Capital Loosens for Gas, Industry Decarbonization

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The energy crisis is facilitating a more nuanced approach to “green” finance and broader energy lending, as the staying power of oil and gas makes the funding of natural gas and the industry’s decarbonization more acceptable, private capital lenders and industry leaders say.

“I think there’s far more moderation in terms of the language around this ‘black and white’ dilemma,” Ecopetrol Finance Chief Jaime Caballero told the CERAWeek by S&P Global conference in Houston, referring to the broader yes/no conversation that was building around fossil fuel financing before the energy crisis picked up steam in the aftermath of Russia’s invasion of Ukraine last year.

Although state controlled, Colombia’s Ecopetrol has 12% of its market capitalization listed on the New York Stock Exchange and around $27 billion in bonds, giving it a view into capital market trends.

Whether couched as “moderation” or “balance,” one key theme of the week-long CERAWeek gathering has been the palpable shift in the perspectives of governments and financiers regarding the transition away from oil and gas.

Whereas climate considerations were the primary — if not exclusive — lens with which energy policy and lending were viewed in many corners of Western government halls and lending offices previously, now, a more orderly off-ramp is envisioned to avoid price and energy shocks to the global economy.

“The energy debate was all sustainability. Today, it is more balanced: security of supply, affordability and sustainability,” TotalEnergies CEO Patrick Pouyanne said Wednesday.

Capital Shifts

Olivia Wassenaar, head of sustainable investing and natural resources for private equity giant Apollo, separately outlined three key ways this shift is influencing capital flows. First is a reduced stigma surrounding natural gas.

“You're hearing a lot more around LNG as a transition fuel,” she said. Fellow panelists agreed.

“I think with what happened in Europe, clearly a number of banks have moved to a place where they’re going to go back and finance gas,” Ecopetrol’s Caballero noted. “It goes way beyond security of supply. It’s a conversation about inflation,” he added.

Matthew Lipton, co-head of infrastructure investment research at private equity outfit Partners Group, said his firm takes the view that, “until there's a technological step-change, [gas] is a necessary complement in the energy transition.”

The second impact, according to Wassenaar, has been to drive wider interest in funding the decarbonization of oil and gas operations.

As more financiers adopt the view that oil and gas will be a significant part of the energy mix for years to come, many are asking “how do we make those processes a lot more environmentally friendly?” she said.

The third impact has been wider financing available for industrial decarbonization.

“I hear a lot of people saying, ‘hey, I want to finance the ‘gray to green’ [transition] … I want to figure out how I can help these businesses who are here, get here, rather than totally staying away from them and just saying, ‘hey, we just put a lot of money in solar and wind,” Wassenaar explained.

Renewed Tolerance

The expanding appetite for decarbonization of existing industries — including oil and gas — stands in sharp contrast to the sentiment shared at CERAWeek a year ago, when multiple lenders noted firm lines segregating “green” or “sustainable” capital from such ventures.

All this is not to say that the past year’s turmoil has returned capital markets to a previous business-as-usual in which the oil and gas industry had effectively limitless access to capital and cheap borrowing costs.

But the flight of capital from the sector appears to have eased in pace in at least some corners, giving way to a more nuanced screening of investment that touches the oil and gas industry.

Bob Maguire, managing director of international private equity firm Carlyle Group, pointed to another recent development that speaks to this shift in capital investment: BP’s share price.

BP has seen its London-listed shares rise about 17% since announcing last month that it would slow its pivot away from oil and gas this decade, moving BP from being a peer laggard to second only to Exxon Mobil among the majors in its two-year share price performance.

“At least on the margin, you know, a [near] 20% pickup in a relief rally in BP shares tells you that the marginal investor in BP is interested in hydrocarbons,” he noted.

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