M&A monitor

Climate crisis drives dealmaking

In the wake of COP27, companies across the globe are reassessing their net zero plans, science-based targets, and offsetting strategies. At the same time, the use of hydrocarbons continues to rise and is some distance from its predicted peak.

As a result, investments in hydrocarbons are still expected to be a mainstay of 2023. That said, we also expect many companies to remain on course with planned transitions to net zero, either because climate change is jeopardising their business, or they can see commercial opportunity from being part of the solution – or both.

Beyond hydrocarbons?

The energy sector had a bumper year in 2022 with profits rising to new heights, due to tensions between China and the West, the war in Ukraine, and global supply issues, resulting in rocketing energy prices. Against this background, we have seen continued investment in hydrocarbons, as many players focus on security of supply and diversified sources of energy rather than face the consequences of energy shortages or unscrupulous suppliers. Driven by continued strong global demand for energy, especially in Asia, and ever-increasing demand in Europe, investments into upstream LNG as well as related downstream infrastructure are forecast to keep growing for the next few years. Whilst hydrocarbons are still expected to be a source of energy for years to come, the recognition of the threats of climate change means that policymakers are increasingly steering capital away from carbon intensive businesses. The combination of ESG pressures, Europe’s taxonomy regulation and central banks’ policies are leading many investors and banks to decarbonise their portfolios. This opens up opportunities for investors to focus on the transition from hydrocarbons to renewable sources rather than avoiding carbon-intensive assets. We therefore expect increased investment activity. To succeed, investors will need to navigate the evolving regulatory backdrop of subsidising, capping and restricting energy supply and prices, and increased scrutiny under foreign investment and national security regimes.

Sustainable balance – with momentum

It is increasingly recognised that the climate crisis will only be solved through international collaboration. The G7 climate club initiative as well as the Inflation Reduction Act in the United States are evidence that more action is needed to achieve the goals of the Paris climate agreement.

To achieve net zero, the search is on for scalable and cost-effective green technologies. Public grants are being made available to bridge the profitability gap of decarbonised industrial applications. One notable example is the United States DOE’s ‘Hydrogen Shot’ programme, which started in 2021 and seeks to reduce the cost of clean hydrogen. Another example is Europe’s requirement to balance short to mid-term energy needs with longer term green energy targets. This dilemma becomes evident in the push for investment in fast-track new LNG import terminals. This new infrastructure, if operated for the usual 25 to 35 years, would be in stark conflict with the net zero ambitions of the European Union, unless they can be converted from LNG supply to the supply of hydrogen or its derivatives.

Outlook for 2023 and beyond

We expect investment into renewables to remain in high demand. We therefore expect to see new partnerships and increased competition for renewable or other decarbonising investments. The focus on renewables will sit alongside the expected continued investment in hydrocarbons in the short and medium term.

Investment in the developmentof innovative technology is key to achieving net zero. Whilst some markets are open to exploring technologies that may be perceived as controversial or experimental, such as fracking, carbon capture and utilisation/storage or new nuclear solutions, others are more reluctant. Overall, we believe investment in this area is likely to increase, particularly in novel green technologies.

Finally, volatility in energy prices as well as in new regulations will keep the players in the sector on their toes. Constant monitoring and adaptation, both when developing and investing into new assets or managing existing portfolios, will be key to success.