Private Ownership of Oil and Gas Assets to Grow

Ownership of the oil and gas industry will change dramatically in the coming years in response to the energy transition.

Experts at the Energy Intelligence Forum 2021 said that environmental, social and governance (ESG) concerns have gone mainstream in the investment community, a development that will likely put more oil and gas assets in the hands of privately owned players.

National oil companies (NOCs), sovereign wealth funds (SWFs) and private equity are expected to seize control of more industry assets as many international oil companies (IOCs) divest to focus more on low-carbon businesses.

New Owners to Emerge

Philip Lambert, CEO of Lambert Energy Advisory, told the Forum that publicly traded Western majors feel compelled to divest significant oil and gas assets because they are 90% owned by Western institutions, where ESG pressure is most intense.

But the sheer volume of assets on offer raises questions about who can buy them.

"We're struggling to find buyers that have the kind of scale needed to acquire these assets," Lambert said.

Private equity is one option, but they are often drawing capital from the same pool of Western investors with the same ESG concerns.

Julian Mylchreest, vice chairman of global corporate and investment banking at Bank of America, wondered if an era of "multinational NOCs" could begin if state-controlled oil companies decide to acquire extensive assets outside their home turf.

Rise of the NOC?

Both Lambert and Mylchreest said NOCs' technical expertise and capacity to operate international assets was underestimated.

Many NOCs are sophisticated outfits on par with many IOCs these days, they said. However, it is possible that NOCs may lack the expertise to run some of the "biggest, most complicated offshore" projects, Mylchreest added.

He said one NOC client was "rubbing his hands at the opportunity" to pounce on assets being discarded by IOCs.

The five biggest Western majors — Exxon Mobil, Royal Dutch Shell, Chevron, Total and BP — are collectively pursuing at least $75 billion worth of asset sales, albeit with different time horizons.

LNG Opportunities

Another area where NOCs and private equity cannot do the job of IOCs is in LNG markets.

Lambert said this is troubling for gas markets, where a price spike is already occurring in Europe and Asia.

ESG pressures have forced majors to dramatically scale back investments in new upstream projects in recent years, and without fresh outlays in gas and LNG schemes, the crisis could deepen.

"The IOCs drive 50% of the world's gas ... LNG is an IOC machine. If you kill the majors, you kill LNG," Lambert said, adding that there are no replacement investors that could step in and fill the technical void left by majors in the LNG space.

Current high gas prices — equal to around $200 per barrel of oil equivalent in some markets — are prompting greater use of coal, which emits twice as much greenhouse gases when burned than gas.

That is a counterproductive response to tackling climate change and threatens to deepen energy poverty, Lambert said.

Experts agreed that despite recent ESG-related hits to stock market multiples, there is still a future for IOCs. Current high oil and gas prices could prompt some to hold onto assets for longer than expected if investors are swayed by the strong returns.

Mylchreest also said European majors are "brilliantly positioned" to capitalize on renewable power backed up by natural gas, which "plays perfectly to their trading operations."

As for US majors, which have resisted strategic shifts into renewables, they could also thrive under a "new, smaller public equity ownership" group that understands the need for continued investment in oil and gas during the transition, said Jason Bennett, partner and energy sector co-leader at Baker Botts.