Whether driven by climate targets, reputational
risk, financial considerations, or a combination
of factors, some MNEs are selling petroleum
assets, sometimes as part of their
decarbonization strategies. However, simply
selling petroleum projects may not reduce, and
may actually
increase,
climate impacts if assets are transferred from
companies with stronger environmental and
reporting commitments to those with weaker
commitments. Moreover, unless handled
responsibly, disengagement by reputable firms
may increase certain other
risks
for host developing countries and their
citizens, such as exacerbating weak governance,
corporate capture and corruption, conflict, and
human rights abuses. Governments, companies,
investors, and civil society should ensure that,
when petroleum projects change hands,
sustainability and governance standards do not
slip. This may require revisiting approaches to
petroleum laws and contracts and updating our
understanding of company and investor social
responsibility.
Host country governments should vet the quality
of would-be buyers. This is not a new concept,
and many governments have built related
protections into their upstream petroleum legal
frameworks. Contracts granting companies the
right to explore for, and extract, petroleum
often include restrictions on companies’ ability
to transfer their interest to another party. For
example, all 28 English-language petroleum
agreements on
ResourceContracts.org[1] signed in the
past five years require prior government
approval for assignments of interest.
[2] 23 of these
specify technical and financial competence of an
assignee as a condition for approval, and 25
require license holders to conduct petroleum
operations in line with best industry practice.
International best industry practice for
petroleum operations is evolving.
Current
technologies can significantly reduce
emissions, and
almost half
of methane emissions can be avoided at no
net cost. Sustainability standards and
public
reporting on companies’ management of
environmental, social and governance (ESG)
impacts are also evolving. Governments should
use their contractual approval rights, as well
as any additional legislative or regulatory
rights, to require that buyers have demonstrable
competence to maintain or exceed the operating,
sustainability and reporting practices of the
seller, taking into consideration the most
recent and robust standards for best industry
practice.
Seller companies should recognize that they too
have important responsibilities. Sellers may
soon see limits on a “clean” exit when
transferring petroleum assets to less
responsible parties. Increasing
attention
to the environmental consequences of such asset
sales may mean growing reputational risks
associated with irresponsible exits, along with
pushback on whether such divestments should
count as part of a company’s net-zero strategy.
On the mining side,
some legal
experts have recommended that sellers
conduct due diligence on buyers to assess their
mission and reputation, ESG standards and
adherence to international best practices, and
that agreements include buyer commitments to
maintain operating standards, stakeholder
commitments and rehabilitation requirements.
Such measures are critical for petroleum asset
sales too, and sellers may build on existing
approaches, such as buyer due diligence, to
address
anti-corruption
risks. The appropriate mechanisms will
depend in part on relevant laws of the
applicable jurisdictions, but sellers will want
to avoid the appearance of washing their hands
of dirty projects to take a step forward on
achieving their own net zero and ESG targets,
while the host country and the planet take a
step back.
Further, investors,
regulators
and standard-setting
bodies
that shape sector norms have a critical role to
play in influencing company incentives and
behavior. Climate disclosure and emissions
reduction rules and standards must address
reporting on transfers and transferred
emissions. Emerging industry norms should also
address broader risks associated with fossil
fuel asset sales. These actors should develop
standards that require sellers to conduct, and
report on, due diligence on key policies and
practices of buying companies, such as their
environmental commitments, stakeholder
engagement and measures to combat corruption
internally and in engagements with high-risk
partners.
Finally, civil society in host countries must
hold governments and companies accountable for
ensuring buyers will maintain governance and
environmental standards. Civil society cannot
exercise its oversight role without transparency
around transfers, including the identity of
sellers and buyers. The requirements of the
Extractive
Industries Transparency Initiative (EITI)
Standard serve as a good starting point
for transparency and could also be a vehicle for
transparency around the types of due diligence
and reporting recommended above. EITI already
requires participating countries to disclose the
process for transferring licenses; the technical
and financial criteria used and any material
deviations from such criteria; and information
about transferees, including their ultimate
beneficial owners. Ideally, information around
transfers would be disclosed before a license is
actually transferred. This will allow civil
society organizations to research the reputation
and performance of potential buyers and raise
red flags. Indeed, disclosures and oversight
before a deal is closed are key for ensuring
companies and governments transfer projects
responsibly.
