Insights - Energy Dais

World Bank to discontinue financing upstream sector of the oil and gas industry

The One Planet Summit in Paris held to mark the two year anniversary of the Paris climate change accord, called by the French President, Emmanuel Macron and co-sponsored by the World Bank had unexpected news, so to speak, to offer than expected. The World Bank, a global multilateral development institution, announced that it will freeze its financing for oil and gas upstream from 2019. The purpose is to fulfill the bigger commitment of halting the operations leading to the climate change, officials said.

No financing for upstream: A step to reduce carbon emissions

In 2010, the global financing institute stopped funding for coal-fired power stations. Since then, it has been facing pressure from the lobby groups to make better use of the $1 billion (£750 million) that it lends for oil and gas and halt this financing for the developing countries. The Bank said it saw the need to change the way it was operating in a “rapidly changing world” and under the light of this thought, it stopped the financing for the upstream projects of the oil and gas industry. “However, in exceptional circumstances, it may consider financing upstream natural gas in the poorest countries where there is a clear benefit in terms of energy access for the poor, and if the project fits within the country’s commitments under the Paris Agreement,” the World Bank said.

In 2017, $4.4 billion went to energy and extractive industries out of the Bank’s total lending of $22.6 billion. Lack of money has long been a constraint in the global effort to limit global warming, worsened by US President Donald Trump’s decision to withdraw America from the Paris Agreement, hence pulling off funding for climate projects. To rectify the effect, the World Bank has announced that by 2020, it will be directing 28% of its lending towards climate action, thereby meeting its target. “In line with countries submitting updated and potentially more ambitious Nationally Determined Contributions, the World Bank Group will present a stock-take of its Climate Change Action Plan and announce new commitments and targets beyond 2020 at COP24 in Poland in 2018,” it said.

What was this Climate Change accord and how it is impacting the environment?

The Climate Change Action Plan that was developed after the 2015 Paris Agreement is well on its course and all the goals stated in it will be achieved on time. Under this agreement, commitments towards ensuring that global warming stays under 2˚Celsius above pre-industrial levels were made by world leaders. And it [World Bank] recognized Oil and Gas sector to be the ‘key emissions-producing sector’. And hence, the move to stop funding for upstream sector is being hailed as one of the many efforts to limit the temperature rise to 1.5˚Celsius.

The World Bank’s ruling favors developing countries by providing finance and other assistance to aid their economic advancement. The summit itself was called to look for alternative sources of funding that is required to shift the economy from fossil fuels to less harmful energy sources, no matter how costly this shift is. The ultimate motive is to maintain a defense mechanism for countries against the weather disasters that are a direct consequence of climate change.

Varied reactions from the Industry

The Greenpeace International climate campaigner Gyorgy Dallos said: “The world’s financial institutions now need to take note and decide whether their financing is going to be part of the problem or the solution.”

Stephen Kretzmann, executive director of the Washington-based advocacy group Oil Change International, said: “Environmental, human rights, and development campaigners have been amplifying the voices of frontline communities for decades in calling for an end to World Bank financing of upstream oil and gas projects. Now, the World Bank has raised the bar for climate leadership by recognizing the simple yet inconvenient truth that achieving the Paris agreement’s climate goals requires an end to the expansion of the fossil fuel industry. It is time for all of the institutions, countries, investors and individuals who are still in the Paris agreement to stop funding fossils – once and for all.” On top of that, greenhouse gas emissions will be reported starting next year from the projects into which it invests financially. The results will be published annually, starting late 2018, the World Bank said.

In the fiscal year 2016, the WBG invested $1.5 billion in the oil and gas upstream industry, which is roughly twice the amount it invested in the fiscal year of 2015. With an objective to ensure that natural resources add value to country’s overall economic growth and sustainable development, the WBG supported multiple initiatives and projects. Sub-Saharan Africa region alone held responsible for 37% of the WBG’s total funding in EI due to a US$ 700 million Ghana’s Sankofa Gas Project, as per IFC’s 2016 Annual Review. Through such larger than usual funding along with other technical assistance, the WBG succeeded to kindle transformational impact in major economies of East Asian and Pacific, Sub-Saharan African and Middle East regions.  The sudden stoppage will surely affect the oil and gas industry and specially the countries having energy needs.

Justification of the move and the road ahead

How does this decision impact them? According to the World Bank, due to the shifts in technology and the evolving markets, countries have a wider set of low cost sources of energy supply to meet their demands. For example, the costs of solar photovoltaic and wind power have fallen by 80% and 60% respectively in the past decade which is again a great time to invest in renewable energy. Even commercial finance is available without difficulty for exploration and production purposes for the countries that have oil and gas resources. Moreover, the World Bank Group is committed to helping countries, extend access to reliable, affordable and sustainable energy for all their citizens.

Quoting the international institute, “We have a long track record of supporting the expansion and improvement of energy access, both on and off-grid – through power generation, transmission and distribution, support to the private sector, and technical assistance and policy work. Tens of millions of people have gained access to energy as a direct result of World Bank Group support, and we will continue this work.” The statement indicates that the institute believes in sustainable growth and that we shouldn’t think that the financing will be cut out.

In such a scenario where a major chunk of funding is chipped off from the financial accounts of projects, one will surely be on a lookout for options. And many have starting exploring other possibilities of funding. For all those who are still looking for options, for funding and growth of business, then a free turkey is coming your way, its collaborative approach which can be the next big thing in the oil and gas industry. Watch our space, Energy Dais for such opportunities for we bring together global oil and gas companies on a single platform.

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