Home Energy assets Global Private Equity – Industry Spotlight: Private Equity and Private Wealth: Will 2022 be the year they dive upstream?

Global Private Equity – Industry Spotlight: Private Equity and Private Wealth: Will 2022 be the year they dive upstream?


Global Private Equity – Industry Spotlight

With traditional lenders heavily influenced by public opinion and political influence, restrictions on their lending to the hydrocarbon industry are likely to persist. So, where will the financing of the essential investments in this sector come from?

As the temperature of climate change rises after COP 26 and calls to definance the hydrocarbon industry grow louder, it seems many financial institutions have been paying attention, and reports indicate that in recent years the Upstream oil and gas industry funding has fallen by hundreds of billions of dollars a year. Many commercial lenders, export credit agencies (ECAs) and multilateral agencies (MLAs) have said they will no longer finance oil projects, previously announced a halt to coal funding.

Rystad recently reported that oil demand now exceeds 99 million barrels of oil per day (bopd), which is higher than pre-Covid demand and is expected to exceed 100 million barrels per day in 2022 as economies recover from Covid restrictions . Likewise, the demand for gas and liquefied natural gas (LNG) has increased sharply to reach 360 million tonnes per annum (MTPA). Both Rys tad and Woodmac have done extensive modeling of the effect on oil demand under likely energy transition scenarios, and both conclude that even with massive growth in renewable energy and the adoption of electric cars, oil demand will remain above 70 million barrels per day and LNG demand will reach 725 MTPA by 2040. Rystad also concluded that at at least 1,000 new oilfields, averaging 150 million barrels of recoverable reserves, need to be discovered and developed over the next 10 years to meet projected oil demand, even under an aggressive decarbonization transition scenario .

But, as we are currently experiencing, this reduction in financing, coupled with a growing demand for oil and gas, is having consequences: investments in production have dropped dramatically and many new fields are waiting for financing to be developed. As a result, supply is struggling to match demand and there has been a dramatic increase in oil and gas and LNG prices, with Brent oil hitting recent highs of US$85 per barrel (bbl), LNG and gas trading at all-time highs Japan Korea Marker at over $40 per million metric British thermal unit (MMBtu), title transfer facility at over $31.6 per MMBtu for January delivery , and even Henry Hub dropping to $4.52/MMBtu, roughly double the December 2020 price.

Without additional financing and investment upstream, these prices are at high risk of being exceeded, bringing with them the corresponding global economic shocks that high oil prices always cause and the resulting energy poverty for the most vulnerable people in developed economies. and emerging.

A potential new source of funding will be private equity (PE) and infrastructure funds, wealth management/private wealth (PW) funds and perhaps some sovereign wealth funds. Many of these funds are interested in the energy sector, but see the renewables market as too hot, with returns often falling into the low numbers, so they can focus on the industry again in upstream, much more profitable.

Oil companies seeking to monetize investments in hydrocarbons must therefore take into account the typical investment needs of PE/PW and the issues that have previously limited investment in the sector.


First and foremost, PE and PW appreciate a strong management team with a proven track record from past oil companies.

Specialized skills

While rising oil prices can yield dramatic returns, it is not the primary investment model. PE/PW are looking for a team that can bring a skill set that will generate strong returns even if oil prices do not rise. For example, business models that have recently attracted private equity investment include expertise in end-of-life field management that maximizes recovery, reduces opex, extends field life and, therefore, delays abandonment responsibility and expertise in a particular regional geology that provides greater exploration success for infrastructure-led infrastructure. exploration.

Current or short-term production

PE/PWs generally favor assets with a clear future production profile, although the value of near-term development assets is increasingly recognized, particularly as part of a portfolio. However, few private equity houses have either the ability to value or the propensity to invest in deep exploration, so a heavily weighted exploration opportunity is unlikely to be attractive.

A targeted net-zero approach can help attract funding.

Transaction size

Much depends on the PE/PW fund that is looking to invest. Large private equity houses often seek fewer but larger investments in portfolios with at least 75,000 barrels of oil equivalent per day of production; China Investment Corporation, Carlyle and CVC Capital Partners’ investment in Neptune, and EIG’s investment in Chrysaor are good examples. PW funds and some of the smaller private equity funds will often look at single assets with production below a thousand barrels.

Carbon Neutral Plan

Increasingly, PE/PW are looking for investments that have a plan to manage future emissions. Private equity funds, in particular, are under pressure from many of their investors to become greener and play an active role in the energy transition, so a targeted net-zero approach can help attract funding.

Potential returns

Last but not least! PE/PW investors always have high rates of return. They will need a clear understanding of how baseline returns can be achieved and must see the potential for greater upside in any investment proposal.


When trying to present an attractive investment opportunity, oil companies should keep in mind the issues that PE and PW have faced in the past.

Get burned on past investments

The American shale is a good example. Although shale has been incredibly successful from a production perspective, not all investors have seen great returns. The oil crashes of 2014 and 2018, which led to a number of Chapter 11 bankruptcies in the shale sector, caused significant losses for many US private equity groups and, although the sector is still attracting ‘interest in the United States, investors are now more cautious. .

Output options

In the past, it was relatively simple to set up a private oil company and then go through a private sale or initial public offering (IPO) to get the private equity fund out of the investment. However, there are now concerns that with the upstream sector becoming less popular with investors, it will become increasingly difficult to exit an investment, at least via an IPO.

Costly investment requirements to meet new net zero targets

Net Zero Goals While many integrated oil companies (IOCs) are shedding hydrocarbon assets that are attractive from a yield standpoint due to the desire to be net zero, IOCs are often shedding a large many of their older, higher-carbon-cost assets that engage in costly retrofits to meet their new net-zero goals (see International news, issue 2, 2021). While these assets meet some of the needs of PE/PW investors, as noted above, they do not meet the carbon neutral requirement, which is likely to reduce their value.

Private equity and private management value a strong management team.

Special Purpose Acquisition Companies

Another potential source of funding for upstream assets may be through special purpose acquisition companies (SPACs), which could also help provide exit options for existing and future PE/PW investors.

SPACS have grown in number in the US and overseas, and the UK’s new SPAC regulations bring its SPAC regime largely in line with that of the US, meaning there is relatively little arbitrage. legal or regulatory in this space between the two markets. London’s long-standing role as a hub for cross-border oil and gas investment and fundraising also means that sponsors may find that upstream asset valuations in this market are closer to their expectations. , provided the investability issues across the sector can be resolved.