The murky world of private equity takeovers of Canadian oil and gas

B.C. union calls for limits and climate disclosure on murky private buyouts of fossil fuels ahead of Brookfield AGM

Private equity takeovers of Canadian oil and gas | An illustration of a person with an oil refinery on their head

A union in British Columbia is pushing two of Canada’s largest financial institutions to rethink their involvement with a private equity industry that opaquely controls large portions of the country’s oil and gas sector.

“Public companies are selling off their most polluting assets in an effort to green their balance sheets,” says Paul Finch, treasurer of the British Columbia General Employees’ Union (BCGEU). “But little changes for the climate as these often older, dirtier and riskier investments have merely moved into the hands of private equity firms.”

Private equity investments in oil and gas have grown in the last decade. Between 2010 and 2021, private equity firms invested at least $1.1 trillion into global energy assets, with the vast majority in fossil fuels, according to data from PitchBook, an investment tracking service, and a report by the Private Equity Stakeholder Project (PESP), a private equity watchdog group.

What concerns the union and climate-oriented investors is the opaque nature of private equity. Private equity is exempt from most of the public disclosure rules for companies listed on public stock exchanges and funds offering investments to the public. This lack of transparency makes it difficult for stakeholders to hold these companies accountable for their environmental and social impacts.

“As oil and gas companies transition their strategies and portfolios and large banks reduce their fossil fuel investments, many private equity firms are standing by, ready to buy up bargain, heavy carbon-emitting assets and move them away from the scrutiny of courts, shareholders and environmental groups,” said Neil Segel, owner of Houston-based NES Consulting, in a report in January.

The 80,000-member BCGEU is hoping to bring attention to the issue by filing shareholder resolutions this spring with Brookfield Asset Management, one of the world’s largest investment management companies, and Royal Bank of Canada (RBC), the country’s largest bank. The two companies represent major BCGEU investments from the union’s strike fund.

Brookfield AGM

The BCGEU resolution, which will be heard at Brookfield’s annual meeting June 10, calls on the massive conglomerate to require two of its affiliated companies with large private equity holdings to set and disclose CO2-emission reduction targets for 2025. In a statement supporting the resolution, BCGEU recommends that the affiliated companies, Brookfield Business Partners and Brookfield Infrastructure Partners, reduce their portfolio emissions by 22% to 32% between 2020 and 2025, a target in keeping with the UN-backed Net-Zero Asset Owner Alliance.

The resolution received support from Glass Lewis, an influential shareholder advisory firm, which recommends that investors vote in favour. Glass Lewis argues that the recommended emission cuts are flexible and in line with the CO2 goals of the parent company, and there would be no undue burden on the affiliated companies to follow suit.

Interest in the resolution should  be strong since the company’s vice-chair and head of transition investing is Mark Carney, the former governor of the Bank of England (and Canada), who also sits as the United Nations special envoy for climate action and finance. In his UN role, Carney established the Glasgow Financial Alliance for Net Zero (GFANZ), which has attracted financial signatories controlling $130 trillion in assets. Brookfield, which holds nearly $700 billion in public and private assets, has joined the alliance through the Net Zero Asset Managers (NZAM) initiative, GFANZ’s asset manager subgroup.

While Brookfield’s renewable energy subsidiary is one of the world’s largest hydro, wind and solar companies (disclosure: I have a holding in this firm, Brookfield Renewable Partners), the company’s private equity affiliates hold significant fossil fuel assets. Last year, for example, Brookfield Infrastructure took over Inter Pipeline, Canada’s fourth-largest oil and gas pipeline operator, in an $8-billion privatization deal.

In response to BCGEU’s proposal, Brookfield argues it’s not necessary for the company to separately set emission targets for its infrastructure and business partner units since it is working on a 2030 emissions-reduction plan for all of its holdings under its NZAM commitment.

The company acknowledges, however, that it doesn’t have full operational control of all its assets. In some of its units, such as renewable power, Brookfield operates generating stations and has control over its emissions. But in other units, such as infrastructure and business partners, it operates as an investor through its private equity agreements, delegating control over emissions and operations to other companies. “We are initially focusing our net zero efforts on investments where we have control,” says Brookfield.

More RBC scrutiny

BCGEU filed a related resolution with RBC calling on the bank to stop any new lending, financing or advisory services to private equity firms purchasing coal, oil or gas assets. These services are critical in facilitating private equity buyouts since equity owners usually depend on large amounts of debt to reduce the equity they need to commit.

In its response, RBC argued that the proposed limitations “will not meaningfully contribute to achieving carbon reduction goals” and could potentially limit the path to net-zero by hampering useful transition projects. The resolution, heard at the April 7 RBC annual meeting, received 6.8% of the shareholder vote, low but not unusual for a first-time resolution at a major bank.

KKR’s case

In Canada, one of the most active fossil fuel private equity players has been KKR, also known as Kohlberg Kravis Roberts & Co., a significant investor in the expansion of Canada’s natural gas industry. KKR is perhaps best known for its $25-billion buyout of food and tobacco company RJR Nabisco in 1988, made famous by the book Barbarians at the Gate.

Among KKR’s Canadian investments is the controversial Coastal GasLink pipeline, taken over from publicly listed TC Energy in 2019 by KKR and Alberta Investment Management Corporation (AIMCO), the Alberta crown corporation that manages the province’s public pension funds. The 670-kilometre pipeline is slated to deliver natural gas for Asian markets from northern B.C. to the LNG (liquefied natural gas) Canada facility now being built in Kitimat, B.C. The pipeline is under construction through the unceded territories of the Wet’suwet’en First Nation and has been vigorously opposed by its hereditary chiefs.

KKR was also involved in a more recent deal with publicly owned Pembina Pipeline to form a new company to own and operate its gas-processing assets in northeastern B.C., a region with significant gas reserves. RBC was the leading banker in both deals.

With the recent launch of a $17-billion global infrastructure fund, KKR seems to be shifting its attention to the energy transition. Yet, like Brookfield and BlackRock, another major private equity manager, it’s not clear how KKR balances its emission reduction targets with its Canadian and global gas expansion.

“An investment in a gas pipeline should be explained,” Lisa Sachs, director of Columbia University’s Center on Sustainable Investment, told Bloomberg. “When you’re making a bid for a major gas pipeline, one should explain how that’s consistent with the commitments and consistent with a net-zero future.”

Canadian oil

While there is significant private equity interest in gas pipelines, private equity investors appear to be avoiding new oil company investments. This isn’t surprising given the huge run-up in oil share prices last year and especially in the last few months since Russia’s invasion of Ukraine. But this hasn’t stopped private equity altogether from investing in Canadian oil, as we saw from the recent shareholder campaign by activist investor Elliott Investment Management against Suncor, a major oil sands producer.

Elliott says it supports Suncor’s plans to reduce its carbon emissions, but the firm’s history shows it hasn’t backed major carbon-reduction plans at other companies. Like private equity firms in the gas industry, it’s difficult to know where Elliott stands on the carbon future of Suncor, one of Canada’s largest CO2 emitters.

Tzeporah Berman, chair of the Fossil Fuel Non-Proliferation Treaty, has argued that what’s needed are “just and equitable buyouts that permanently retire those assets without propping up fossil fuel companies or pushing the cost of environmental liabilities onto taxpayers.”

But this will take time. In the interim, Finch says he hopes the union’s shareholder proposals with Brookfield and RBC will shed light on private equity’s lack of transparency.

“We are in the age of stakeholder capitalism, but that concept is difficult to apply to private equity firms because of their lack of disclosure,” he says.

Eugene Ellmen writes on sustainable business and finance.

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