Although the oil and gas industry has enjoyed a record financial run since the COVID-19 pandemic, the tightening of capital has led to more deliberate activity in mergers and acquisitions (M&A).
- 2022 saw a double digit percentage drop in deals versus 2021, with the back half of the year dominated by large cap companies.
Main Idea: What does that mean for the industry going forward?
- Forecasts support a stable oil benchmark price for 2023 and 2024, so M&A may look like it did in 2022.
- ESG scores and carbon emission performance provides a differentiator when buyers are looking for assets.
- Over the last couple of years, O&G companies have been building resilience from deploying capital for emission reductions to lower-carbon O&G development to investing in renewables.
- M&A activities will no doubt incorporate carbon performance and climate risk both from the buy-and sell-side, and this only looks to accelerate with current and forecasted access to capital.
Going Deeper: Here are five key considerations for assessing carbon performance and climate risk during M&A due diligence in the oil and gas sector:
1. Adapting to Changing Regulatory Compliance
- One of the primary ways that environmental concerns are assessed in M&A due diligence is by evaluating the seller's compliance with local, state, and federal regulations, including past violations or incidents that may have resulted in fines or penalties.
- Acquirers will want to ensure that the seller has a strong track record of compliance with regulations related to air quality, water usage, waste disposal, and other environmental factors.
2. Evaluating Climate ImpactRisks and Adaptation
- Acquirers will also want to assess potential environmental risks associated with the target company's operations.
- This may include evaluating the impact of climate change on the company's assets or operations, as well as assessing potential risks associated with spills or accidents.
- Understanding these risks can help acquirers make more informed decisions about whether or not to proceed with an acquisition.
3. Scrutinizing Current and Past Carbon Performance Data
- Acquirers will want to understand how much GHGs are emitted by the seller each year as well as what steps they have taken (or plan to take) to reduce their carbon footprint.
4. Identifying Net Zero or Carbon Reduction Initiatives
- Acquirers will want to understand any existing or planned initiatives so that they can continue these efforts post-acquisition.
- This may include measures such as Leak Detection and Repair programs, emission reduction plans, marginal abatement cost curves, etc.
5. Completing Third-Party Verification or Certification
- Independent, third-party experts can help identify any potential risks or liabilities that may not be immediately apparent through traditional due diligence methods.
In Conclusion: Assessing environmental concerns during M&A due diligence for oil and gas companies is critical for identifying potential risks and liabilities associated with these transactions. By thoroughly evaluating regulatory compliance history, potential risks associated with operations or climate change impacts on assets; analyzing emissions data; identifying sustainability initiatives; engaging third-party experts where appropriate - acquirers can make more informed decisions about whether or not to proceed with an acquisition while minimizing risk exposure from possible future legal liability issues arising from non-compliance with relevant laws governing environment protection activities.
