In the early 2010s, a gold rush beckoned in north-eastern Australia. Around ten new coal mines were proposed in the Galilee Basin, an untapped 247,000 square kilometre coal area with just 20,000 residents, and an estimated 23 billion tonnes of premium-quality low-sulphur coal. The region was deemed “Australia’s newest coal region”, set to boost the output of a country that was already a top three global coal exporter.
Fast-forward a decade and just one site, the Carmichael mine, has started operations. Getting just that mine approved was a struggle, with intense activist opposition and banks refusing to fund the development. Carmichael only exported its first coal at the end of 2021, eight years behind schedule.
The unmet promises of Galilee are symptomatic of a broader trend. Over the past decade, climate activist pressure has become more pronounced, the UN climate movement has grown in stature, and the impacts of climate change have become undeniable. Meanwhile, the prices of clean technologies have plummeted, with lithium-ion batteries and solar power both dropping by nearly 90 per cent in the past decade. It has become harder for policymakers and businesses in rich democracies such as Australia to justify carbon-intensive projects.
Analysts now warn that bankrolling new fossil fuels introduces not only climate risk, but also financial risk. Research published in Nature in November, for example, found around half of the world’s fossil fuel assets will be worthless by 2036 in a net-zero 2050 scenario, due to the fall in demand. “You could be an investor who doesn’t really care about climate change, or only wants to maximise their financial return, but avoiding investment in fossil fuels means avoiding risk, and that makes sense for any investor,” says Mike Coffin, head of oil and gas at think tank Carbon Tracker.
We should not, however, get carried away. Fossil fuel industries remain wildly off-track from net-zero requirements, with November’s UN Production Gap report showing governments are set to produce more than twice the amount of fossil fuels in 2030 as would be consistent with limiting global warming to 1.5°C. The soaring price of oil, hitting highs of $90 in January 2022 amid the global economic recovery, has made drilling extremely lucrative once again, with many oil majors looking at bumper profits this year.
But the tide is slowly shifting, even if the power of incumbency remains strong. Oil companies like Shell and BP have now pledged to reach net-zero emissions to varying degrees, while the largest public oil major, ExxonMobil, did so in January 2022 (though a reliance on carbon capture and storage, and the absence of Scope 3 emissions in the pledge, have attracted criticism). More and more financing institutions have signalled that they will no longer support fossil fuel projects. Around 450 such organisations, representing 40 per cent of the world’s financial assets, signed up to the Glasgow Financial Alliance for Net Zero (Gfanz) at Cop26, pledging to decarbonise their investment portfolios.
Dirty asset disposals
As oil and gas companies pivot away from business-as-usual, they will inevitably seek to maximise the value of their dirty assets, which might not all be profitable in the long term. One way that data shows companies are beginning to do this is by selling off certain assets, to focus their operations on key markets and bolster their balance books for more turbulent energy transition years ahead. Indeed, the combined value of asset sales by ten listed oil and gas majors in the US and Europe between 2016 and 2021 was nearly $200bn, shows data from analytics company GlobalData.
"We have seen a general shift of European and US energy companies moving away from higher break-even assets [that require a higher price of oil to be economical to extract],” says Biraj Borkhataria, who co-heads European energy research at investment bank RBC Capital Markets. In recent months, Anglo-Dutch oil major Shell sold off its shale gas operations for $10bn (an unfinished deal that is not featured in the above graph). Shell has also held discussions about divesting its oil operation in Nigeria, where it has been present for more than six decades.
Borkhataria adds that US oil majors such as Chevron and ExxonMobil so far “do not appear to be under as much pressure as the European majors”, which are based in countries further along in their energy transition than the US. The data backs this up: European majors Shell, BP and Eni have sold off significantly more oil and gas assets than they have bought since the Paris Agreement, while Chevron, Exxon and ConocoPhillips have bought more than they have sold.
Bad news for the energy transition?
While asset disposals can help companies cover their own backs, doubts remain over how beneficial they are for the broader energy transition. There can be “unintended consequences” where assets “fall into the hands of operators under less scrutiny”, says Borkhataria. These operators can have lower environmental standards – for example, in the flaring and venting of methane during production, an area that needs to be tackled in the next five to ten years if the world is to stand a chance of reaching net zero by mid-century.
Asset sales from oil majors risk a greater share of future oil supply being controlled by national oil companies like Saudi Arabia’s Aramco or Russia’s Rosneft, which collectively control 55 per cent of current oil and gas production and 90 per cent of reserves. These companies typically do not have net-zero pledges, says Coffin, and are often based in countries with undiversified economies, the governments of which will be keen to maintain fossil fuel production to avoid financial difficulty.
Other asset buyers are private companies that do not have to answer to environmental, social and governmance (ESG) concerns in the same way as listed companies. This trend has been seen in UK North Sea oil, where the five largest upstream asset sellers in North Sea oil in the past five years have been listed oil majors, while four out of the five largest purchasers have been private or independent companies, shows data from GlobalData.
“In the UK, more and more companies are divesting and moving out of the declining North Sea basin,” says Euan Graham, a senior researcher at think tank E3G. “A third of production in the UK is now by privately owned companies, which are less susceptible to shareholder pressure and generally under much less pressure to transition to renewables.”
Sell-offs versus stewardship
Similar trends are taking place in the coal sector, where commodities giants are exiting coal to focus on other metals and minerals. Giant mining corporations Rio Tinto, Anglo American and Mitsubishi have all exited the thermal coal mining sector since the Paris Agreement, making billions of dollars in the process. Rio Tinto sold off its mining assets to smaller mining companies, shows GlobalData's data, including the Chinese government-backed Australian coal specialist Yancoal. Anglo American, meanwhile, spun off its coal business into a new company, Thungela Resources, which is listed on the Johannesburg Stock Exchange.
Mitsubishi sold its assets to Glencore, the world’s largest commodities trader. This London-listed giant argues that being an ethically minded owner of coal assets can be more beneficial to climate action than simply selling them off. The company maintains an ambitious goal of reaching net zero across its entire operations by 2050. “Through responsible stewardship of assets and a commitment to a managed decline of our coal portfolio… we will deliver on our ambition to reduce our total emissions,” said former CEO Ivan Glasenberg in 2020.
“Glencore will go down as one of the last major listed coal companies,” says Tim Buckley, a financial analyst. “They are not building new capacity; they are just maintaining and buying up existing capacity at very low prices – and this is proving to be very profitable indeed: coal prices went up 400 per cent in 2021.”
Some 97 per cent of Glencore’s shareholders approved the company’s climate strategy in May 2020, but acceptance is not universal. In November 2021, the activist investor Bluebell Capital Partners called on the company to spin off its thermal coal business, encouraging it to “chart a new future” in a letter seen by the Financial Times. Bluebell advised that Glencore could see its share price rise by up to 45 per cent if it sold off its coal business.
Ultimately, though, the question of stewardship versus sell-offs from individual companies misses the bigger picture. An entire ecosystem of fossil fuel supply and demand needs to align with the energy transition, otherwise one company will perennially appear in the place of another that may have exited.
“Banks, investors, legislators and regulators all need to step up, alongside the companies that actually extract. Then we would get somewhere,” says Wolfgang Kuhn, an investment consultant. “Smaller or less scrupulous companies buying up assets and mismanaging them is a nonsense concept, if the risk for those assets is increased materially and they would not be able to profit from them.”
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