A torch is burning at the Repsol oil refinery in Cartagena, Spain. In the EDF analysis between 2017 and 2021, Repsol was one of the best sellers of assets.

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Oil and gas giants are increasingly selling dirty assets to private firms, raising concerns that traditional fossil fuel deals are incompatible with zero world.

This comes at a time when large oil and gas companies are under enormous pressure to set short- and medium-term goals in line with the goals of the landmark Paris Agreement. It is widely acknowledged that this agreement is very important to avoid the worst of what the climate crisis has brought.

A study published last week by the nonprofit Environmental Defense Fund shows how oil and gas mergers and acquisitions that could help energy giants implement their transition plans are not helping to reduce global greenhouse gas emissions.

Of course, the burning of fossil fuels such as coal, oil and gas is a major factor in the climate crisis, and researchers have repeatedly stressed that limiting global warming to 1.5 degrees Celsius will soon be unattainable without immediate and profound emission reductions. in all sectors.

An EDF analysis of more than 3,000 transactions between 2017 and 2021 shows how incineration and emission liabilities disappear when tens of thousands of wells are transferred from public companies to private firms that have no oversight or reporting requirements to shareholders.

These deals can make it seem as if sellers have reduced emissions, when in fact the pollution is simply carried over to companies with lower standards.

Andrew Baxter

Director of Energy Transition at EDF

These same often obscure private companies tend to disclose little of their activities and may be committed to scaling up fossil fuel production.

Such deals are growing both in number and scale, according to an EDF study, rising to $ 192 billion in 2021 alone.

“These deals can make it look like sellers have reduced emissions, when in fact the pollution is just being passed on to companies with lower standards,” said Andrew Baxter, director of energy conversion at EDF.

“Regardless of the intentions of sellers, millions of tons of emissions are virtually disappearing from the public eye, probably forever. And as these wells and other assets age under reduced supervision, environmental problems are only getting worse,” he added.

The report says the increase in the number and scale of oil and gas deals coincided with growing fears from investors about the loss of the ability to assess the company’s risks or hold operators accountable for their climate promises.

It also has implications for some of the world’s largest banks, many of which have set zero-financed emission targets. Since 2017, five of the six largest U.S. banks have advised on multibillion-dollar deals.

As a result, the analysis calls into question the integrity of Big Oil and Wall Street’s commitment to the planned energy transition, a shift vital to avoiding a cataclysmic climate scenario.

What is the energy transition?

The EDF analysis used industry and financial data on mergers and acquisitions to track changes in how emissions could change after a sale. It is assumed that this is the first time that comprehensive data on how large oil and gas large companies transmit emissions to private buyers have been compared.

In one example, Britain’s Shell, France’s TotalEnergies and Italy’s Eni – all state-owned firms with zero targets – sold their stakes in Nigeria’s oil field to a private equity operator last year.

EDF says leading vendors like Shell, for example, have good positions to pilot climate-adjusted asset transfers.

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According to an EDF analysis, between 2013 and the time of the transfer, there was virtually no regular incineration under the leadership of TotalEnergies, Eni and Shell, the largest seller of assets from 2017 to 2021.

However, almost immediately after that the outbreak increased sharply. It was said that the case study highlights the climate risks arising from oil and gas production operations.

Gas flare combustion is the combustion of natural gas during oil production. At the same time, pollutants such as carbon dioxide, soot and methane are released into the atmosphere – a powerful greenhouse gas.

The World Bank has said that ending this “wasteful and polluting” industry practice is central to wider efforts to decarbonise oil and gas production.

CNBC contacted Shell, TotalEnergies and Eni to comment on the EDF analysis.

“Wink, wink, nod”

Andrew Logan, senior director of oil and gas at nonprofit Ceres, told CNBC that an EDF study shows that so far before the emissions were something like “winking and nodding” when large energy companies sell off high-pollution assets without worry. too much about whether the buyer is going to do what he should.

“But it is interesting that these private investment companies are usually supported by state money. You know, the partners in these companies are state pension funds, so there are levers of influence,” he added.

Larry Fink, CEO and chairman of the world’s largest asset manager BlackRock, sharply criticized the oil and gas giants for selling to private firms during the COP26 climate conference in Glasgow, Scotland, last year.

Fink said the practice of public companies selling highly polluting assets to opaque private companies “doesn’t change the world at all. It actually makes the world worse. ”

In July 2021, some of the world’s largest oil and gas companies were ordered to pay hundreds of millions of dollars through an environmental commitment account of $ 7.2 billion to decommission old oil and gas wells in the Gulf of Mexico that they previously owned.

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Logan of Ceres said an important part of responsible asset transfer should be accounting for the cost of shutting down wells at the end of their lives. In North America, for example, he highlighted the “huge problem” with so-called “orphan wells”.

These are oil and gas wells abandoned by fossil fuel companies that may end up in the hands of companies that do not have the ability or intention to clean them.

“It’s interesting to see how different the process of selling assets is in most of North America compared to assets in the Gulf of Mexico, because in the Gulf of Mexico there are federal rules that basically say if you sell assets and the next company – or next, next, next the company doesn’t clean it up – that responsibility will come back to you, ”Logan said.“ So you’re very interested in choosing partners wisely and make sure they have the money to clean the well. ”

Last July, some of the world’s largest corporate issuers were ordered to pay hundreds of millions of dollars in a $ 7.2 billion environmental commitment account to decommission old oil and gas wells in the Gulf of Mexico that they previously owned. It was believed that this case would be a turning point for future legal battles over the cost of cleaning.

“I think we need something similar in the rest of the world, where there is a recognition that this commitment has to go. You have to pay for it, and we have to know about it at every stage of the process,” Logan said.

What can be done to solve the problem?

The EDF report says coordinated action by asset managers, companies, banks, private investment companies and civil society groups can help reduce the risks of oil and gas mergers and acquisitions.

“It’s important to do this research because when we work with companies in the sector, it’s definitely on the agenda,” said Dror Elkayam, an analyst at ESG Legal & General Investment Management, a major global investor and one of Europe’s largest assets. managers.

Asked whether there are large oil and gas companies that should be at least partially responsible for the transfer of assets, Elkayam said: “So this is a matter of dispute, right?”

“I think we will definitely benefit from a greater level of disclosure of these assets,” he told CNBC via video call. This may include the emissions associated with these assets, or the extent to which the firm’s climate goals will be achieved by disposing of assets versus organic decline. “I would say this is an important area,” Elkayam said.

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