The oil-and-gas industry is increasingly looking to tap the rapidly growing pool of ESG-linked financing. Not everyone is convinced by the companies’ pledges to cut emissions, which underpin the loans.
Since 2021, a handful of North American fossil-fuel companies have issued sustainability-linked bonds and other instruments that are typically tied to certain environmental, social and governance metrics.
For example, pipeline giant
, oil field water services company
Aris Water Solutions Inc.
and well operator Presidio Petroleum have collectively sold more than $3 billion in sustainability-linked bonds over the last two years, according to the companies. One of the latest offerings was closed by
, the owner of the most oil and gas wells in the U.S., which received $215 million in October from an asset-backed security linked to emissions-reduction targets.
Sustainability-linked securities typically feature ESG goals set by borrowers, including cutting emissions intensity—emissions as a proportion of total energy produced—or increasing racial and ethnic representation in their workforce. Unlike with green bonds, companies can use deal proceeds for general funding and not only for projects beneficial to the environment.
Some analysts said the loans can be fraught because the nascent market has yet to set firm enough standards and penalties for missed targets. The securities are generally structured so that the bond’s coupon rate increases if the companies fail to reduce greenhouse-gas emissions, and, in some cases, is discounted if they succeed.
This financial structure could encourage oil-and-gas companies to set ambitious climate goals, but issuers will have to implement those targets for the bonds to credibly qualify as sustainable, said Andrew Logan, senior director for oil and gas at sustainable-finance nonprofit Ceres.
“It’s going to be up to the industry to demonstrate that they are able to adhere to a high standard,” he said.
Sustainability-linked financing is growing rapidly. Many industries have issued these securities, ranging from fashion to pharmaceuticals. There were 42 issuances in the U.S. last year, totaling about $30 billion, according to financial-markets platform Dealogic. That compares with just three in 2020 representing roughly $2 billion. S&P Global estimates that global issuance of all sustainable securities will reach $865 billion this year.
The bonds provide a much-welcomed funding mechanism for the oil-and-gas sector, which in recent years has seen oil-wary investors turn their backs on it, said executives and industry experts.
“They’re a great opportunity for issuers to diversify their investor base, and at the same time they can showcase their sustainability commitment,” said Heather Lang, a principal at consulting firm ESG Global Advisors Inc., who advises issuers.
Presidio, a Fort Worth, Texas, company that produces about 30,000 barrels of oil equivalent a day, last year issued $430 million in securities due in 2036, said Will Ulrich, Presidio’s co-chief executive. The bonds are tied to achieving reductions in greenhouse-gas emissions across the company’s operations and in the energy it uses by 50% over a five-year period, he said. If it succeeds, Presidio will receive a small break in the interest rate.
“We thought a way that could differentiate us from other people would be being able to get a sustainability-linked bond rating,” Mr. Ulrich said.
As part of the climate targets attached to the bond, Presidio retrofitted more than 1,200 pneumatic valves at well sites to reduce releases of methane into the atmosphere, he said. Methane is second only to carbon dioxide as a contributor to rising global temperatures, according to the Environmental Protection Agency.
Oil-and-gas producers also like the loans because they can spend the money as they choose, said Erin Boeke Burke, a lead analyst at ratings firm S&P Global Ratings. Diversified Energy, which issued four ESG-linked financings this year, said it would use the proceeds of its latest security issuance for general corporate purposes and to repay previous borrowings.
“They’ve got the flexibility in terms of overall use of proceeds, but they’re still able to draw attention to transition-associated activities,” Ms. Burke said.
Some investors have expressed concerns that issuers get to determine their own performance on climate targets attached to the bonds, say analysts.
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For instance, Ceres’ Mr. Logan said that Diversified Energy’s issuance was problematic because there is debate over how to accurately measure reduction of methane emissions, which the company has set as a goal. “There’s a concern that Diversified has set targets before it has a true sense of what its actual emissions are,” he said.
A spokesman for Diversified said the company regularly checks well sites for emissions and that its efforts have been recognized by a methane emissions reduction initiative backed by the United Nations. Ratings agency Sustainable Fitch certified the bond issuance, he said.
Some investors are also concerned that most issuers’ emissions targets don’t include those generated when consumers use their products, said Charlotte Edwards, an ESG analyst at
PLC. Another factor affecting the perception of the bonds is that some companies set goals they would have achieved anyway or face insufficient penalties if they don’t achieve them, she said.
Tamarack Valley Energy, an oil-and-gas producer based in Calgary, Alberta, sold debt securities worth $200 million in February, linked to a reduction in emissions intensity of 39% by 2025 in its operations and energy uses. If it fails, the Canadian company will see the coupon rate increase by 75 basis points.
But S&P Global Ratings noted in a review that meeting these targets wouldn’t have as much of an effect on reducing global emissions as if the company had pledged to reduce those attached to its products. It also said that the company was on track to substantially reduce its emissions thanks to a large investment in gas conservation on some of its assets.
June-Marie Innes, director of finance and sustainability at Tamarack Valley, said S&P Global Ratings had approved of the sustainability component of the issuance. She said the company has the greatest influence over its own operations and that it is committed to getting those cleaned up as much as it can.
“There’s a penalty if we don’t do what we say we’re going to do, and I think that’s a good thing,” she said.
Write to Benoît Morenne at email@example.com
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