Private equity may see cash flow from North Sea assets fall 60% in moderate energy transition
New production riskier as peak demand approaches
Private Eyes Wide Shut: Private Equity Investments in Oil and Gas at Risk from Energy Transition
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the full report
It is increasingly clear that the energy transition is well underway, with renewables substituting for oil and gas.
Projections for oil and gas demand present a bleak picture for the industry: the International Energy Agency (IEA) now foresees global demand for oil, gas, and coal all peaking by the end of this decade. This seismic shift in energy consumption will have significant consequences for energy investors, across all asset classes.
This report is primarily written for private equity investors – both General Partners (GPs) and Limited Partners (LPs) – and highlights the unique risks which they face from continued investment in Upstream, alongside those facing listed equity investors.
It builds on existing Carbon Tracker methodologies and analysis to better equip private equity investors with the tools to evaluate the viability of their investments, and:
- Demonstrates the demand substitution impact of an accelerating energy transition on project viability.
- Outlines the strategies open to private equity upstream portfolio companies and highlights the relevant key risks under different paces of transition.
- Reviews the risks to which GPs and LPs are uniquely exposed via upstream investments.
- Highlights strategies for GPs and LPs to mitigate the chance of potential lower returns from transition-induced value erosion.
- Quantifies the impacts of a slow and moderate paced transition to private equity backed companies’ future cash flows, investments, and production.
- Identifies the key considerations for policymakers and financial regulators.
- Throws a spotlight on private equity backed companies’ role in new licensing.
Quotes
Maeve O’Connor, author and Oil, Gas & Mining Analyst at Carbon Tracker said: “The North Sea offers a case study of the risks that private equity backed upstream producers face from both new and existing fields. Companies are chasing marginal, more expensive barrels of oil in an already difficult cost environment. The likelihood of these higher-cost barrels remaining economic in a fast transition scenario seems to be decreasing.”
Mike Coffin, Carbon Tracker’s Head of Oil, Gas, & Mining said: “The energy transition is accelerating and will erode demand for oil and gas, with severe repercussions for the financial health of many oil and gas companies. Private equity firms investing in such companies at this stage of the transition are taking a serious gamble. Firms could be left holding companies whose value has cratered, with no buyers willing to take them off their hands. Even under a transition progressing at a moderate pace, the value of these oil and gas investments could be significantly lower than anticipated.”