M&As shaping the low-carbon energy landscape

The worldwide shift toward a decarbonized future is witnessing an extensive metamorphosis in the global energy landscape, with S&P Global Commodity Insights low-carbon mergers and acquisitions database revealing persistent and robust deal activities since 2022.

Three pivotal factors have predominantly fueled the surge in M&A movements in the low-carbon sector, advancing the global energy transition:

The Paris Agreement. The 2015 Paris Agreement spearheaded global efforts to tackle climate change, mobilizing governments, corporations and investors to transition toward sustainable energy sources by prioritizing commitments to contain global warming and catalyzed investments in low-carbon alternatives.

The pandemic effect. While the coronavirus pandemic brought many challenges, it underscored the environmental benefits of reduced carbon emissions. This global health crisis reinforced the pressing need for cleaner energy sources, heightening global awareness. As a result, governments, companies and investors intensified their dedication to accelerating the transition to cleaner and more sustainable energy sources, realizing the pivotal role of low-carbon technologies in reducing greenhouse gas emissions, combatting climate change and ensuring a sustainable future.

The Russia-Ukraine war. Geopolitical tensions stemming from the ongoing conflict have forced Europe to accelerate its efforts to transition away from Russian oil and gas, especially natural gas. This has spurred investments in alternative energy sources, reshaping the continent's energy landscape.

In addition to these three key factors, the US expects to see a further surge in M&A activity following the introduction of the Inflation Reduction Act in the second half of 2022.

The energy industry has undergone a transformative reshaping since 2022, marked by a wave of low-carbon deals. The investment landscape is diverse, with transactions spanning across various sectors and regions, reflecting a multifaceted approach toward carbon reduction.

A record 1,382 deals were seen in 2022. A modest decline has been seen in 2023, with 945 deals over January-September, compared with 1,037 deals during the period a year earlier. From January 2022 to September 2023, $240 billion worth of assets were transacted in the low-carbon sector.

More than two-thirds of the total deal count since 2022 occurred in Europe and North America, while Asia and Australasia accounted for about one-fifth.

Renewable generation assets formed about half of these deals. Solar and wind energy assets dominated this category, making up nearly 90% of all transactions. This underscores continuous investments across multiple sectors, contributing to the worldwide transition to a less carbon-intensive economy.

The evolving energy landscape has a rising M&A focus on undeveloped solar and wind resources. Concurrently, there is a growing appetite for fully developed diverse asset portfolios over single-category ones.

Another key trend is the surge in corporate deals, showing companies' intentions to fortify their sector-specific capabilities.

Participation of oil and gas companies

The world of rising low-carbon transactions sees oil and gas companies as pivotal players. Their active participation in low-carbon initiatives, particularly in renewable generation, bioenergy and electricity storage segments, highlights their commitment to change. The creation of a robust and diverse energy portfolio to navigate the energy transition compliments companies' objectives of being good environmental stewards.

Oil and gas companies made up nearly 25% of all buyers in global low-carbon M&As in terms of transaction value and deal count post-2022.

However, with a spike in oil and gas prices in 2023 leading to increased revenues and returns, as well as higher spending on upstream acquisitions, there has been a noticeable slowdown in their low-carbon M&A activity. This uptick in cash flows in 2023 from traditional energy sources seemingly diverted their growth focus away from renewables and low-carbon sectors as companies also digest renewables acquisitions made in the last two years.

A surge in upstream M&A boosted the global deal value to its highest in a decade, surpassing $200 billion. Among the standout deals in 2023, ExxonMobil agreed to acquire Permian-focused Pioneer Natural Resources, and Chevron announced its takeover of Americas-focused Hess Corporation, each more than $60 billion. Earlier in the year, ExxonMobil and Chevron had taken over Denbury and PDC Energy, respectively, in two multibillion-dollar transactions.

In addition, poor low-carbon financial performance affects oil and gas companies' stocks. The rise in interest rates has also slowed down M&A activity, especially for emerging technologies, emphasizing the swift effect of macroeconomic dynamics on oil and gas companies' investment choices.

Between January 2022 and September 2023, oil and gas companies' green investments were allocated in three primary segments:

• 19% to the supply chain sector, underlining its imperative role in enabling the energy transition and the intent to reinforce sustainable and eco-efficient processes within the supply chain;
• 17% to the solar sector, highlighting their involvement in this rapidly expanding industry; and
• 10% to the wind sector, both onshore and offshore, indicating their strategic approach to diversifying their energy portfolios.

Sectors such as technology, trends and evolution and bioenergy also garnered interest from the oil and gas companies, emphasizing their strategic intent to remain at the helm of technological strides and venture into diverse energy sources.

Upstream dominance in CCUS deals

The adoption of carbon capture and utilization technology (CCUS) is crucial to meet the Paris Agreement's goal of limiting the rise in global temperature to well below 2 C. Despite its existence for over four decades, only about 100 projects have come into fruition globally, having a total capacity to capture approximately 48 million mt of CO2.

CCUS is projected to play a critical role in reducing carbon emissions, which have been on the rise in the post-COVID era. This technology is expected to account for nearly 15% of the cumulative reduction in emissions as the world aims to achieve its net-zero target by 2050.

Advancements in CCUS are predominantly seen in the capture stage, fueled by innovation. Near-term predictions show a potential dip in cost across the value chain. Supportive policies like the US IRA, which grants tax credits for CO2 sequestration, are pivotal in enhancing CCUS developments. The European Union's substantial Eur3.6 billion pledge also underscores governments' dedication to the innovation of CCUS technologies.

More than 50% of the world's CCUS capacity is situated in North America, with Europe and Asia-Pacific coming next. A large volume of this capacity is in the US, driven by government support, significant number of natural gas processing plants and a strong appetite for CO2 in enhanced oil recovery.

The CCUS sector is still in its early stages -- most deals focus on conducting research and feasibility studies, and technology-sharing partnerships to uncover the viability of diverse CCS ventures. CCUS offers oil and gas companies two key benefits: emissions reduction and the opportunity to realize economic gains -- driving operators to be more involved in deals within this segment.

Oil and gas companies account for about 70% of all CCUS-related M&A transactions, demonstrating their commitment to emissions curtailment. Moreover, the significant participation of global integrated oil companies underscores major international oil and gas players' alignment with energy transition and carbon reduction objectives.

The adoption of this technology by the oil and gas industry will be pivotal in steering low-carbon, efficient, and sustainable development of oil and gas resources. Their knowledge of subsurface geology is instrumental in the storage of captured CO2.

As we look ahead, the world is rapidly moving toward an energy landscape prioritizing low-carbon sources. Pure-play renewable companies are at the forefront through their unwavering commitment to clean energy. Private equity firms seeking to diversify returns and betting on the profitability of clean energy investment are actively financing this transformation.

Traditional oil and gas companies are recalibrating their investment strategies to align with this emerging reality. Together, all these players are scripting the future clean energy era. The rise in low-carbon M&A flow will support these companies in building new energy portfolios, gaining sectoral capabilities and accelerating the global transition to a low-carbon economy.

This article first appeared in the December 2023 edition of Commodity Insights Magazine .