Energy Giants Ditch Oil and Coal Projects. Smaller Rivals Want Them.

Source: By David Hodari, Wall Street Journal • Posted: Thursday, April 22, 2021

BP, Rio Tinto and others sell assets for financial and environmental reasons, in possible boon for those who still embrace fossil fuels

Energy deals centered on the North Sea have resumed after a lull last year. Photo: robert perry/Shutterstock

For all the talk of a transition away from fossil fuels, players in the energy sector are still willing to bet there is more money to be made in oil and coal.

Major oil companies such as BP BP -1.76% PLC and Royal Dutch Shell RDS.A -1.86% PLC are selling billions of dollars of assets to bolster their finances and reduce carbon emissions, while mining companies including Anglo AmericanNGLOY -1.75% PLC and Rio Tinto RIO -2.42% PLC have exited coal projects.

Snapping up those unloved assets is a band of smaller competitors that wager that fossil fuels will remain the world’s main energy source for years to come, particularly in developing countries, and that underinvestment by larger rivals will further boost commodity prices.

For the big companies, these sales generate funds typically used to pay down debt and help them make the case that they are unloading polluting projects as they face growing investor pressure to map out their future in a lower-carbon economy. But, these projects—and their emissions—aren’t going away. Instead, they are being managed by smaller players that often face less environmental scrutiny. Buyers are also betting their fossil-fuel projects have plenty of room to run.

“While I agree that the direction of traffic is one way, toward renewables, I think it’s going to take longer than people think,” said Blair Thomas, chairman ofHarbour Energy PLC.

Harbour, which has bought U.K. assets from Shell and ConocoPhillips, COP -1.26% recently went public in London through a merger with Premier Oil HBR 3.98% of the U.K., adding fossil-fuel projects in Asia and Latin America.

Mr. Thomas said the tie-up would make it easier to tap funds to fuel further growth, and that he expects a pullback in investment by major oil companies will support higher crude prices.

“Capital that is not being spent now, is production that the industry won’t have two or three years from now,” he said. “The question is, will renewable penetration happen fast enough so that as demand comes back you don’t create a pinch? I tend to think it won’t.”

The world’s thirst for fossil fuels remains high. In 2019, before the coronavirus pandemic hammered global transportation and industry, oil, natural gas and coal accounted for 81% of global energy consumption, according to the International Energy Agency. That figure is forecast to drop to 76% by 2030, though rising overall demand means using even more carbon-intensive energy.

A coal mine operated by Anglo American in South Africa, where the fossil fuel is considered crucial for electricity generation. Photo: Waldo Swiegers/Bloomberg News

The expectation of rising demand plus a recovery in commodities prices this year—supply cuts and an improving global economy have boosted Brent crude more than 70% since late October—have meant there is no shortage in buyers of oil, gas and coal assets.

Europe’s North Sea has been an area of particular interest. After a lull in mid-2020, deal making in the region has resumed, with small, mostly private players buying up assets being sold by global giants. The deals have come despite the location having some of the world’s highest production costs, and even though the area’s production peaked in the late 1990s.

There is “a wave of private money that’s been coming in sensing an opportunity to extract value out of these assets that larger companies weren’t investing in,” said Wood Mackenzie analyst Scott Walker.

U.K.-based NEO Energy bought Exxon Mobil Corp.’s XOM -1.53% North Sea assets for more than $1 billion in February, and bolstered its presence in the region with an additional $450 million acquisition in March. Last year it bought some of Total SE’s TOT -1.56% North Sea assets.

NEO, owned by Norwegian private-equity group HitecVision, says it can improve the profitability of assets it buys by increasing production and cutting costs.

‘While I agree that the direction of traffic is one way, toward renewables, I think it’s going to take longer than people think.’

— Blair Thomas, chairman of Harbour Energy

Buyers of fossil-fuel assets are swimming against the tide of governments enacting policies to speed the energy transition. President Biden plans to hold a climate summit this week at which the U.S. could set a new goal for reducing its emissions.

Many of the oil fields recently in play are “mature assets with high operating expenditure that typically have high emissions and that reinforces big companies’ desire to sell,” said Tore Guldbrandsøy, an analyst at consulting firm Rystad Energy. He added that buyers also face the risk of future carbon taxes.

While the world’s wealthiest countries might have already hit peak oil demand, the Organization of the Petroleum Exporting Countries, or OPEC, forecasts that countries such as China and India will drive oil consumption up 43% by 2045 from 2019 levels.

BP’s $2.6 billion sale in February of a stake in an Omani gas block to Thailand’s national oil company, PTT, is evidence of growing emerging-market demand, according to Bernstein Research analyst Oswald Clint. While several Asian countries “have been talking about net-zero [emissions], all of them are still indicating strong appetite” for fossil fuels, he added.

Developing economies don’t have the luxury of accelerating their transition away from fossil fuels, said Mike Teke, chief executive of Seriti Resources, a coal-mining company.

Seriti, based in South Africa, has previously bought assets from Anglo American and is in the process of acquiring projects from South32 Ltd. , expanding in a fuel seen as too dirty by some but still crucial for the country’s electricity generation.

“It’s well and good for the developed world to tell us that we must shut down all coal-fired power stations and to say to us climate change is a big problem,” Mr. Teke said. “We cannot do that unless we want to cause civil strife and civil war.”

As bigger competitors exit coal, Mr. Teke said he sees an opportunity to make money from a commodity that will be in demand in Africa for decades to come.

Coal prices are rallying as the global economy recovers from the pandemic, while the energy transition is fledgling, giving mining companies “a short beautiful summer,” he said. He also wants to expand into other commodities across the region.

Poorer countries’ hunger for cheap energy could revitalize parts of the U.S.’s bankruptcy-laden coal sector, according to Azvalor Asset Management.

The Spanish investment firm already owns a 15% stake in Pennsylvania’s Consol Energy Inc., which exports about one-third of its coal, and said it recently took new positions in Alliance Resource Partners LP and Arch Resources Inc. ARCH -1.73%

“The market appears to believe that the energy transition away from fossil fuels will be achieved in a matter of years,” said Fernando Bernad, Azvalor’s co-chief investment officer. “The reality is likely to be a matter of decades.”

—Sarah McFarlane contributed to this article.

Write to David Hodari at