Diversification out of upstream oil and gas
Cost pressures aside, geopolitical factors are driving some companies to plan strategic moves towards decarbonization. Global energy supplier ENGIE, for example, is pursuing a transformation plan aimed at redesigning and simplifying its portfolio of activities towards a low carbon footprint and less exposure to commodity prices. As part of this plan, it has said that it could eventually sell its exploration and production (E&P) assets depending on the price.2
Maria Moræus Hanssen, CEO, ENGIE E&P, explains that the fundamental shift in ENGIE’s strategy is driven by decarbonization, decentralization and digitalization: “These three words describe the mega-trends that we see, and they are what we are aiming to reposition ourselves towards.”
She expects to see more oil and gas companies hiving off E&P businesses and anticipates private equity becoming a main buyer of such assets: “E&P used to be big companies, big corporates. Now I think E&P is going to be more and more about companies owned by private equity firms, who have very different perspectives and very different behaviour: a lot of these buy and turn around things.”
Non-financial due diligence for M&A
As increased M&A activity and expectations for new portfolio ownership models come into play, companies across the sector are taking on greater obligation to account for their environmental and safety performance in annual reports and other documents required by regulators and law.
Commenting for DNV GL’s research, Brian Sullivan, executive director of IPIECA, the global oil and gas industry association for environmental and social issues, says: “I am not seeing any compromises being made in response to the low oil price. Companies now view sustainability as part of their licence to operate, not as something that could be compromised.”
This trend is being given added impetus by the global decarbonization agenda. Indeed, only three per cent of senior oil and gas professionals say that their companies will be scaling down sustainability initiatives in 2017.
The industry’s appetite for continued sustainable practice will appeal to the investment community, which is seeking reassurance over environmental risks in deals. A cross-industry report published by PwC reveals that up to 40% of private equity investors have seen poor environmental, social and governance (ESG) performance as a reason to demand a material discount on a purchase price, or to walk away from a deal.3
“The potential or actual environmental liabilities associated with target deals across asset lifecycles can be substantial,” advises Elisabeth Tørstad, CEO, DNV GL – Oil & Gas. “Our due diligence teams provide regulatory compliance and management system suitability, safety, technical, commercial, and environmental due diligence for investing in or divesting oil and gas assets. They see that identifying and quantifying these risks allows purchasers and sellers to negotiate around terms and conditions that can make or break a deal.”
As the industry reorganizes, the trend toward smaller players owning and operating assets, and the anticipated greater involvement by private equity, creates greater need for technical expertise to support due diligence.
The PwC study suggests that private equity firms may be no less keen than current oil and gas asset owners to avoid unacceptable additional costs, fines or reputational damage. It finds ESG factors high up the agenda for private equity houses; more than two-thirds (70%) have made public commitments to invest responsibly across their portfolios. Of those surveyed, 44% plan to assess the impact on their portfolios of the United Nations’ 17 Sustainable Development Goals (SDGs), while 36% see reputation benefits in supporting these goals.
Meeting sustainability targets and requirements
DNV GL assists potential buyers and sellers of oil and gas sector assets to cost-effectively and safely meet business, regulatory and reputational objectives in the sustainability area. It can help the industry to align with the UN SDGs and with national regulations and initiatives implementing the COP21 Paris Agreement on limiting global warming.
To help minimize any negative aspects of oil and gas developments while maximizing positive impacts such as affordable access to energy supplies, DNV GL has developed a framework for benchmarking financial and reputational consequences of exploiting resources worldwide.