Kimmeridge publishes white paper on the need for the energy industry to build its own carbon offset exchange
Kimmeridge Energy Management Company, LLC (Kimmeridge), a private equity firm focused on upstream energy, with an investment philosophy underpinned by fundamental research, today published a white paper entitled: "Why the Energy Industry Needs a Carbon Offset Exchange."
Contrary to popular belief, little has happened in the past year to quell the world's thirst for oil. With global lockdowns and limited vapor trails overhead, in 2020 oil demand declined just 9 per cent versus 2019. As global demand for fossil fuels is expected to remain robust over the next decade (and likely longer), reducing the carbon intensity of the oil and gas industry is essential – and the industry is already starting to make progress.
Market participants are increasingly measuring their carbon emissions and managing their operations more sustainably as part of a broader push to embed ESG principles into the E&P business model. However, even with these positive developments, there are two main impediments to the industry's momentum:
- Lack of uniformity in E&P companies' goals / plans
- Absence of explicit economic incentive for such companies to reduce their GHG emissions
Despite their central role in the environmental debate, E&Ps have no way of generating offsets from reducing emissions, or even from keeping hydrocarbons permanently in the ground. The current rules governing offset projects are too cumbersome, bureaucratic and academic, and hinder the potential for meaningful emissions reductions from the industry.
Within its paper, Kimmeridge describes these obstacles in detail and presents practical, industry-wide solutions to facilitate the goal of net-zero, namely:
- E&Ps must commit to an independently verified reduction in the carbon intensity of their production of 50 per cent by 2030.
- The creation of an O&G industry-wide offset exchange to facilitate carbon trading.
Ben Dell, Founder and Managing Partner of Kimmeridge, says: "We believe that an industry incentivized to get to net zero through its own actions, and not just through planting trees, is the right and necessary path forward for E&Ps. At present, there is no compelling incentive structure that encourages oil & gas companies to actively reduce emissions and no platform that points them in the direction of a clean energy future. The industry must therefore take emissions reduction targets and the ability to offset emissions into its own hands.
“As Kimmeridge and many others have witnessed in recent years, the principles articulated in our white papers continue to be acknowledged and endorsed by those seeking to adopt a new E&P business model that would make the sector investable now and well into the future. Without critical reforms like these, the industry will remain mired in quicksand, struggling to attract capital and unprepared for the future of energy."
Kimmeridge has seen first-hand, through the firm's own investments, that genuine commitments to measurable emissions reductions are indeed feasible for the industry. A clear example is Civitas Resources, a leading E&P in Colorado's DJ Basin, which is slated to begin life as a public company later this year as the state's first net-zero oil & gas producer (on a scope 1 and 2 basis).