Think tank Carbon Tracker has claimed North Sea cash flows could fall by more than 60% if a “moderate” energy transition pace is delivered.
In a new report, entitled ‘Private Eyes Wide Shut’, Carbon Tracker claims “the energy transition is irreversible and accelerating falling demand will drive down commodity prices, and with it the cash flows and value of oil and gas companies.”
The document highlights 10 firms in Norway and the UK that are backed by private equity which it predicts could face serious headwinds as transition efforts progress from 2024-30.
North Sea operators named by the think tank include NEO Energy, Sval and Vår Energi (both backed by HitecVision), Harbour Energy and Repsol (EIG), Pandion Energy and Star Energy Group (Kerogen Capital), Neptune Energy (backed by Carlyle and CVC Capital Partners), ONE-Dyas (AtlasInvest), and Wellesley Petroleum (Bluewater).
The document suggests that eight of the 10 businesses stand to lose between 63% and 100% of their aggregate cash flow between 2024 and 2030 if a “moderately-paced transition” is achieved.
Two firms that were unaffected were Norway’s Wellesley and Star Energy, as neither has any existing projects in the North Sea, the report notes, drawing on Rystad data.
Funding the transition
Trade body Offshore Energies UK (OEUK) said that it “remains committed to supporting all its members as they tackle the challenges of the energy transition.”
It has also been widely argued that firms within the oil and gas industry are helping deliver the energy transition and are diversifying into the renewable market while supporting oil and gas operations.
One of the firms pointed to by Carbon Tracker, Repsol, was found to have spent 24% of its capital expenditure on the energy transition in 2023.
Reports from law firm CMS last year showed that some firms were dedicating up to a quarter of their CAPEX to the energy transition, however, others set aside less than 1%.
Meanwhile Exxon chief executive Darren Woods last year told the World Petroleum Congress in Calgary that rising global demand meant producers could ill afford to cut supplies.
“No matter where demand gets to, if we don’t maintain some level of investment in the industry, you end up running short of supply, which leads to high prices,” he said.
OEUK’s Workforce Insight 2023 report found a “homegrown energy transition” using existing skills could see the UK energy workforce increase by 50%, leading to 225,000 employed in the sector by 2030.
According to the report, more than 90% of workers employed in oil and gas production and its associated supply chain have skills that are potentially transferrable to wind, carbon capture, utilisation and storage (CCUS) and clean hydrogen production.
The Carbon Tracker findings relate to a “moderately-paced transition in line with a 1.7°C temperature rise,” the group claims that “many oil and gas companies” only take into account existing climate pledges in their investments which assumes a “slow energy transition” which is on a 2.4°C pathway.
Stranded asset warning
The UK’s largest producer of oil and gas, Harbour Energy stands to lose 81% of cash flow if the 1.7°C pathway, outlined by Carbon Tracker, is achieved. ONE-Dyas, backed by Belgium’s AtlasInvest, risks 100% of cash flow if this pathway is delivered.
The “moderate” and “slow” transition pathways used in Carbon Tracker’s analysis is based on the International Energy Agency’s Stated Policies Scenario (based on a 2.4°C pathway) and the Announced Pledges Scenario (which is in line with the 1.7°C outlook).
“Firms could be left holding companies whose value has cratered, with no buyers willing to take them off their hands,” said Carbon Tracker’s head of oil, gas, and mining, Mike Coffin.
“Even under a transition progressing at a moderate pace, the value of these oil and gas investments could be significantly lower than anticipated.”
The IEA’s figures also highlight that there will be a demand for around 55 million barrels per day in 2050.
This is a drop from the peak demand seen in 2030 of 93 million barrels a day, however, this highlights a need for hydrocarbons throughout the energy transition.
Currently, there is high demand for oil and gas with the latest figures showing that 70% of UK demand for oil relates to transport.
Last year, UK Prime Minister Rishi Sunak rolled back the deadline for the sale of new petrol and diesel cars, pushing a ban on engine sales to 2035.
Yet even with residual demand in sectors like transport, heat and power, diminishing returns could see some investors hit hard.
Maeve O’Connor, author and oil, gas and 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.”
Companies backed by private equity are usually left with heavy debts after their purchase and “could be disproportionately at risk of financial distress if cash flows falter,” Carbon Tracker argues.
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