New production riskier as peak demand approaches

LONDON/NEW YORK, 25 January – Private equity firms invested in the North Sea could see cash flow from oil and gas fall by more than 60% below expectations if global warming is held to 1.7°C, finds a report from the financial think tank Carbon Tracker published today.

It says many oil and gas companies are only taking into account existing climate pledges in their investments, assuming a slow energy transition consistent with a 2.4°C pathway. However, clean technologies, supported by government climate policies, are eroding global demand for oil and gas and the International Energy Agency expects it to peak by end of decade. The report warns that the energy transition is irreversible and accelerating falling demand will drive down commodity prices, and with it the cash flows and value of oil and gas companies.

Private Eyes Wide Shut – Private Equity Investments in Oil and Gas at Risk in the Energy Transition notes that companies backed by private equity are usually left with heavy debts after their purchase and “could be disproportionately at risk of financial distress if cash flows falter”. Oil and gas producers face a range of risks including falling demand, tighter climate policy, and the possibility of decommissioning liabilities coming forward.

It identifies 10 private equity-backed companies active in the North Sea: NEO Energy, Sval and Vår Energi (all backed by HitecVision); Harbour Energy and Repsol (both backed by EIG); Pandion Energy and Star Energy Group (both backed by Kerogen Capital); Neptune Energy (backed by Carlyle and CVC Capital Partners); ONE-Dyas (AtlasInvest); Wellesley Petroleum (Bluewater) and finds:

  • Eight companies with existing or approved projects would risk losing between 63% and 100% of their aggregate cash flow between 2024 and 2030 in a moderately-paced transition in line with a 1.7°C temperature rise compared with what they would expect in a slow transition in line with 2.4°C. (Wellesley only has unapproved projects and Star only holds a licence.)
  • Most companies have a significant portfolio of projects yet to be approved that are not even consistent with a slow transition. These are the only options held by Star.
  • Without new development most companies’ 2030s production will be under 25% of 2022 levels.

Maeve O’Connor, author and Oil, Gas & Mining Analyst at Carbon Tracker said: “The North Sea offers a case study of the risks that private equity backed upstream producers face from both new and existing fields. Companies are chasing marginal, more expensive barrels of oil in an already difficult cost environment. The likelihood of these higher-cost barrels remaining economic in a fast transition scenario seems to be decreasing.”

Private equity firms source most of their capital from investors such as insurance companies, pension funds and asset managers. The report warns investments could be at risk unless they scrutinise private equity valuations of oil and gas investments to ensure they properly account for risks in the energy transition.

North Sea production has been in decline for two decades and its mature fields are reaching the end of their productive lives. Oil majors and utilities have been selling off their assets and companies backed by the 10 private equity firms now control about 13% of all production.

Mike Coffin, Carbon Tracker’s Head of Oil, Gas, & Mining said: “The energy transition is accelerating and will erode demand for oil and gas, with severe repercussions for the financial health of many oil and gas companies. Private equity firms investing in such companies at this stage of the transition are taking a serious gamble. Firms could be left holding companies whose value has cratered, with no buyers willing to take them off their hands.  Even under a transition progressing at a moderate pace, the value of these oil and gas investments could be significantly lower than anticipated.”

Private equity firms now face decisions on whether to direct companies to increase production – a strategy the report warns is increasingly risky when these companies already face threats to cash flows from their existing projects. Investing to extend the lifetime of fields or develop new fields is expensive and new production could take three to five years to come online, and be exposed to commodity price fluctuations through the 2030s and beyond:

  • NEO is due to make a final investment decision in 2024 on two UK projects which are unlikely to break even in a moderate transition: the $249 million Affleck Redevelopment; and $171 million Leverett project, which also involves Harbour.
  • Sval, Neptune and Vår are due to decide whether to greenlight investment on two smaller projects in Norwegian waters which would not even be economic in a slow transition.

However, Pandion and Vår have significant production locked in from existing projects, leaving them particularly exposed to future falls in commodity prices.

Company Private Equity Backer Cash flow from existing North Sea projects at risk (2024-2030) in moderate (1.7°C) transition*
Harbour Energy (UK) EIG (US) 81%
NEO Energy (UK) HitecVision (Norway) 65%
Neptune Energy (UK) Carlyle (US), CVC Capital Partners (Luxembourg) 63%
ONE-Dyas (Netherlands) AtlasInvest (Belgium) 100%
Pandion Energy (Norway) Kerogen Capital (UK) 90%
Repsol (Spain) EIG (US) 74%
Star Energy Group (UK) Kerogen Capital (UK) n/a
Sval (Norway) HitecVision (Norway) 64%
Vår Energi (Norway) HitecVision (Norway) 70%
Wellesley Petroleum (Norway) BlueWater (UK) n/a
Sources: Rystad Energy, private equity firm and company reporting. * Potential decline in cash flows from existing projects (2024-2030) under a moderate (1.7°C) transition scenario vs a slow transition (2.4°C) scenario. Star Energy and Wellesley Petroleum have no existing projects in the North Sea, per Rystad.

Private equity investments in oil and gas companies took off globally after the 2014 oil price crash, as firms moved in with cheap capital to sweep up assets whose values had plummeted. Windfall profits in the last two years have generated renewed interest.

Private equity firms will often seek to access the last stores of oil and gas by extending the life of fields and/or pursue new developments, while also aggressively driving down costs, and then sell assets at a time calculated to maximise gains. But the report warns that they – and the institutions that contribute most of their investment capital – face significant risks beyond declining demand.

Private Equity investors in oil and gas face range of risks

Government climate policy will raise costs and could force companies to close projects and cancel new developments. The UK has committed to a 50% cut in emissions from oil and gas production by 2030, which will likely require operators to make costly investments to end flaring of gas and improve efficiency. The Labour Party has pledged to ban all new oil and gas exploration if elected. Norwegian production has a third the carbon intensity of UK production thanks to tighter standards, but the country is seeking a further 30% cut in emissions by 2030 and the “low-hanging fruit” for operators has gone.

Companies may have to decommission assets early because of falling demand for fossil fuels or government policy. The cost of meeting Asset Retirement Obligations can equal production revenues for the last 10-15 years of operation, and if costs are brought forward, this can have a major impact on cash flows. If companies cannot fund decommissioning costs, liabilities will likely fall on their private equity backers.

Private equity firms may struggle to offload oil and gas companies. Private equity firms usually hold investments for 5-10 years before looking to sell, but oil majors and utilities are retreating from the North Sea to avoid the risks of managing many marginal, late-life fields, while the chances of an IPO are slim – several recent floats in the UK have been abandoned due to lack of investor interest.

The report notes that many private equity firms have weaker environmental commitments than the listed companies they buy assets from. Research shows that private ownership often leads to increases in flaring, poorer emissions disclosures and worse well retirement standards.

It warns firms could jeopardise their sources of finance if they are seen to ignore transition risk and climate concerns. Financial institutions are under growing pressure from their own investors to align with global climate targets. In Europe, most private equity funds are sourced from financial institutions that are likely to have made climate commitments around their portfolios.

The report calls on policymakers to require private equity-backed firms to meet minimum standards on emissions and disclose their performance, paying particular attention to methane. Policymakers should also ensure private valuations of oil and gas investments properly account for climate risk and consider the potential systemic impact of private equity activity, noting that commentators have begun to question whether private equity could trigger the next upheaval in global markets as rising interest rates threaten the industry’s business model.


Carbon Tracker’s analysis and core to its overall thesis assumes that as demand for oil and gas declines, only projects with lower production costs will remain competitive, while high-cost projects risk becoming “stranded assets”. The more the market is oversupplied the further prices are likely to fall. It modelled demand in a slow and moderate energy transition using the IEA’s Stated Policies Scenario (STEPS), consistent with a 2.4°C pathway, and the IEA’s Announced Pledges Scenario (APS), consistent with a 1.7°C pathway.




Once the embargo lifts the report can be downloaded here:

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About Carbon Tracker

The Carbon Tracker Initiative is a not-for-profit financial think tank that seeks to promote a climate-secure global energy market by aligning capital markets with climate reality. Our research to date on the carbon bubble, unburnable carbon and stranded assets has begun a new debate on how to align the financial system with the energy transition to a low carbon future.