Booming merger and acquisition activity in the oil and gas sector could have an alarming impact on efforts to reduce emissions in the energy transition. A disturbing report by the EDF on Transferred emissions: how risks in oil and gas M&A could hamper the energy transition highlights the potential for reduced environmental stewardship and limited climate disclosure.

The EDF carried out detailed analysis of the scale of ‘transferred emissions’ during M&A activity over a five-year period to 2021. The US environmental advocacy group did a deep dive into transaction data and found a troubling trend of assets moving from owners with strong climate commitments and established climate disclosure practices to those with weaker standards.

Case studies showed clear evidence that asset sales could result in reduced environmental commitments and corresponding increases in greenhouse gas (GHG) emissions (see Box 1 and 2).

Although EDF recognises that M&A activity is essential for oil and gas activity, especially as major companies reduce fossil fuel activities in a move towards increased renewable-related activities, it suggests that the climate problems are simply being transferred and sometimes exacerbated.

The report emphasises that ‘closing the transferred emissions loophole requires co-ordinated planning from leaders across the financial and real economy communities’. This is a significant demand, considering the size and breadth of deal-making involved.

EDF estimates there were 498 deals totalling over $192bn in 2021, surpassing deals struck in 2015, 2016 and 2020. What’s more, over the last five years, the number of public-to-private transfers exceeded the number of private-to-public transfers by 64%.

This matters as assets are increasingly moving away from companies with strong environmental commitments to those where they are privately owned and more relaxed about environmental factors.

In 2018, deals that moved away from environmental commitments accounted for 10% of transactions, rising to 15% of transactions by 2021. During this period, more than twice as many deals moved assets away from operators with net zero commitments than the reverse.

Stewardship risk in upstream oil and gas appears to be rising, with the report noting the movement of upstream oil and gas facilities to private markets with ‘traditionally less transparency and reduced environmental commitments’. This suggests there is a growing number of assets which are at risk of weak climate stewardship.

‘Given the potential ramifications of oil and gas dealmaking the transferred emissions problems has become an increasingly mainstream topic across the environmental community, especially as demand for decarbonisation incentivises companies to sell high-emitting assets,’ says EDF. However, the analysts note there is currently ‘sparse information’ on how upstream asset transfers may impact climate outcomes.

The case studies show a disturbing trend for post-transaction increases in natural gas flaring and other climate-related indicators. ‘These asset transfers to operators with reduced environmental commitments can stall progress in emissions reduction and, in some cases, can lead to a near-term rise in emissions,’ says the report.

Taken together, the analysts conclude that upstream M&A trends show that oil and gas asset sales can have a significant effect in slowing the energy transition. ‘Not only could emissions increase in the immediate future, but climate disclosure could decrease while environmental liabilities could remain unresolved for decades longer than necessary.’

EDF suggests that ‘how companies sell assets must change’ and ‘new tools should ensure sustained climate stewardship as assets change hands’. It recommends that corporate sellers could increase specific climate standards in deal terms to improve disclosure and environmental stewardship. It also suggests that private buyers could work proactively to implement and adopt these standards. 

EDF calls for coordinated action from asset managers, companies, banks, private equity firms and civil society groups, so M&A stewardship risks can be reduced. Institutional investors could invite oil and gas companies to disclose their annual emissions reduction stemming from asset transfers and encourage operators to incorporate climate safeguards in M&A deal terms. Moreover, investors could ‘reward’ oil and gas companies that decide to steward assets responsibly, it says.

For their part, EDF recommends that buyers could commit to enhanced climate disclosure and best-in-class methane mitigation, flaring reduction and well remediation. Companies selling assets could require prospective buyers to adhere to these practices, while banks could ensure that such standards are integrated in real transactions.

Top sellers like Shell, Repsol and Chevron are said to be well positioned to pilot climate-aligned asset transfers by devising contracts that require buyers to disclose emissions and emissions reduction targets.

A big ask? 
Some may feel this is a big ask. But the statistics give a clear idea of the scale of the challenge.

Over the last five years, a significant number of upstream oil and gas deals moved assets from companies with well-publicised climate commitments to companies that lack such commitments:

• Some 155 deals worth $86.4bn moved assets away from net zero-aligned companies. 
• A further 298 deals worth $144.9bn have transferred assets from companies with flaring commitments to those without. 
• Some 211 deals totalling $115.6bn have pushed assets away from companies with methane goals to companies without explicit methane emissions reduction targets. 
• While 150 deals totalling $76.8bn have shifted from Oil and Gas Methane Principle (OGMP) members to non-members. 
 

Deals between companies without environmental commitments comprised the vast majority of [M&A] transactions.

The proportion of reduced-environmental commitment transactions ballooned from 15% of overall deal value in 2018 to 30% of overall deal value in 2021.

The report emphasises that these figures highlight the risk of oil and gas emission reductions ‘stalling in the near term’ and point to a potential growing trend of ‘asset transfers becoming more central to companies’ emission reduction strategies.’

Alarmingly, analysis of oil and gas M&A deals in the last five years shows that many fossil fuel assets are, in aggregate, moving from being relative industry leaders on tackling climate change to relative laggards in the move from public to private markets.

EDF is aware that: ‘While these trends do not guarantee that GHG emissions are rising due to M&A activity, they do show that “at minimum” the climate risk management, disclosure and governance of oil and gas facilities is weakening, making emissions more likely to stall out or increase.’

Furthermore, with hundreds of assets being transferred to companies that lack net zero targets, strategic oversight of high-emitting facilities is primed to decline. These transactions may hamper the oil and gas industry’s capacity to meet climate expectations over the long term.

The movement of assets from public to private companies also indicates an overall decline in climate risk disclosure from upstream operators.

An important step for environmental awareness 
Alessandro Basi, Special Advisor to the International Energy Agency (IEA) commended the EDF report in a recent blog. ‘Over the last few years, the pressure on international oil and gas companies to introduce environmental commitments has mounted significantly. This is a very important step for improving environmental awareness and taking further steps. However, something that always puzzled me was to note that very often the divestments of assets from large corporations were celebrated like a victory.’

‘This research from EDF shows that assets divestment does not make [fossil fuel] assets disappear from the market, including any potential production of oil or gas from them. In other words, the environmental implications of such operations need to be carefully scrutinised in order to assess the potential impact.’

‘The reality is pretty difficult – over the last five years, the vast majority of asset transfers have gone from companies with flaring commitment to others without; from companies with net zero targets to others without those; and from companies embracing methane reduction goals, to companies not being set such goals.’

Basi recommends the report as a ‘helpful and data-driven reminder that moving towards a cleaner future requires much more than slogans and celebration of “real” victories’.