An energy transition loophole is allowing Big Oil to offload high-polluting assets to private buyers

Oil and gas giants are increasingly selling off dirty assets to private firms, amplifying concerns that the fossil fuel industry’s traditional dealmaking is not compatible with a net-zero world.

It comes at a time when oil and gas majors are under immense pressure to set short and medium-term targets in line with the goals of the landmark Paris Agreement. It is widely recognized that this accord is critically important to avoid the worst of what the climate crisis has in store.

Research published last week by the non-profit Environmental Defense Fund shows how oil and gas mergers and acquisitions, which may help energy giants execute their transition plans, do not help to cut global greenhouse gas emissions.

To be sure, the burning of fossil fuels, such as coal, oil and gas, is the chief driver of the climate crisis and researchers have repeatedly stressed that limiting global heating to 1.5 degrees Celsius will soon be beyond reach without immediate and deep emissions reductions across all sectors.

EDF’s analysis of over 3,000 deals between 2017 and 2021 shows how flaring and emissions commitments disappear when tens of thousands of wells are passed from publicly traded companies to private firms that have no oversight or reporting requirements to shareholders.

These same often obscure private companies tend to disclose little about their operations and can be committed to ramping up fossil fuel production.

Such deals are growing in both number and scale, EDF’s research says, climbing to $192 billion in 2021 alone.

“These transactions can make it look as though sellers have cut emissions, when in fact pollution is simply being shifted to companies with lower standards,” said Andrew Baxter, director of energy transition at EDF.

“Regardless of the sellers’ intent, the result is that millions of tons of emissions effectively disappear from the public eye, likely forever. And as these wells and other assets age under diminished oversight, the environmental challenges only get worse,” he added.

The report says the surge in the number and scale of oil and gas dealmaking has coincided with growing fears among investors about losing the ability to assess company risk or hold operators accountable to their climate pledges.

It also suggests implications for some of the world’s largest banks, many of which have set net-zero financed emission targets. Since 2017, five of the six largest U.S. banks have advised on billions of dollars worth of upstream deals.

As a result, the analysis calls into question the integrity of Big Oil and Wall Street’s commitment to the planned energy transition, a shift that is vital to avoid a cataclysmic climate scenario.

EDF’s analysis used industry and financial data on mergers and acquisitions to track changes in how emissions may have changed after a sale. It is thought to be the first time that comprehensive data on how oil and gas majors transfer emissions to private buyers have been collated.

In one example, Britain’s Shell, France’s TotalEnergies and Italy’s Eni — all publicly held firms with net-zero targets — sold off their interests in an onshore oil mining field in Nigeria last year to a private-equity backed operator.

The World Bank has said ending this “wasteful and polluting” industry practice is central to the broader effort to decarbonize oil and gas production.

CNBC has contacted Shell, TotalEnergies and Eni for a request to comment on EDF’s analysis.

Andrew Logan, senior director of oil and gas at nonprofit Ceres, told CNBC that EDF’s research shows there has been something of a “wink wink, nod nod approach” to transferred emissions to date, whereby energy majors sell off high-polluting assets without worrying too much about whether the purchaser is going to do what they are supposed to.

“But what’s interesting is that those private equity firms tend to be backed by public money. You know, it is public pensions funds that are the partners in those firms so there is leverage there,” he added.

Larry Fink, CEO and Chair of BlackRock, the world’s largest asset manager, sharply criticized oil and gas giants for selling out to private firms during the COP26 climate conference in Glasgow, Scotland, last year.

In July last year, some of the world’s largest corporate emitters were ordered to pay hundreds of millions of dollars as part of a $7.2 billion environmental liabilities bill to retire aging oil and gas wells in the Gulf of Mexico that they used to own. The case was thought to be a watershed moment for future legal battles over cleanup costs.

“I think we need something like that in the rest of the world where there’s an acknowledgment that that liability has to travel. It has to be paid for and we have to be aware of that at every stage of the process,” Logan said.