UK Banks Abandon North Sea Oil Sector Financing, Fossil Fuel Financing Turns To US Banks

DrillingUK Banks Abandon North Sea Oil Sector Financing, Fossil Fuel Financing Turns To US Banks

Almost all UK banks have stopped financing small independent oil and gas producers, which account for the bulk of North Sea output and investment. Changes in the UK tax system, especially the recent extension of the oil and gas windfall tax until March 2029, have had a negative impact on the financing ability of the country's independent oil and gas producers. Bank financing for the industry is typically based on the value of reserves, which fall when tax rates increase.

"The future of the North Sea now depends on US banks or Norwegian banks, not British banks. If you can't generate cash from existing operations, you can't recycle that capital and invest in the energy transition," said Julian Regan-Mears, vice president of strategy, integration and corporate affairs at Neptune Energy, at an event hosted by UK Offshore Energy in London. Neptune Energy operates the UK's largest single producing gas field and supplies about 6% of the UK's gas. These smaller producers are now turning to US and Norwegian banks for financing.

Last year, Lloyds condemned fossil fuel financing, joining a growing number of financial institutions in Europe. Lloyds, the UK’s largest bank, announced that it had updated its climate policy and would no longer support direct financing for the development of new oil and gas fields. The bank said its new policy prohibits project financing or reserve-based lending for greenfield oil and gas projects, but that the policy does not rule out general lending to companies in the sector. Unsurprisingly, climate groups welcomed Lloyds’ move and called on other UK banks to follow suit.

Lloyds is not alone. Large European banks have cut their financing to fossil fuel companies by nearly 30% amid growing shareholder pressure.

Smaller US banks step up oil and gas financing

The situation in the US is very different, with smaller regional banks significantly increasing their lending to oil and gas companies over the past two years. Since the beginning of 2022, regional banks BOK Financial, Truist Securities, Fifth Third Securities, Citizens Financial and US Bancorp have reportedly increased their total lending to oil and gas companies by more than 70% compared with the previous six years. The five banks now rank among the top 35 banks in the world in terms of the number of deals they have signed with oil and gas companies.

Globally, fossil fuel financing remains dominated by four U.S. banks—JPMorgan Chase, Citigroup, Wells Fargo and Bank of America—which have accounted for a quarter of all fossil fuel financing over the past six years.

The eight largest buyout firms are investing nearly as much in coal, oil and gas as the big banks, according to a recent analysis by the Private Equity Stakeholder Project and the American Financial Reform Education Fund (AFREF). Last year, private equity firms including Apollo Global Management, Carlyle Group, Blackstone, Brookfield Asset Management, KKR and Warbug Pincus collectively managed $216 billion worth of fossil fuel assets, matching the amount invested in fossil fuels by the big banks. In fact, the top 10 private equity funds have 80% of their energy investments in fossil fuels.

A report co-signed by major climate organizations such as Greenpeace, the Natural Resources Defense Project, the Sierra Club and the Sunrise Project pointed out: "Private equity firms have invested billions of dollars in drilling, hydraulic fracturing, transportation, storage and refining of fossil fuels and power generation, which is in stark contrast to the trajectory of our development and the 1.5-degree temperature target set by climate scientists and international policymakers."

Some practitioners said that the current fossil fuel market financing is shifting from public markets, which are subject to more regulation and public supervision, to less strictly regulated markets such as private equity.