By: Thomas J. Powell, Senior Managing Partner, Resolute Capital Partners
During his campaign, Joe Biden promised to make the climate a central focus of his presidency. Now, only a few months into his administration, President Biden seems intent to follow through on this pledge. One of his first orders was to cancel the permit for the Keystone XL oil and gas pipeline. Additionally, the Biden Administration has suspended new oil and gas leases and drilling permits on federal land. And while these moves may have received the greatest amount of media coverage, the president is also working to eliminate subsidies for oil and gas.
But the government is not the only source of capital trying to distance itself from fossil fuels. Banks, insurance companies and other large organizations are all fleeing the oil and gas industry, creating a constriction of capital and leaving a large gap that will need to be filled. Private equity has the potential to fill that gap.
OIL AND GAS IS NECESSARY…
First, I want to be clear that, as an individual, an entrepreneur and a citizen, I fully support a cleaner environment and a greener future, and I believe that we should make a transition to renewable energy sources, but it is important to remember that this will be a transition. A century-plus history of oil dependence cannot be changed overnight.
Oil fuels our transportation; it heats our homes; and it is used to make a number of products, including plastics, solvents and other goods. In the U.S., oil and gas accounted for 69 percent of the energy consumption in 2019, according to the U.S. Energy Information Administration (EIA). Furtherore, according to BP, oil and gas was responsible for 57 percent of the global energy consumption (a difference which can be attributed to, at least in part, the world’s use of coal – 27 percent worldwide versus only 11 percent in the United States). And, according to DNV GL, a leading classification society, oil and gas will still account for 44 percent of the world’s primary energy supply in 2050.
What’s more, Reuters has reported that it is entirely possible that without adequate exploration, the world as a whole could face an oil shortage of up to 450 billion boe by 2040, despite a shift towards greener energy. Rystad Energy, the independent research company, states that it will require a capital expenditure of at least $3 trillion to meet the demand required. With investment capital leaving the oil and gas space, this number seems impossible to hit, but it also leaves a great opportunity for private equity investors.
…BUT PERHAPS NOT SOCIALLY ACCEPTABLE
Although data seems to suggest that oil and gas will be necessary for the foreseeable future, there has been a mass exodus of investor capital within the industry. As mentioned, President Biden has pledged to eliminate government subsidies for fossil fuels, an amount calculated by the Environmental and Energy Study Institute to be roughly $20 billion.
Large banks are also moving away from the sector. As reported by the Fossil Fuel Finance Report 2021, JP Morgan’s financing for fossil fuels fell by 20 percent in 2020, and Wells Fargo’s fossil fuel financing decreased by 42 percent. Additionally, CitiBank recently announced its intent to transition to greener energy, with the goal of being net zero by 2050, and restricting investments to oil and gas exploration in certain areas. The Bank of Montreal also recently announced it will leave the U.S. oil and gas market.
Similarly, other companies are following suit. Australian insurance leader, Suncorp, recently stopped underwriting, financing or directly investing in new oil and gas projects and pledged to phase out underwriting and financing existing oil and gas businesses by 2025. It will stop directly investing by 2040.
Swiss Re recently announced its guidelines for restricting insurance and investment for oil and gas companies. And in the U.S., Axis became the first insurer to cease coverage for certain oil and gas projects, as reported by NU Property and Casualty Group. It seems it may only be a matter of time before other U.S. insurance companies follow in their footsteps, especially as they face increased social pressure from activists and large businesses.
New York state recently announced that its $226 billion pension fund, one of the world’s most influential investors, has pledged to drop its fossil fuel stocks. According to an article from CNN, even the Rockefeller Foundation, the $5 billion philanthropic organization established by oil tycoon John D. Rockefeller, is divesting away from oil and gas.
PRIVATE EQUITY MAY BE ABLE TO FILL THE SPACE
I believe this massive loss of capital investment from institutional investors, coupled with a perceived and sustained demand for oil and gas over the next 20 to 30 years, is creating an emerging market. This presents the potential for one of the greatest buying opportunities in oil and gas history for investors who are prepared, knowledgeable, and have the means to invest.
The events of 2020, including the oversupply and lack of demand resulting from COVID-19 and the OPEC/Russia price war, has resulted in many small- to medium-sized oil and gas companies facing bankruptcy. Top-tier producers are beginning to fractionalize and sell off all or portions of their non-operated assets to shore up their balance sheets. Many are extremely overleveraged, sitting on a mountain of debt, with oil and gas accounting for nearly $90 billion in debt for potential fallen angel companies, as reported by Fitch Ratings.
As of this writing, and nearly a full year since oil prices dramatically dipped into the negative range for the first time in history, oil prices have recovered and are nearly $72 per barrel. And while it may seem counterintuitive, an article from The National has claimed that the industry has done well in the past when a Democrat was president, particularly during the Carter and Obama administrations. It seems possible that conditions could be ripe for a private equity firm with the necessary experience and skill, and its investors, to thrive under the current administration.
I want to reiterate, I fully support the transition to green energy, but this change will take time, and in order to make that transition safely and efficiently, the world will still depend on oil and gas. I expect the more the current administration and other social pressures limit new investment capital into oil and gas, the more potential there will be for private equity investors to find massive investment opportunities and grow their portfolios.
Thomas Powell is senior managing partner of Resolute Capital Partners, which he founded in 2010. His 35-year investment career began at Wells Fargo, and he later founded ELP Capital, a multibillion-dollar mortgage banking investment company, before shifting his focus in the early 2000’s to private equity. Powell is the author of several books, including Standing in the Rain, and co-author of Six Secrets: An Entrepreneur’s Guide to Attracting Startup Capital. He is an instructor at Harvard’s Office of Executive Education program.
The views and opinions expressed in the preceding article are those of the author and do not necessarily reflect the views of The DI Wire.