The importance of ESG within the energy sector continues to be a headline topic and one which for oil and gas companies needs to form part of their business strategy as to how they contribute to the economy and society in which they operate.
With the ongoing pressure to achieve net zero targets and move to energy transition, the oil and gas industry might expect to see increasing mergers & acquisitions (M&A) activity (particularly in relation to older assets) as a means for companies to meet their emissions targets and comply with the growing ESG reporting requirements, such as those outlined in the updated NSTA Strategy, the ESG disclosure requirements and the Climate Compatibility Checkpoint.
However, there is debate around whether the sale of an oil and gas asset from one company to another actually achieves a “cleaner” environment. From a global perspective, where a large oil and gas company which is underpinned by strong ESG principles and net zero targets sells an asset to a smaller company (commonly with lower or no ESG principles or net zero targets), the seller will look more environmentally friendly on paper with the emissions from that asset then falling outside its portfolio , but the emissions from the asset will continue. In addition the acquiring company may not implement the same climate stewardship of the asset due to having less robust ESG/net zero programmes.
There has been some discussion within the industry amongst stakeholders such as oil and gas companies, private equity companies (who have backed the vast majority of buyers of oil and gas assets in the UKCS in recent years) and financial institutions, that climate stewardship alongside a strong ESG framework should be factored into the overall sales transaction. This might involve the seller screening the incoming licensee’s credentials as regards net-zero targets/ESG compliance, or the incoming licensee giving an undertaking that it has the financial and operational capabilities to ensure such targets/compliance are met, or a commitment by both the seller and the buyer to be transparent in the reporting of the asset’s emissions. In light of the continuing focus on the environmental and social impact of such deals, this could affect the way M&A deals are negotiated. However this is unlikely to itself discourage investment in the UKCS where the NSTA strategy already requires relevant companies to “take appropriate steps to assist the Secretary of State in meeting the net zero target, including by reducing […] greenhouse gas emissions from sources such as flaring and venting and power generation […]”.
In the UK, when the NSTA Strategy was introduced, one of the key mantras was seeking to facilitate “right assets in the right hands”. At the time, that was generally understood to mean facilitating the transfer of assets to those who could continue operations most economically and efficiently. In the current climate, that understanding may need to be updated to include considerations that are aligned to the net zero target obligations mentioned above.
Where a transaction involves a change of operatorship of the asset, co-venturers and regulators will also have an increasing focus on what impact the transfer will have from an emissions perspective. Co-venturers may therefore look to more closely scrutinise the expected working practices and governance of the buyer to ensure they are satisfied with their ESG offering.
Interestingly, the NSTA launched a consultation on 28 March (closing on 23 May) inviting views on proposed guidance on the conduct of licence assignments in the UKCS. The current draft guidance envisages that consenting parties are expected to behave properly in considering consent requests including, for example, explaining why any condition on consent is needed and give reasons for any withholding of consent.
The guidance goes on to provide that conditions imposed should be proportionate and not used as leverage for other unconnected commercial matters. How the finalised guidance (expected later in 2023) might be applied in the context of the matters discussed here will be something to keep under consideration.
Whether you are a seller or a buyer, or even a coventurer, corporate reputation is highly important, especially for public limited companies whose operations are constantly under scrutiny. It will also be important for private equity players who attract investment from various different sources. Investors and shareholders are equally concerned about the environmental and social impact of their own investments. It therefore feels appropriate that these considerations may be brought into M&A transactions directly.