KKR-Backed Energy Investor Bets on Cleaning Up Drillers’ Mess
(Bloomberg) -- A long-time investor in oil and gas companies is now betting on cleaning the mess they leave behind.
BlackGold Capital Management LP, a private equity firm partially owned by KKR & Co., is helping form a company to finance and start handling the cleaning and plugging of non-producing wells -- a major source of greenhouse gas emissions and other pollutants -- before they’re even drilled.
OneNexus Environmental, as the venture has been named, was designed to operate much like a life insurance company for wells. It’s willing to collect premiums from onshore drillers during the life cycle of insured wells, then take ownership and become legally liable for decommissioning those sites when they’re no longer productive.
BlackGold’s move underscores how traditional fossil-fuel investors are seeking to take advantage of opportunities emerging from the energy transition as oil and gas companies face increasing pressure to keep a lid on growth and take action on their carbon footprint. Persuading them to ensure the responsible retirement of new wells alone would create a multi-billion dollar market for companies such as OneNexus, according to Adam Flikerski, a managing partner at BlackGold.
“The numbers can be staggeringly lucrative for OneNexus and at the same time accomplish and solve for a significant problem in society and for the industry,” Flikerski said in an interview. While BlackGold is still not ready to fully abandon conventional oil and gas funding, there’s “no question” most of its future growth will come from investments with green, sustainable characteristics, he said.
The U.S. alone has about 3.4 million abandoned oil and gas wells, and only 40% of those are plugged, according to an Environmental Protection Agency report for the United Nations Framework Convention on Climate Change. Many belonged to companies that went bankrupt, or were sold to small drillers still hoping to extract some fuel out of the ground, or were simply abandoned amid a lack of capital for needed remediations.
That’s partly because onshore drillers have no legal obligation to set aside funds for their asset retirement obligations, meaning they can just carry estimates of that liability on their balance sheet, says Tony Sanchez III, OneNexus founder and chief executive officer. The new firm will seek to raise $300 million in equity as reserve capital for the liabilities they’re willing to aggregate.
“It’s a giant unfunded liability,” Sanchez said in the same interview. Insuring well retirement would allow companies to move liabilities associated with asset retirement obligations off their balance sheets, improving their borrowing capacity as well as their environmental credentials, he said.
OneNexus also marks a twist for Sanchez, a former owner and CEO of Sanchez Energy Corp., a Texas driller that filed for bankruptcy in 2019 and emerged from Chapter 11 a year ago as Mesquite Energy.
“If we’re going to produce oil and gas, we should do so in a sustainable manner,” Sanchez said. “And one of the components to sustainability is: when the well finishes its producing, the funding should be available to plug it and not leave this for future generations.”
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