Should oil companies receive climate finance?

BURLINGTON, Vt. — A civil society group is warning that a World Bank-led effort to reduce gas flaring — the highly polluting practice of burning excess gas during oil production — could be used as a lifeline for the struggling fossil fuel industry at a time when transitioning to clean energy should be the highest priority. While the World Bank is leading a voluntary partnership to eliminate gas flaring, which could have benefits for both human health and climate mitigation, the civil society group charges that the decision by the bank’s private sector arm to partially finance some of these efforts amounts to a subsidy for oil companies. This conflicts with the World Bank Group’s broader emphasis on shifting energy prices to better reflect the real costs associated with burning fossil fuels, according to Heike Mainhardt, senior adviser at Urgewald, a German environmental and human rights organization. “If countries would just properly price the climate change externalities of these industries, that could really make the biggest difference, and yet they turn around and they tell you that you should be using public money to help stop the gas flaring of oil fields,” Mainhardt told Devex. “Not only are they helping the oil industry, they’re calling it climate finance for the Paris Agreement,” she added. In 2015, the World Bank and the United Nations launched the Zero Routine Flaring by 2030 initiative, a voluntary partnership between oil companies, governments, and development institutions, which aims to build regulatory, technical, and financial cooperation that can help eliminate this practice. The bank also leads the Global Gas Flaring Reduction Partnership, which is “a public-private initiative comprising governments, oil companies, and international organizations working to end routine gas flaring at oil production sites around the world as a way to increase energy access, improve efficiency, and mitigate climate change,” according to Anita Rozowska, a World Bank communications officer, who described the partnership in an email to Devex. Mainhardt does not dispute that gas flaring is a harmful practice that should be ended. She objects to the use of public finances to subsidize investments in facilities that can process gas instead of burning it, because these costs should be absorbed by fossil fuel companies instead, she argues. While not directly related to the voluntary gas flaring reduction efforts, the International Finance Corporation, the private sector arm of the World Bank Group, is planning to mobilize up to $400 million to finance an oil company’s plan to reduce gas flaring. IFC plans to invest in the Basrah Gas Company’s construction of a new gas processing plant in the oil-rich region of southern Iraq, which will significantly increase the company’s ability to process raw gas. The Basrah Gas Company is a joint venture between the state run South Gas Company, which holds a 51% stake, the oil giant Shell, which owns 44%, and Mitsubishi, which owns 5%. As part of a project estimated to cost $1 billion over the next five years, IFC has approved a $400 million “green loan” — which means it adheres to principles intended to “facilitate and support environmentally sustainable economic activity.” The loan includes up to $200 million from the institution’s own account, according to project documents. That will be combined with a loan under IFC’s Managed Co-Lending Portfolio Program and up to $200 million from commercial banks, with the remainder of the project funded by the company’s operating cash flows. “Not only are they [the World Bank] helping the oil industry, they’re calling it climate finance for the Paris Agreement.” --— Heike Mainhardt, senior adviser, Urgewald In addition to qualifying as a green loan, “it has also been classified as Climate-related by IFC in accordance with the IFC Definitions and Metrics for Climate Related Activities and the Joint Multilateral Development Banks’ Methodology for Climate Finance Tracking,” according to IFC’s project documents. IFC did not respond to questions from Devex in time for publication. Mainhardt described public finance for gas flaring reduction as “the exact opposite of a carbon tax,” which is a policy the World Bank has advocated to help keep global warming below 2 degrees Celsius, the less ambitious target set by the Paris Agreement on climate change. “Their sales pitch is — the amount of public money you would spend on it saves more greenhouse gas emissions than you could save doing a lot of other things. I get that sales pitch, but that takes away from the fact that you are subsidizing an oil field,” Mainhardt said. She added that instead of phasing out fossil fuels, this kind of public support is likely to help oil producers that are currently under financial strain, since reducing flaring and processing the recovered gas is actually a profitable venture for companies that are able to make the investment. “It’s a beautiful bailout, because they can say, ‘look, we’re saving the climate by providing this bailout.’ It’s a clever sales pitch,” she added. Public financial support could also help oil producers move forward with an industry-wide plan to diversify into petrochemicals, with the recovered gas that otherwise would have been flared serving as a “cheap input” for those plastics, Mainhardt said. Last week, the New York Times reported on the oil industry’s extensive efforts to lobby African countries to do away with policies that restrict the use of plastics, such as bans on plastic bags. An estimated 145 billion cubic meters of gas were flared from oil production facilities in 2018, according to the bank. That equates to roughly 750 billion kilowatt hours of power, which is more than is consumed on the entire continent of Africa, according to a 2019 presentation by Zubin Bamji, the World Bank’s program manager for the Global Gas Flaring Reduction Partnership. The methane that oil producers are unable to capture and utilize, which is instead burned in smoking orange plumes, is a particularly harmful greenhouse gas, trapping 34 times more heat than carbon dioxide over the course of a century, according to Bamji’s presentation. The pollution from gas flaring has also been shown to worsen asthma and hypertension, and has been linked to elevated incidents of some forms of cancer. In July, the New York Times detailed the multifaceted human and environmental toll of routine gas flaring in Basra, Iraq. For years, the country’s profitable oil reserves meant that recovering excess natural gas was not a priority. Now, with energy economics shifting and Iraq’s economy suffering, the flares represent a wasted resource that could stave off power shortages and eliminate the need to import gas from Iran. The Zero Routine Flaring by 2030 initiative has won the endorsement of most multilateral development banks, as well as some of the world’s largest fossil fuel companies, and some of the world’s largest oil-producing countries. “Our work is on policy and we are not financing gas infrastructure,” Rozowska wrote, referring to the Global Gas Flaring Reduction Partnership. “GGFR’s strategy is to provide support to governments as they provide a legal, regulatory, investment, and operating environment that is conducive to upstream investments to stop flaring and to the development of viable markets for utilization of the associated gas and the infrastructure necessary to deliver the gas to these markets,” she added.