By David Hodari
For all the talk of a transition away from fossil fuels, players
in the energy sector are still willing to bet there is more money
to be made in oil and coal.
Major oil companies such as BP PLC and Royal Dutch Shell PLC are
selling billions of dollars of assets to bolster their finances and
reduce carbon emissions, while mining companies including Anglo
American PLC and Rio Tinto PLC have exited coal projects.
Snapping up those unloved assets is a band of smaller
competitors that wager that fossil fuels will remain the world's
main energy source for years to come, particularly in developing
countries, and that underinvestment by larger rivals will further
boost commodity prices.
For the big companies, these sales generate funds typically used
to pay down debt and help them make the case that they are
unloading polluting projects as they face growing investor pressure
to map out their future in a lower-carbon economy. But, these
projects -- and their emissions -- aren't going away. Instead, they
are being managed by smaller players that often face less
environmental scrutiny. Buyers are also betting their fossil-fuel
projects have plenty of room to run.
"While I agree that the direction of traffic is one way, toward
renewables, I think it's going to take longer than people think,"
said Blair Thomas, chairman of Harbour Energy PLC.
Harbour, which has bought U.K. assets from Shell and
ConocoPhillips, recently went public in London through a merger
with Premier Oil of the U.K., adding fossil-fuel projects in Asia
and Latin America.
Mr. Thomas said the tie-up would make it easier to tap funds to
fuel further growth, and that he expects a pullback in investment
by major oil companies will support higher crude prices.
"Capital that is not being spent now, is production that the
industry won't have two or three years from now," he said. "The
question is, will renewable penetration happen fast enough so that
as demand comes back you don't create a pinch? I tend to think it
The world's thirst for fossil fuels remains high. In 2019,
before the coronavirus pandemic hammered global transportation and
industry, oil, natural gas and coal accounted for 81% of global
energy consumption, according to the International Energy Agency.
That figure is forecast to drop to 76% by 2030, though rising
overall demand means using even more carbon-intensive energy.
The expectation of rising demand plus a recovery in commodities
prices this year -- supply cuts and an improving global economy
have boosted Brent crude more than 70% since late October -- have
meant there is no shortage in buyers of oil, gas and coal
Europe's North Sea has been an area of particular interest.
After a lull in mid-2020, deal making in the region has resumed,
with small, mostly private players buying up assets being sold by
global giants. The deals have come despite the location having some
of the world's highest production costs, and even though the area's
production peaked in the late 1990s.
There is "a wave of private money that's been coming in sensing
an opportunity to extract value out of these assets that larger
companies weren't investing in," said Wood Mackenzie analyst Scott
U.K.-based NEO Energy bought Exxon Mobil Corp.'s North Sea
assets for more than $1 billion in February, and bolstered its
presence in the region with an additional $450 million acquisition
in March. Last year it bought some of Total SE's North Sea
NEO, owned by Norwegian private-equity group HitecVision, says
it can improve the profitability of assets it buys by increasing
production and cutting costs.
Buyers of fossil-fuel assets are swimming against the tide of
governments enacting policies to speed the energy transition.
President Biden plans to hold a climate summit this week at which
the U.S. could set a new goal for reducing its emissions.
Many of the oil fields recently in play are "mature assets with
high operating expenditure that typically have high emissions and
that reinforces big companies' desire to sell," said Tore
Guldbrandsøy, an analyst at consulting firm Rystad Energy. He added
that buyers also face the risk of future carbon taxes.
While the world's wealthiest countries might have already hit
peak oil demand, the Organization of the Petroleum Exporting
Countries, or OPEC, forecasts that countries such as China and
India will drive oil consumption up 43% by 2045 from 2019
BP's $2.6 billion sale in February of a stake in an Omani gas
block to Thailand's national oil company, PTT, is evidence of
growing emerging-market demand, according to Bernstein Research
analyst Oswald Clint. While several Asian countries "have been
talking about net-zero [emissions], all of them are still
indicating strong appetite" for fossil fuels, he added.
Developing economies don't have the luxury of accelerating their
transition away from fossil fuels, said Mike Teke, chief executive
of Seriti Resources, a coal-mining company.
Seriti, based in South Africa, has previously bought assets from
Anglo American and is in the process of acquiring projects from
South32 Ltd., expanding in a fuel seen as too dirty by some but
still crucial for the country's electricity generation.
"It's well and good for the developed world to tell us that we
must shut down all coal-fired power stations and to say to us
climate change is a big problem," Mr. Teke said. "We cannot do that
unless we want to cause civil strife and civil war."
As bigger competitors exit coal, Mr. Teke said he sees an
opportunity to make money from a commodity that will be in demand
in Africa for decades to come.
Coal prices are rallying as the global economy recovers from the
pandemic, while the energy transition is fledgling, giving mining
companies "a short beautiful summer," he said. He also wants to
expand into other commodities across the region.
Poorer countries' hunger for cheap energy could revitalize parts
of the U.S.'s bankruptcy-laden coal sector, according to Azvalor
The Spanish investment firm already owns a 15% stake in
Pennsylvania's Consol Energy Inc., which exports about one-third of
its coal, and said it recently took new positions in Alliance
Resource Partners LP and Arch Resources Inc.
"The market appears to believe that the energy transition away
from fossil fuels will be achieved in a matter of years," said
Fernando Bernad, Azvalor's co-chief investment officer. "The
reality is likely to be a matter of decades."
Sarah McFarlane contributed to this article.
Write to David Hodari at David.Hodari@dowjones.com
(END) Dow Jones Newswires
April 21, 2021 05:44 ET (09:44 GMT)
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