The Increasing Role of Private Equity in Oil and Gas

In the past 20 years, there has been an upward trajectory in both the number of private equity deals in the oil and gas industry and the dollar value of these deals. According to a new report from the Private Equity Stakeholder Project, since 2010, the ten largest private equity firms have invested $1.1 trillion into the energy industry.  

The oil and gas industry has four major sectors: midstream, oilfield services, downstream, and upstream. The risk continuum between these sectors and the growing need for capital has resulted in private equity becoming more prevalent in investment opportunities. Private equity players are looking to both buy properties and back experienced management teams to leverage their experience, relationships, and industry expertise for start-up companies.

How Private Equity Is Shaping the Oil and Gas Industry of the Future

Private equity’s increased presence in the oil and gas industry is empowering them to play a key role in the current energy transition that is taking place due to the increased importance of sustainability and environmental concerns.

As more nations and companies worldwide commit to net-zero carbon targets, many oil and gas companies are looking to get rid of their most polluting wells and least efficient properties. (This also gives private equity firms the opportunity to buy these assets for a cheaper price and enter the oil and gas industry.) Banks, also feeling the pressure of the current energy transition, have a reduced desire to finance the oil and gas industry. This withdrawal of capital from banks has led private equity into an even more important role in the oil and gas industry as they become an important source of capital.

Providing ESG Portfolio Options for Private Equity

Many private equity firms have started to look for ways to add environmental, social, and corporate governance (“ESG”) criteria when assessing the performance of their portfolio companies. Some private equity firms have realized the value that can be created by having strong ESG measures and have dedicated funds to improve their ESG performance. Another way private equity firms are adapting to the ongoing energy transition is increasing their investments in renewable energy-related assets and opportunities, which are frequently initiated and spearheaded by energy organizations.

As different trends and possible new reporting requirements come into play with the ongoing energy transition, it will be interesting to see how private equity firms handle new challenges and adapt with the industry in the future, and potentially drive change.