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Private Equity Defends Oil & Gas

Private Equity

By: Private Equity News – Private equity firms that back oil and gas businesses are becoming increasingly vocal about the role the sector can play as the world shifts to cleaner energy — and they are using the current energy crisis to make their point.

Energy-focused firms including NGP Energy Capital Management, Pickering Energy Partners, and Quantum Energy Partners have been sending articles, reports, and presentations to investors highlighting the importance of oil and natural gas during the transition to renewables. The effort comes as investors continue putting less money into fossil fuels.

The private equity firms argue that the renewable energy sector cannot expand capacity quickly enough to attain net-zero emissions by 2050, a common goal shared by the US government and various big companies.

The world would do better, the private equity firms say, if the US continued supplying a big portion of the oil and natural gas it needs — avoiding a production shift to countries with looser environmental standards — while investing in systems that capture and store carbon dioxide to reduce emissions in the sector.

Relying too much on renewable energy sources has risks, the private equity firms say, pointing to how natural gas shortages and weak winds led to high energy prices in Europe last year, even before Russia’s invasion of Ukraine this February. Natural gas prices soared further after Moscow recently slashed exports to Europe, an effort to split the Western coalition opposing Russia’s Ukraine invasion, energy specialists say.

“We need to quit just focusing on replacing all hydrocarbons with wind and solar. We’ve got to ask ourselves, ‘What’s practical? What can we really do?’” said Wil VanLoh, chief executive of Houston-based Quantum. He added that the world has never experienced a complete energy transition before but instead added new sources of energy over time. “It’s kind of make-believe to think that we can actually replace three forms of energy this time,” VanLoh said, referring to coal, oil, and natural gas.

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Pension funds, endowments, and other institutional investors are increasingly moving away from fossil-fuel-related assets, often under pressure from environmental activists and their own constituencies. Private equity firms raised a total of $2.98bn across seven oil-and-gas-focused funds in the US in the first half of this year, 40% less than the total of $5bn they collected across 12 such funds in the year-earlier period, according to research provider Preqin.

The private equity firms striving to persuade investors not to abandon the oil and gas sector are certainly defending their economic interests. But their leaders say they are also reacting to what they consider misconceptions about a sector that, they say, is critical to providing the world with the low-cost energy it will need on its path to net-zero emissions.

Many investors agree that investing in energy assets beyond renewables is still necessary, consultants and investors said.

“I think that a lot of private equity investors recognize that the energy transition is going to take a while,” said Matt Garfunkle, a partner at London-based Pantheon Ventures, an investor in private capital funds. Garfunkle added, however, that appetite for oil and gas funds remains muted as investors largely prefer to back businesses that are expanding their “green side”.

He pointed to Pantheon’s recent investment in a fund that backed power company Calpine, which operates many natural-gas-fired plants and builds solar and wind projects.

Oil-and-gas-focused private equity firms are also increasing their investments in clean energy businesses as they try to win over investors while pointing out their efforts to reduce carbon emissions across their portfolios. For example, NGP-backed oil-and-gas companies recorded a drop of 14% in direct emissions and 40% in methane intensity last year, according to a recent article that NGP sent to all its investors. Other such firms, particularly Kimmeridge Energy Management, argue that the oil-and-gas sector itself must change if it wants to continue attracting capital. One important step would be to set its own net-zero goal, according to the New York firm. In a recent white paper, Kimmeridge called for the sector, among other actions, to electrify operations, reduce flaring and use carbon credits to achieve net-zero emissions by 2030.

“We don’t have an oil and gas problem. We have a carbon emissions problem,” said Kimmeridge managing partner Ben Dell. “If we took the emissions out of the oil-and-gas industry, there’s no reason why we shouldn’t support it.”


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