The Economist: Who buys the dirty energy assets public companies no longer want?

The Economist reported that some of the $44bn of mostly fossil-fuel assets that the oil and gas industry has shed since the start of 2018 are not being closed down, but bought up by private equity firms funded by university and pension funds.

The Economist, February 7, 2022: Who buys the dirty energy assets public companies no longer want?

In the past two years alone, private equity firms bought “$60bn-worth of oil, gas and coal assets, through 500 transactions—a third more than they invested in renewables. Some have been multibillion-dollar deals, with giants such as Blackstone, Carlyle and KKR carving out huge oilfelds, coal-fired power plants or gas grids from energy groups, miners and utilities. Many other deals, sealed by smaller rivals, get little publicity.”

PE managers are no longer marketing energy funds except those with a focus on renewables. Instead, these are being whitewashed as funds labeled “growth” or “opportunistic”.

“In June a fund manager owned by Brookfeld, which is based in Canada, acquired joint ownership of the entire portfolio of North American oil and gas loans of ABN AMRO, a Dutch bank. In July Brookfeld agreed to pay $6.8bn for Canada’s fourth-largest pipeline company—a day after touting a $7bn fundraising round for a green “transition” fund.”

Because PE managers “want to do a lot of deals… many don’t have time to craft considered decarbonisation plans for assets,” according to The Economist.

Using data from PEI Media, The Economist looked at eight PE firms that closed fossil-fuel deals in the past two years. The investors included 53 pension funds, 23 universities and 32 foundations, such as the University of San Francisco, the Pritzker Traubert Foundation, Britain’s West Yorkshire Pension Fund, and Chinese insurer China Life.

The Economist noted that private equity firms can source capital cheaply: “In contrast to the majors, which have an annual cost of equity of about 10%, they typically finance energy deals with 80% debt, at interest rates of 4-5%.”

For example, last month a group of investors led by private equity firm EIG Partners hired Citigroup and JPMorgan Chase to help it refinance the $11 billion loan it took in June to buy Saudi Arabian oil pipelines.