Oil majors are now seeking funding from alternative markets as banks decline putting capital into fossil fuel development. This is due to pressure by society to cut back on emissions.
Last year, clean energy projects attracted $580 billion funding, raising fears that fossil fuel developers are being crowded out.
The year 2023 may see dwindling funding for fossil fuel as lending to the oil and gas industry is crippling.
According reports more banks pledged in 2022 to stop funding some or all types of new fossil fuel developments as lenders are under increased pressure from shareholders and society to cut back on the emissions profiles of their client portfolios.
The oil and gas industry, on the other hand, was flush with cash last year as prices soared, but the sector stuck to capital discipline and, especially in the United States, focused on remunerating shareholders and paying down debts instead of taking on more loans.
Last year, clean energy projects and ventures saw around $580 billion in money raised on the debt markets, per data compiled by Bloomberg.
At the same time, the debt issuance arranged for oil, gas, and coal firms was nearly $530 billion. That was the first time renewable energy funding topped the debt financing for fossil fuels, according to the data crunched by Bloomberg.
Still, the data from 2022 may not be indicative of the beginning of a new trend in debt markets for the energy sector.
Oil and gas firms have started to turn to alternative sources of funding, which are more difficult to readily compile, according to April Merleaux, research manager at environmental nonprofit Rainforest Action Network (RAN).
“It’s difficult to say with confidence that there’s a new trend in the lending markets that will extend into 2023,” Merleaux told Bloomberg.
Private U.S. oil and gas producers are looking at a booming market for alternative funding, as banks have pulled back from funding oil and gas operations and other traditional sources of financing, such as equity investment or reserve-based lending (RBL) facilities, are drying up.
This new market, which emerged in 2019, is the proved developed producing (PDP) securitization, in which an oil or gas producer issues bonds in an asset-backed securitization (ABS) transaction. In other words, upstream producers use the cash from their oil and/or gas production as collateral for the notes placed with investors.
“Securitizations backed by oil and gas assets help diversify funding sources for companies that would typically access capital from more traditional sources, such as reserve based lending (RBL) facilities, high-yield bond issuance or equity investment,” Fitch Ratings said in early 2020 when this type of funding was brand-new and the pandemic hadn’t crushed oil demand yet.
