As the oil and gas industry faces upheaval amid swings in global prices and catastrophic climate change, private equity firms – a class of investors who focus on maximizing profits – are emerging. entered the fray.
Since 2010, the private equity industry has invested at least $ 1.1 trillion in the energy sector, double the combined market value of three of the world’s largest energy companies, Exxon, Chevron and Royal Dutch Shell, according to a new study. The overwhelming majority of those investments were in fossil fuels, according to data from Pitchbook, a company that tracks investments, and new analysis from the Private Equity Stakeholder Project, a nonprofit that pushes for more disclosure about private equity transactions.
Only around 12% of investments in the energy sector by private equity firms have been in renewables, such as solar or wind power, since 2010, although these investments have grown at a faster rate, according to Pitchbook data.
Private investors are taking advantage of an oil industry facing the heat of environmental groups, courts and even their own shareholders to start moving away from fossil fuels, the main force behind climate change. As a result, many oil companies began to divest some of their dirtiest assets, which often ended up in the hands of privately funded companies.
By seeking low bargain prices – seeking to buy riskier, less desirable assets on the cheap – buyers keep some of the more polluting wells, coal-fired power plants, and other inefficient properties going. This keeps greenhouse gases in the atmosphere.
At the same time, banks, facing their own pressure to reduce investment in fossil fuels, began to withdraw from industry financing, raising the role of private equity.
Investments in fossil fuels have come at a time when climate experts, along with the world’s most influential energy organization, the International Energy Agency, say nations need to move away more aggressively. burning fossil fuels, said Alyssa Giachino of Private Equity Stakeholder. Project.
“You see the oil majors feeling the heat,” she said. “But private equity is quietly picking up the dregs, perpetuating the operations of less desirable assets.”
In its report, the Private Equity Stakeholder Project looked at investments made by the 10 largest private equity firms since 2010, including giants Blackstone, KKR and Carlyle, and found that around 80% were in oil, gas and coal. This was despite many of these companies touting their sustainable investments.
Private equity firms have become an increasingly powerful, but secretive, investment force over the past decades. They typically pool large pools of money from wealthy or institutional investors in order to invest directly in companies, often those in difficulty and unable to raise capital in a more traditional way. Since companies are required to disclose relatively limited information, it can be difficult to get a complete view of their holdings or their climate or environmental practices.
Drew Maloney, chairman and CEO of the American Investment Council, a business group that represents private equity, said the industry “plays an important role in the energy transition and is investing more each year in energy projects. renewable”. By 2020, private equity had funded more than half of all private renewable energy projects across America, he said.
“This significant investment creates more jobs and cleaner energy for the future,” said Mr. Maloney.
The private equity industry, which manages $ 7.4 trillion in global assets, now plays a major role in a wide range of American life, from firefighting services to nursing homes, often funding its debt transactions while generating profits for its clients and fees for its managers. . Its clients include public pension funds, which now on average spend around 20% of their investments in private equity.
In the fossil fuel industry, one of the effects of sales to private investors is to shift these assets, along with their emissions and other environmental risks, away from the public eye. While all companies, public or private, must comply with environmental regulations, private companies are exempt from many public financial disclosure rules. As a result, some of the country’s biggest emitters of methane, a particularly potent gas for global warming, are oil and gas producers backed by relatively little-known investment companies.
In 2017, Hilcorp, a private company backed by private equity giant Carlyle, bought the San Juan Basin assets of oil company ConocoPhillips in Colorado and New Mexico for $ 3 billion, and last year , it bought all of BP’s operations and interests in Alaska for $ 5.6 billion. Hilcorp is now the nation’s largest known emitter of methane, reporting nearly 50% more emissions from its operations than the nation’s largest fossil fuel producer, Exxon Mobil, although it only produces about a third of Exxon’s oil and gas volume.
Hilcorp, Carlyle and ConocoPhillips did not comment.
David McNeil, head of climate risk at Fitch Ratings, wrote in a note earlier this year that there is a growing trend among publicly traded companies and investors to divest from fossil fuels or other holdings that contribute to the change, but “comparatively little attention is paid to who buys these assets”, and private equity firms, in particular, “will generally have less incentive to cut emissions than their public counterparts”.
At the height of the pandemic, dozens of privately-backed oil and gas producers filed for bankruptcy, raising fears they would use the restructuring process to evade clean-up rules. Now, as oil and gas prices rise again, private shale drilling and fracking is leading to a rebound in oil and gas drilling.
“Every private equity fund is obsessed with one thing, and only one: how much money can we make with any given investment? Said Ludovic Phalippou, professor of financial economics at the Saïd Business School at the University of Oxford. “And when these largely anonymous businesses collapse, you don’t even know who to be mad at because you don’t even know who they are.”
There are some signs of change.
Since 2010, Pitchbook data shows that private equity investments in renewables have grown to about three times the clip of fossil fuel investments, albeit from a much lower base. Last year, a drop in demand for oil triggered by the Covid-19 pandemic resulted in the fewest fossil fuel deals among the top 10 private equity firms since 2011, while the number of investments in renewable companies has increased.
And paradoxically, rising oil and gas prices can help renewables become even more competitive with fossil fuel projects, as higher electricity prices could help boost demand for new wind projects or solar among utilities and others seeking to protect themselves from sharp fluctuations in the market.
Ayako Yasuda, professor of finance at the Graduate School of Management at the University of California at Davis, said private equity has “a lot of incentive to maximize what its clients want.” If clients were pushing funds to find profit in environmentally friendly investments, “I don’t think they would have a problem doing that. “
Kate Holderness, spokesperson for Blackstone, said virtually none of the company’s capital over the past three years has been in oil exploration or production. while nearly $ 11 billion has been committed to clean energy projects. The company aims to cut emissions by 15% in all new investments where it controls energy use, she said.
Weak disclosure rules mean it is difficult to verify environmental claims in the private equity industry. Blackstone has been criticized for deals such as its acquisition of a project to build a new oil pipeline and export terminal in Louisiana that would emit more than 500,000 tonnes of greenhouse gases per year. Ms Holderness said the pipeline would be fitted with real-time emissions detection and monitoring technology.
Groups like the Private Equity Stakeholder Project have called on the Securities and Exchange Commission to require private equity firms to fully disclose details of their fossil fuel holdings. The American Investment Council, the trade group, opposed such a move, saying the current requirements were adequate, especially since the private equity industry serves relatively sophisticated investors – pension funds or d ‘others with huge sums of money to invest, and the means to do it their own research.
Sophie Shive, associate professor of finance at the University of Notre Dame, said stricter transparency rules would help good private equity firms differentiate themselves in a murky industry and gain new investors. Right now, she said, “it’s just easier for bad actors to hide.”