An oil & gas bond we knew would come eventually… Repsol: first oil & gas bond: good on GBPs, not so sure on green credentials:
Last week, the first green bond was issued by an oil company. Madrid based Repsol SA issued a EUR500m bond maturing in 2022.
We’ve always posited that the green bond market is about the asset not the issuer; and that using the “brown” balance sheets of fossil fuel companies to fund green assets was needed for a faster transition to a green economy.
That means we have supported green bonds financing renewables from banks with balance sheets dominated by fossil fuel loans and “brown to green” bonds from companies like the giant Indian energy utility NTPC, because the assets are material to addressing climate change.
Repsol transparency & disclosure is good
The proceeds for the bond will be used to finance and refinance energy efficiency investments in Repsol’s chemical and refinery facilities in Spain and Portugal with the following technology types:
- Upgrade of equipment: Heat
- Upgrade of equipment: Dynamic equipment
- Improvements of operating criteria
- Energy Integration
- New units / Process scheme modification
- Network optimization
When it comes to the labelling process, Repsol has ticked all the boxes on best practice - disclosure is good, they have met the Green Bond Principles (GBP), provided useful information for investors and received an external review.
Joint bookrunners: BBVA, Banco IMI, Banco Bilbao, BNP Paribas, Caixabank, Citigroup, Goldman Sachs, HSBC, Morgan Stanley, Santander, Societe Generale.
So how “green” are these investments?
The goal of the bond is to reduce GHG emissions from refineries and, yes, the bond will avoid emissions: an estimated 1.2m tonnes of CO2 annually by 2020.
Taking our cue from the Paris COP21 Agreement, Climate Bonds takes the position that green bond investments should be in line with the very steep emissions trajectory that is needed to achieve a rapid transition to a sub-2 degree Celsius world.
This means according to the current scientific estimates, that global emissions from energy and industry have to halve every 10 years. This will require wholesale business model shifts – not just efficiency improvements, but business planning that fundamentally addresses both the projected growth in global energy demand and emissions reduction targets.
In this context, the 1.2m tonnes in annual GHG savings seems to be fiddling around the edges.
(For some context: Repsol’s CO2 emissions in 2016 were 19.7 million tonnes CO2, up from 17.9m in 2015. This, of course, does not include indirect emissions from consumption, which at a refining capacity of over 1 million barrels per day, is much much higher.)
If we’re going to have a chance of limiting warming at 2 degrees or less, investment undertaken by the oil and gas industry – as a high emissions sector - needs to be very ambitious.
There is very little time to move from our current trajectory, on the more negative scenarios heading towards 4 degrees or more (a catastrophic outcome by any assessment).
What is clear is that time for incremental improvements, including in the oil and gas sector, has passed.
We urgently need a deep, rapid and sustained reduction in emissions.
While Repsol's bond does not directly invest in increasing fossil fuel output (an obvious no no), refineries are still processing fossil fuels and, any investment in making refineries more efficient, as this bond is aiming to, will likely extend plant operating lifetimes and therefore indirectly increase emissions over time.
Repsol has not reported how they will address these potential indirect effects.
This point on indirectly increasing emissions is similar to that being made to proponents of ‘clean coal’ or coal efficiency improvements. Although such investments will drive incremental improvements, these improvements are not seen as substantial enough to help deliver a sub-2-degree pathway.
That’s why they are specifically excluded from the World Bank’s green bonds and the Climate Bonds Taxonomy. For this reason, bonds financing clean coal are not included in Climate Bonds data.
What a 2-degree pathway means for investments in the oil and gas sector
A sub 2-degree world requires the majority of investment flows to drive large scale and rapid shifts in the global economy towards a low carbon, low emissions model – particularly in energy systems.
This requires moving away from fossil fuel-based energy production and transitioning to electric transportation systems, knowing that most grids will be powered by renewables in the near future, not coal.
For the oil & gas sector, this means investing in clean energy capacity and alternative fuels (2nd and 3rd generation biofuels), and expanding infrastructure for charging electric vehicles etc.
Such investments would be driving ambitious rather than incremental change and is what we would have liked to see in this bond. We need to see “brown to green” pathways become the norm rather than the exception in oil and gas.
Green bonds have the potential to act as a catalyst in driving investment in the rapid shift needed. Bonds like Repsol’s will not make this happen. At best, they are a beginning.
Repsol points out that much of their reserves and refinery capacity are actually now in gas – a transition fuel? Potentially yes, but there are some anxieties around gas.
The contribution of gas to emissions reduction appears to have been over-stated because of fugitive emissions. When people talk about emission savings from gas they are generally talking about "deemed" emission savings – what’s estimated.
It turns out that there can be a big discrepancy between estimates and reality. For example, at least two NOAA reports in the US suggest significant gas pipeline leakage. There has been a global spike in methane generation in the past five years, and it looks like it may be coming from fugitive emissions (from pipelines, flaring, etc) as gas production ramps up.
The global emissions trajectory we urgently need simply can’t afford those emissions.
And, investing in improvements in downstream gas refining may be encouraging more gas to come through a leaky system, potentially negating emission savings.
For example, a single gas blow-out in LA in 2015, lasting 112 days, was equal to one-quarter of the annual methane pollution from all other sources in the Los Angeles Basin. There is a risk that efficiency improvements at one point in the supply chain can be completely wiped out by a single accident or blow-out.
Remember that methane is 30 times more potent a greenhouse gas than CO2.
Until we’re certain about fugitive emissions across a gas supply system we need to use the precautionary principle.
Applying that precautionary principle, we won’t be including this bond in our green bond listings.
But we do applaud Repsol for their strong levels of disclosure.
We do not regard this bond as “greenwashing.”
Repsol has provided detailed, honest information to investors and, in the absence of any public guidance about whether or not more efficient refineries are green, left it to investors to decide their level of support for the bond.
But this highlights the challenge in dealing with complicated emissions questions; exactly the area where clear science-based criteria would make life easier for both issuers and investors.
Developing that criteria takes work (as any of the 300 international experts providing their time free to develop Climate Bonds standards across a host of different sectors will attest to) but is necessary.
From a climate perspective, Repsol’s business strategy should aim for greater change – for example by transitioning to bio-feedstock. This needs to be an urgent focus for industry (subject to bio-feedstock certification) and would allow quick re-use of existing refineries.
Or, like NTPC, Total and others, they could move towards renewables. Any of those applications would be a business model that was more compliant with the direction of COP21 goals and associated NDC commitments by every nation.
In a nutshell, the Repsol green bond encapsulates the international challenge.
Incremental change is out of time.
Till next time,
PS: In São Paulo on the 30th May?
The Climate Bonds Initiative is convening an Executive Dialogue profiling Brazil’s emerging green bond market and investment opportunities in Agriculture, Energy & Infrastructure.
Limited place are still available.
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