Sellers of fossil fuel assets should require buyers to continue climate change and emissions reduction plans, according to principles devised by environmental investor group Ceres and the Environmental Defense Fund.

A quick and dirty method for oil and gas companies to reduce their carbon emissions is to sell heavy-emitting assets to smaller, often privately backed firms, the groups said in a Jan. 19 report. That does nothing to reduce the global carbon count, though, which could even increase if a buyer cancels emissions reduction plans to save money.

Working with an unnamed group of oil and gas firms, banks, private equity firms and environmental groups, Ceres and EDF created the 27-page "Climate Principles for Oil and Gas Mergers and Acquisitions." The voluntary framework offers guidance and sample contract language to ensure that a buyer of oil and gas assets continues any emissions reduction programs the seller put in place.

The report suggests sellers should conduct due diligence to ensure potential buyers can maintain or improve an asset's mitigation efforts, and that any transaction should include a plan for eventually decommissioning the assets. Sellers should also share best practices and strategies for emissions reduction, the report said, and buyers should continue to publicly report emissions after the transaction.

EDF said its research showed that most oil and gas mergers and acquisitions between 2017 and 2021 relieved the seller of climate responsibilities without requiring the buyer to uphold the same standards.

"At the core of the Climate Principles is the belief that buyers of assets should continue to uphold the maintenance of climate standards after a change in ownership," EDF and Ceres said in the report.

'Implementation would require buy-in'

The plan would be difficult to put into action, Haynes & Boone LLP senior counsel and environmental attorney Jeff Civins said in an interview and an email. "This is a substantial undertaking, even at the more modest end of the spectrum," Civins said. "Even if you're not negotiating for enforceable provisions that will require them to reduce their emissions over some period of time, I think this is a very ambitious project."

"The solution is very prescriptive, requiring — among other things, in addition to a commitment to contractual obligations — financial and greenhouse gas due diligence (and quantification), and its implementation would require buy-in by the buyer as well as the seller," Civins wrote.

The devil would be in the details of any such arrangement, Civins said. Asset sellers could make sure that their carbon reduction efforts remain in effect by only selling to parties with the financial wherewithal to continue them, and they could add conditions to the sale that run with the property, Civins said.

Financial weight

The key to making the Ceres and EDF proposal work would be the investment bankers and private equity investors, according to Rob Thummel, managing director and senior portfolio manager for oil and gas investment fund manager TortoiseEcofin. "Private companies have to be financed somehow," Thummel said. "So banks, banks, banks."

"The banks require disclosures on the properties they're buying and require the private companies — in order to get financing — to have decarbonizing activities that will carry forward," Thummel said. "Even the equity investors have to think about it."

Thummel cautioned against measures that might push investors to withdraw capital from North American oil and gas companies, which would "just shift that oil and gas production to dirtier countries," Thummel said. The managing director suggested avoiding that outcome could require "a global compact of some sort, like the Kyoto Protocol."

Pressure on banks and investors would not be a cure-all, Thummel said. "Where it breaks down is you sell a big property to [a company that] doesn't care about ESG-related things," Thummel said. "I don't know how you prevent that effect."

But something similar to the Ceres and EDF proposal will be necessary if the oil and gas industry plans to participate in the climate fight, Ceres oil and gas expert Laetitia Pirson said in a statement at the release of the guidelines.

"Integrating the climate principles into dealmaking is a critical opportunity for oil and gas companies and all parties involved to demonstrate leadership on climate, fulfill their climate commitments in a credible way, gain a competitive advantage in negotiations, and level the playing field across the industry," Pirson said.

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