240 Mt CO2-eq) and black soot and other GHGs being directly emitted into the atmosphere.
The transferred emissions problem presents an opportunity for firms across the energy and finance sector to demonstrate real climate leadership. The EDF says that forging a new model of climate-aligned dealmaking will require refashioning traditional business tools for a net-zero reality.
That type of bold, immediate action is essential to combat the pressing climate crisis.
The number of countries announcing pledges to achieve net zero emissions over the coming decades continues to grow. But the IEA reports that the pledges by governments to date — even if fully achieved — fall well short of what is required to bring global energy-related carbon dioxide emissions to net zero by 2050 and give the world an even chance of limiting the global temperature rise to 1.5 °C.
Yes, it is possible to transition to a net zero energy system by 2050 while ensuring stable and affordable energy supplies, providing universal energy access, and enabling robust economic growth. It can be cost-effective and economically productive so as to result in a clean, dynamic and resilient energy economy dominated by renewables like solar and wind instead of fossil fuels.
But, because public companies are subject to stricter disclosure regulations than private companies, private operators are able to avoid scrutiny from investors, regulators, and the general public. Though a number of private companies and private equity firms are taking steps to lead on emissions reporting, in the aggregate, asset transfer from public to private markets is likely to make the oil and gas industry’s climate impact even more opaque.
Energy constituents need to step up and seek out the real numbers behind the majors’ claims of being on the path to zero emissions.
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