As the oil and gas industry faces turmoil amid fluctuations in global prices and catastrophic climate change, private equity firms, a class of investors with a focus on profit maximization, have entered the fray.
The private equity industry has invested at least $ 1.1 trillion in the energy sector since 2010, according to a new study, double the combined market value of the world’s three largest energy companies, Exxon, Chevron and Royal Dutch Shell. The vast majority of those investments were in fossil fuels, according to the Pitchbook, a company that tracks investments, and a new analysis by the Private Equity Stakeholder Project, a nonprofit that requires more disclosure of private equity deals.
Since 2010, only about 12 percent of private equity investments in the energy sector have been in renewable energy sources such as solar or wind, although these investments have grown at a faster pace, according to the Pitchbook.
Private equity investors are taking advantage of the oil industry, facing heat from environmental groups, ships and even their shareholders, to begin ditching fossil fuels, the main force behind climate change. As a result, many oil companies began to divest themselves of their dirtiest assets, which often ended up in the hands of privately held companies.
By seabed fishing at favorable prices – seeking to obtain riskier and less desirable assets at a lower cost – buyers keep some of the most polluting wells, coal-fired power plants and other underperforming properties in operation. This traps greenhouse gases in the atmosphere.
At the same time, banks, faced with their own pressure to reduce investment in fossil fuels, began to withdraw their funding to the industry, increasing the role of private capital.
The fossil fuel investment comes at a time when climate experts as well as the world’s most influential energy organization, the International Energy Agency, say countries need to more aggressively move away from burning fossil fuels, said Alyssa Giachino of the Private Equity Stakeholder Project.
“You see the big oil companies are feeling the heat,” she said. “But private equity is quietly picking up the trash, perpetuating operations with the least desirable assets.”
In its report, the Private Equity Stakeholder Project analyzed investments made by top 10 private equity firms since 2010, including the giants Blackstone, KKR and Carlyle, and found that about 80 percent of investments were in oil, gas and coal. This is despite the fact that many of these firms advertised their sustainable investments.
In recent decades, private equity firms have become an increasingly powerful but secretive investment force. They typically collect huge pools of money from wealthy or institutional investors to invest directly in companies that are often in distress and unable to raise capital in more traditional ways. Because firms are required to disclose relatively limited information, it can be difficult to obtain a complete picture of their holdings, their climatic or environmental practices.
Drew Maloney, president and CEO of the American Investment Council, a private equity trading group, said the industry “plays an important role in the energy transition and invests more in renewable energy projects every year.” Private equity funded more than half of all private renewable energy projects in America in 2020, he said.
“This significant investment creates more jobs and cleaner energy in the future,” said Mr Maloney.
The private equity industry, which manages $ 7.4 trillion in global assets, currently plays an important role in a wide range of American life, from firefighting services to nursing homes, often financing its deals with debt while generating profits for its clients and royalties. for their managers. … Clients include government pension funds, which currently invest about 20 percent of their investments in private equity on average.
In the fossil fuel industry, one of the consequences of selling to private investors is to move these assets, their emissions and other environmental hazards away from the public. While all companies, public or private, must comply with environmental regulations, private firms are exempted from many of the rules for public financial disclosure. As a result, some of the country’s largest sources of methane emissions, especially a potent global warming gas, are oil and gas producers backed by relatively little-known investment firms.
In 2017, Hilcorp, a private company backed by private equity giant Carlyle, bought the assets of oil company ConocoPhillips in the San Juan Basin in Colorado and New Mexico for $ 3 billion, and last year bought out all of BP’s operations in Alaska and interest for $ 5. $ 6 billion. Hilcorp is currently the largest known methane producer in the country, reporting nearly 50 percent more emissions from its operations than the country’s largest fossil fuel producer, Exxon Mobil, despite only producing about a third of Exxon’s oil and gas.
Hilcorp, Carlyle and ConocoPhillips did not comment.
David McNeill, head of climate risk at Fitch Ratings, wrote in a memo earlier this year that there is a growing trend among public companies and investors to ditch fossil fuels or other holdings that contribute to climate change, but “relatively little attention is being paid. depends on who buys those assets ”and, in particular, private equity firms“ generally have less incentive to cut emissions than their government counterparts. ”
In the midst of the pandemic, dozens of privately-backed oil and gas companies filed for bankruptcy, raising fears that they would use the restructuring process to evade cleanup rules. Now that oil and gas prices are rising again, private shale drilling and hydraulic fracturing are driving an increase in oil and gas drilling.
“Any private equity fund is obsessed with one thing and one thing only: how much money can we make on each particular investment?” said Ludovic Falyppe, professor of financial economics at the Said School of Business at Oxford University. “And when these mostly anonymous firms collapse, you don’t even know who to be angry with because you don’t even know who they are.”
There are some signs of change.
Since 2010, private investment in renewables has grown by about three times that of investment in fossil fuels since 2010, albeit from a much lower base, according to Pitchbook. Last year, the drop in oil demand fueled by the Covid-19 pandemic resulted in the lowest number of fossil fuel deals among the top 10 private equity firms since 2011, while investments in renewable energy companies surged.
And paradoxically, rising oil and gas prices could help renewable energy become even more competitive compared to fossil fuel projects, because higher electricity prices could help fuel demand for new wind or solar projects among utilities and others. individuals seeking to protect themselves from sudden market fluctuations.
Ayako Yasuda, professor of finance at the Graduate School of Management at the University of California, Davis, said private equity is “highly motivated to maximize what its clients want.” If clients were to invest in order to profit from environmentally responsible investments, “I don’t think they will have a problem with that.”
Keith Holderness, a spokeswoman for Blackstone, said virtually no capital in the company has been invested in oil exploration or production in the past three years. while nearly $ 11 billion has been allocated to clean energy projects. The company aims to reduce emissions by 15 percent through all new investments in which it controls energy use, she said.
Weak disclosure rules mean it is difficult to verify environmental claims in the private equity industry. Blackstone has come under fire for deals such as the acquisition of a new pipeline and export terminal in Louisiana that will emit more than 500,000 tons of greenhouse gases a year. Ms Holderness said the pipeline will be equipped with real-time emission detection and monitoring technology.
Groups such as the Private Equity Stakeholder Project have called on the SEC to force private equity firms to fully disclose details of their fossil fuel reserves. The American Investment Council, a trade group, opposed such a move, saying the current requirements are adequate, especially given that the private equity industry caters to relatively savvy investors – pension funds or others that have huge amounts of money to invest in and need for this remedy. own research.
Sophie Scheive, assistant professor of finance at the University of Notre Dame, said stricter transparency rules would help good private equity firms stand out in the dark industry and attract new investors. Right now, she said, “it’s easier for bad actors to hide.”