Seismic demand drops will shift oil and gas views on green M&A deals

The seismic shift in energy demand witnessed during COVID-19 is altering the mind-set of oil companies – shifting the motivation for green investment decisions to hard-wired financial gain.

It’s important to note that COVID-19 has impacted the capacity of new project finance and capital expenditure budgets to back new renewable assets coming onstream in the short term.

With the third oil price shock in the past decade, fragile future OPEC support and the ethical investing movement having a tangible affect on oil equities, the argument for diversification by traditional oil and gas producers into renewable energy is hard to ignore.

As global energy demand looks set for fundamental change, government rescue packages like the EU’s €500 billion support for low carbon energy will alter the competitive landscape for renewable energy.

Producers are not pulling back on their climate goals, so, with new future capacity coming on-stream, there could be medium-term appetite to go after green M&A to ensure delivery of energy transition commitments.

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We expect new entrants into the green industry will need to circumvent significant engineering, regulatory and operational knowledge gaps by buying brownfield assets. Acquiring on-stream renewable assets with existing and proven economics can de-risk an investment compared to entering at the greenfield level. It can also provide the chance to bring in new knowledge and service ecosystems – reducing the steepness of the knowledge curve.

Companies like Royal Dutch Shell, through its North Sea operations, leverage regional service and supply chain efficiency to competitively transition into greenfield renewable asset builds. Many oil and gas companies, however, won’t be as well positioned geographically or as well connected to the required renewable service chain.

Green assets will also remain in direct competition with cut-price oil and gas assets from distressed sellers.

The medium and long term return on investment forecasts will continue to be a prime driver of capital allocation for energy companies. The mandate of companies to return maximum value to shareholders will remain a priority.

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