Oil and gas players: Financing woes easing with new ‘pragmatism’ in ESG movement

The focus is increasingly on reducing the climate footprint of fossil fuels, though experts warn of the high costs involved.

Offshore gas Southeast Asia
The International Monetary Fund estimates that eliminating fossil fuel subsidies could prevent 1.6 million premature deaths annually, generate US$4.4 trillion in revenues, and accelerate progress toward global climate goals. Image: Flickr/ Chong H Ong.

Despite more banks pledging to end financing for oil and gas production, petrochemical businesses say funding is still largely easy to come by, especially for projects in developing countries.

Investors are also taking a more realistic view on environmental, social and governance (ESG) matters, which helps to keep money flowing, they add.

Oil and gas production has bounced back sharply from the Covid-19 pandemic lows in 2020, aided in part by a rush for additional supplies after Russia invaded Ukraine last year and fractured global fuel tradelines.

Many emerging economies are also looking to exploit their fuel reserves to accelerate economic growth.

Roberto Lorato, chief executive of Indonesian gas developer MedcoEnergi, said ESG policies had taken a “top-down and almost mass-ideological approach” in past years, but the war in Ukraine has injected some “pragmatism” into the movement.

“As an operator in [Asia], finally, investors are appreciating that different regions in the world will have to move towards net-zero at a different speed,” Lorato said, speaking at the APPEC conference in Singapore, one of the region’s biggest gathering of the industry’s traders and executives, on Monday.

“When we go to investors and ESG rating agencies, [we ask if] there is an understanding that they should be deploying investments and ESG ratings based on [the characteristics of] different regions of the world. That has been a very difficult conversation which only now is starting to be appreciated,” he added.

MedcoEnergi has several oil and gas exploration and development projects in Indonesia, as well as Mexico, Libya and Tanzania. It raised its capital expenditure by nearly 50 per cent this year to US$370 million, and allocated more funds to development projects.

Anupam Agarwal, finance director of ONGC Videsh, the international arm of India’s state-owned oil and gas firm, said it did not see financing to be a concern.

ONGC Videsh raised a US$500 million loan earlier this year, with funders reported to include Singapore’s DBS and the State Bank of India. Agarwal said the loan was secured with a “very competitive rate”.

What he sees from bankers is “not a no-go for oil and gas”, but a greater focus on transition plans.

“They [want] to see a transition to renewables. They ask about companies’ plans to move towards ESG. If you have very good plans, the funds are available,” Agarwal said.

ONGC itself has set a 2038 net-zero target for its own emissions, a venture said to require over US$24 billion in spending, including on expanding its renewables portfolio.

“There is a general realisation that energy security is equally important [to sustainability]. The old energy – oil and gas –  and new energy are going to co-exist for a long time,” Agarwal said.

Globally, major banks have in recent years pledged to stop supporting upstream oil and gas projects. In Southeast Asia, Singapore’s OCBC and UOB have both made this vow, though top lender DBS has not. Instead, DBS has a decarbonisation target for financed emissions in its oil and gas portfolio – from over 38 million tonnes of carbon dioxide in 2020 to 3 million tonnes by 2050.

Fossil fuel financing last year was at the lowest level globally since 2016, though the trend is seen as a blip amid oil majors’ expansion plans, according to Dutch non-profit Banktrack. The report had also noted that the State Bank of India – financier for ONGC Videsh – were among lenders in Asia without credible fossil fuel exclusion policies.

Meanwhile, major private equity firms have been walking back on ESG stringency as pressure mounts against measures that could hurt profits.

Developing countries are also calling for more investments in developing their fossil reserves. Among them, Nigeria, which has termed the years up to 2030 “a decade of gas” for the country, wants to more than triple gas output in seven years.

At the Gastech conference in Singapore this week, Nigeria’s minister of state gas Ekperikpe Ekpo said he was in town to seek funding.

“Part of my reason for being here is to let the world know that Nigeria is open for investment,” he told the conference.

But Dongjae Oh, oil and gas finance program lead at South Korea-based non-profit Solutions for Our Climate (SFOC), said developing nations should not rely on fuel extraction for growth, lest the market becomes oversupplied and prices drop.

Oh said SFOC research found that projects for liquefied natural gas supply are already exceeding expected demand in the coming years.

“Right now [developing countries] can secure a lot of funding from issuing bonds and getting loans from other countries and Western banks, but they will face severe risk in not being able to repay all of the loans and bonds,” he added.

Clean tech to the fore?

As oil and gas production is expected to increase further, some see low-carbon technologies as becoming increasingly important to keep global warming in check.

Nobuo Tanaka, emeritus executive director of the International Energy Agency (IEA), noted that promising solutions include carbon capture and “blue” hydrogen fuel, made from methane but with associated emissions trapped.

“[These technologies] are getting more and more important, but it is not easy,” Tanaka said, pointing out the costs involved. It will be a challenge making steeper fuel reductions in the future towards net-zero emissions too, he said.

IEA had said in 2021 that no new oil and gas developments can happen in its net-zero scenario.

“We need to over time evaluate current situations and make additional commitments if necessary. What new technology may help in the future – who knows?” Tanaka said.

At Gastech, Indonesia, which wants to scale up gas production capacity after years of gradual decline, also talked up its plans for carbon capture.

“Increasing gas production means we have to implement [carbon capture, storage and utilisation] massively,” said Tutuka Ariadji, deputy minister and director general of oil and gas at Indonesia’s energy and mineral resources ministry. 

The country has 15 carbon capture projects, and total investment into them could be just shy of US$10 billion, Tutuka said.

SFOC’s Oh said that while technologies such as those reducing methane leakage could help decarbonise existing oil fields could help, they cannot be reason to develop new supplies.

“Any alternative technologies justifying additional oil and gas fuel expansion, which we see often right now, will not be tolerable,” he said, pointing to opportunities in putting money into renewables instead.

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