PE Could See 60% Cash Fall in North Sea

Private equity (PE) firms invested in the North Sea could see cash flow from oil and gas fall by more than 60% if global warming is held to 1.7°C, a new report from think tank Carbon Tracker has shown. Although many oil and gas companies are only considering current government climate pledges and are investing in line with a 2.4°C pathway, the International Energy Agency expects fossil fuel demand to peak by 2030. Falling demand past that point could drive down prices, and with them, company cash flows and valuations. “The energy transition is accelerating and will erode demand for oil and gas, with severe repercussions for the financial health of many oil and gas companies,” said Mike Coffin, Head of Oil, Gas and Mining at Carbon Tracker, adding that PE firms investing in them at this stage were taking a “serious gamble”. The report also identified 10 PE-backed companies, which together control 13% of North Sea production, warning that they faced a range of risks including falling demand, tighter climate policy and potential future decommissioning liabilities. They could face even greater risks if their backers directed them to increase production: most companies have projects still pending approval which aren’t even consistent with the 2.4°C pathway – let alone 1.7°C. “The North Sea offers a case study of the risks that PE-backed upstream producers face from both new and existing fields,” said Maeve O’Connor, who authored the study. “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.”

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