North Sea
Net zero in the
As oil exploration and production companies restructure their operations to achieve net zero targets, ESG-aligned commodity finance is supporting them along the way. flow shares the experiences of Lundin Energy and Harbour Energy
E
nergy is needed for the production of all industrial and consumer goods, and has traditionally been sourced
mainly from oil, gas and coal. Renewable forms of energy, from solar, wind and hydropower, all the way to pioneering processes for the production of hydrogen by electrolysis, contribute to more sustainable energy generation.
But according to the International Energy Agency’s (IEA’s) World Energy Outlook 2020 report, oil will still comprise a significant portion of the energy mix in 2040 (23%, versus today’s 33%), alongside other forms of energy. Despite the uncertainty brought on by Covid-19, the broader energy transition is taking place across the entire energy, resources and industrials sector. In order to meet the Paris Agreement’s 2°C target, upstream oil and gas production emissions need to decrease by 50% by 2040 compared to 2020 levels.
The IEA explains: “For any pathway to net zero, companies will need clear long- term strategies backed by investment commitments and measurable impact. The finance sector will need to facilitate a dramatic scale up of clean technologies, aid the transitions of fossil fuel companies and energy-intensive businesses, and
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bring low-cost capital to the countries and communities that need it most. Engagement and choices made by citizens will also be crucial, for example in the way they heat or cool their homes, or how they travel.”1
With around 7.8 billion people already on Earth, and the figure projected to be approaching 10 billion by 2050, such transformation will take years – and the right finance structures will be needed to support producers as they transition along
this path. Transactions can support the use of renewable forms of energy for the extraction and processing of conventional raw materials, or the sustainable expansion of existing business models.
“Sustainability is essential, and includes high environmental, social and governance (ESG) standards in the commodity sector,” says Deutsche Bank’s Head of Natural Resources Finance, Sandra Primiero. “On
the environmental side, a reduction of CO2 emissions is a key focus area and it is very positive to see how many corporates in the sector embrace their responsibility and work closely with financing partners who support them on their path.”
In other words, providers of natural resources finance are working towards getting their clients ‘Paris aligned’, and should not stop financing oil and gas, but rather support producers as they transition to cleaner energy production processes. “Continued financing of our commodity clients reflects our joint responsibility to form the energy transition, which will only happen hand in hand,” Primiero adds.
This article shares two Deutsche Bank ESG-linked commodity finance transactions where the margin paid by the client increases or decreases depending on their ESG performance to agreed metrics. Both companies involved are examples of a new breed of agile, independent oil exploration and production (E&P) entities with a strategy of reaching once inaccessible or undiscovered reserves in a sustainable manner.
Lundin Energy Two years ago, in flow’s review of reserve- based lending in the North Sea,2
we
Lundin and Harbour are role models in their sector when it comes to environmental ambitions
Yann Ropers, Head of London for Natural Resources Finance, with global responsibility for RBL finance, Deutsche Bank
touched on Lundin’s reputation as one of the largest independent E&P companies operating in the Norwegian Continental Shelf (NCS). The company has grown from generating US$250m EBITDA in 2015 to around US$1.5bn in 2020. Lundin has enjoyed remarkable exploration success in the NCS, including in the giant Johan Sverdrup field, which has gross proven (2P) reserves of more than 2,650 million barrels of oil equivalent (MMboe). At its peak level of production (expected in 2022) its Johan Sverdrup asset alone will account for one-third of all petroleum production from Norway.
Thanks to its solid management and exceptional oil discoveries, Lundin has
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