Who buys dirty energy resources public companies no longer wants?

T.He is the first The law of thermodynamics states that energy cannot be created or destroyed, only transferred from one place to another. The same seems to apply to the energy industry itself. Under pressure from investors, activists and the government, the six largest oil companies in the West have allocated $ 44 billion to most fossil-fuel resources since the beginning of 2018. The industry is looking at a total settlement of $ 128 billion in the coming years, said Wood McKenzie, a consultant. Last month ExxonMobil said it would cut off its Canadian shell business; Shell lays its remaining Nigerian oil field blocks. But most of the time these obsolete units are not being shut down. Instead they are moving away from the floodlight world of the listed market to a shady environment.

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Many end up in the hands of private equity (On) Companies. In the last two years alone, they have bought, 60 billion worth of oil, gas and coal resources through 500 transactions – one-third more than they have invested in the renewable sector (see chart). Some billionaire deals have been struck with giants like Blackstone, Carlyle and the like KKR Building gas grids from large oil fields, coal-fired power plants or power groups, miners and utilities. Many other deals, sealed by smaller rivals, receive little publicity. It sits uneasily with the credo of other investors in many pension funds, universities and private funds, of which 1,485, representing $ 39trn assets, have promised to remove fossil fuels. But very few people seem ready to leave a juicy return on the table.

OnThe love affair with oil is not new. Between 2002 and 2015, growing global demand for the fuel pushed its price above $ 100 per barrel, focusing on “upstream” resource-exploration and production, particularly frying well-mushrooms. But then Saudi Arabia and its allies, interested in crushing American shells, flooded the market, destroying drilling firms and making transactions sour. Funds purchased targeting fossil fuels posted a ten-year internal rate of return (IRRs) -0.7% at the end of June 2021, a data firm thinks Prikin.

But the wind has changed. As demand for oil and gas continues to decline while investment in supply limits is reduced, prices are rising again, boosting producers’ profits. BPLast year, for example, it earned $ 12.8 billion, the highest since 2013. Shell predicted IRR20% for investment in upstream projects, as against 10% for renewables. Buyout funds, which often have a life expectancy of ten years, can expect to get their money back in half, most of which is generated from resale assets rather than acquisitions from operating cash flows. They can be a source of cheap capital: in contrast to majors, whose annual cost of equity is about 10%, they typically trade energy with 80% debt at an interest rate of 4-5%. And the discounts imposed by the stockmarkets on “brown” assets, coupled with factors of sustainability rather than financial issues, are causing a lot of misalignment to improve private funds.

On Managers have also been clever in changing their tactics. Without focusing on renewable energy, many are no longer marketing energy funds. Instead, upstream resources are being squandered on funds labeled “growth” or “opportunism,” along with others, covering a variety of industries. Private-lending funds snatch oil and gas loans from banks. The biggest change is a flurry of “medium-sized” assets (primarily pipelines) by private-infrastructure funding. Because their revenues are contracted and paid for by large clients – major energy and utilities – they are considered very secure, as well as attractive. IRRIn high adolescence. Some companies do everything. In June, a fund manager who owned Brookfield in Canada acquired joint ownership of the entire North American oil and gas debt portfolio. ABN Amro, A Dutch bank. In July, Brookfield agreed to pay $ 6.8 billion for Canada’s fourth-largest pipeline company – a day after raising $ 7 billion for a green “transition” fund.

On Companies say they can be trusted to manage those assets well. Since they own the controlling bets and avoid the constant gaze of the public market, they consider themselves in a unique position to improve efficiency and reduce emissions. But there is growing concern about the incentive to pocket dividends first and the rest later. Global private-capital “dry powder” – fund-raising money that has not yet been spent – hit a record 3.3trn. With so much to spend, managers want to make a lot of deals, which means many don’t have time to consider decarbonization plans for assets.

Investors seem to be in no hurry to tighten the taps. A recent survey by Probitas Partners, which helps non-governmental organizations raise funds, shows that investors today have almost no appetite for oil funds. But there are a few policies that exclude case-by-case transactions by broad funds. Uses data from PEI Media, Economist Eight views On The companies that have closed the fossil-fuel deal in the last two years Investors in some of their most recent energy-savvy vehicles include 53 pension funds, 23 universities and 32 foundations. Many come from the United States, such as the Texas Teacher Retirement System, the University of San Francisco, and the Pritzker Trubert Foundation, but this is partly because more institutions are located there. On The list also includes the West Yorkshire Pension Fund and China Life.

Over time, some investors may decide to go out of their way to fund part of their fossil-fuel deal. But a third, yet more opaque class is ready to take action: state-owned enterprises and sovereign funds are operating in the shadows. Last month, Saudi Aramco, the national oil company of the Kingdom, acquired a 30% stake in a refinery in Poland, and the Angolan group Somoel bought offshore oil assets from Total in France. In 2020 in Singapore GIC The emirate was part of a group that provided 10 10 billion for a partnership in the pipeline.

Can a bank act as a regulatory force? Europe’s big lenders will soon face a “green” stress test; Many have announced net-zero targets. The Wall Street banker says their appetite for upstream deals is “rapidly declining”. Yet for big deals, the bond market remains open. Small deals can tap into the private-debt market. And although Western banks avoid lending to mid-sized projects, Asians do not. There is still plenty of liquidity. Last month, a group of investors led by Dr. OWN, An American buyout firm, hired Citigroup and JPMorgan Chase to help refinance a $ 11 billion loan taken in June to buy a Saudi pipeline. No matter how deep you dig into the capital structure, the laws of thermodynamics still seem to apply. 3

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This article is published in the Finance and Economics section of the print edition under the title “Fossil Hunter”.

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