Oil and gas funding is full of financial uncertainty

Hydrocarbon project financing is still controversial for many investors, especially since different reports make it hard for them to stick to their energy shift and climate change goals. Even though recent news suggests that big financial institutions will keep pouring money into the oil and gas industry worldwide, Norway's national wealth fund, Norges Bank, has taken a strong stand. In a statement, Carine Smith Ihenacho, a senior executive at Norges Bank Investment Management, the most significant stockholder in the world, said that Big Oil's efforts to switch to cleaner energy seem to need to be more because carbon emissions keep increasing.

The Norges Bank's comment came when most oil and gas companies profit from rising oil and gas prices while resisting calls for more ambitious ESG (Environmental, Social, and Governance) targets and investments in the energy transition. Some big oil companies, like Shell, have even said they need to figure out how committed they are to the energy shift. Instead, they are focusing on big oil and gas projects. This comment from Norges Bank also shows how international oil companies (IOCs) and national oil companies (NOCs), like Aramco, feel about the International Energy Agency's (IEA) suggestion to stop developing new oil fields. The way people talk about climate change and pollution has become very political.

Smith Ihenacho emphasized the need for a complete change to the energy system. He urged companies to take more significant steps to move away from fossil fuels and toward green energy sources. She said companies must change faster to reach the net-zero emissions goal by 2050. Norges Bank's attitude is in line with what it has always said it would do to fight climate change and achieve the purposes of the Paris Agreement. Critics, on the other hand, say that Norges Bank, which has made billions from Norway's oil and gas industry, has not entirely gotten out of hydrocarbons because it still has shares and loans in companies related to hydrocarbons and is still investing in hydrocarbon-related businesses.

Smith Ihenacho did not talk about these investments directly, but she did ask the world's most prominent investors to pressure companies to make robust change plans. She was critical not only of the companies that made hydrocarbons but also of industries like steel, chemicals, and transportation that rely on them. Smith Ihenacho said that Norges Bank faces an uphill fight even within its investment portfolio since only 23% of the companies in which the $1.4 trillion wealth fund invests have credible net-zero goals. Norges Bank has significant stakes in big U.S. oil companies like Exxon Mobil and Chevron Corp (1% each) and Shell and BP (3% each). Smith Ihenacho said that selling these shares is not a choice and that she plans to pressure the company from the inside.

Norges Bank and other institutions like the Dutch pension fund ABP are in a more complicated situation than most people thought. A report by The Guardian and the Dutch investigative websites Follow the Money, and Investico says that foreign banks, including European ones, are still involved in hydrocarbon financing. The study shows that since the Paris Climate Agreement, the world's bond markets have helped fossil fuel companies get about €1 trillion (£869 billion) in funding, even as pressure on European banks grows. Large European banks like Deutsche Bank, HSBC, Barclays, and Dutch banks like ING have backed bond sales for oil projects worldwide. Since 2016, companies like Petrobras in Brazil and Rosneft in Russia have been big winners.

These vast numbers are usually not included in ESG reports because bond sales are not included in how well a bank is doing with climate change. Critics say oil and gas companies increasingly turn to bonds to raise money since banks make it an attractive option. Research shows that Deutsche Bank, a substantial German bank, has been the principal underwriter or bookrunner for fossil fuel bonds, raising €432 billion since the Paris climate deal. During the same time frame, HSBC sold bonds to raise about €423 billion for fossil fuel firms. Crédit Agricole and BNP Paribas, both French banks, helped bring in €351 billion and €295 billion, respectively. ING and ABN Amro, two Dutch banks, were also involved on a smaller scale and contributed around €100 billion.

There is still a long way to go before the Paris Agreement's climate change and emissions goals can be met. The situation described above is interesting but not surprising in financial or legal terms. Even the European Union has recently admitted that fuels will be a big part of the global and EU economies for decades. Given the big problem, it is essential to know that many national oil companies are not even allowed to tell the public what they are investing in. The €1 trillion number from The Guardian's story is probably just the tip of the iceberg, and it does not look like it is going away soon.

Based on international reports like those from OPEC and the EIA, demand for oil and gas will likely keep going up over the next few years and could reach its peak after 2040. This means that financing, whether through bonds or project finance, will continue to be a good idea if big players like Norges Bank do not take more drastic steps, like selling off all their stock stakes in companies that deal with hydrocarbons. Real change may still be challenging since the media often drive the conversation more than concrete acts.