In recent months, UK Export Finance (UKEF) has been working to roll out a new transition development guarantee scheme to help oil and gas companies switch towards less polluting operations. But while industry bodies have backed the export credit agency’s plans, analysts have warned any new initiative must avoid funding any and all fossil fuels.
In late March, the UK government announced the launch of a new transition Export Development Guarantee (EDG) to help those firms with “credible transition plans” gain working capital support.
Companies within the oil and gas sector had shown increasing concern over the government’s bid to end foreign fossil fuel support by March 31, with many industry respondents to a government consultation on the policy change demanding more time to gear their operations towards cleaner energy sources.
They warned that the sudden withdrawal of support could hurt companies throughout the supply chain, with many already struggling from the effects of Covid-19, as well as low oil and gas prices.
“Industry, in the majority, advocated for much later implementation timings of two, four or even five years,” the government said in its report.
“Many respondents noted the current relatively small size of clean energy export opportunities, compared to those in the oil and gas sector, as a rationale for longer timing or phasing of implementation. Renewable and low carbon markets were not yet considered mature enough to fully transition to, and many businesses would not be able to support the same number of jobs or make the same returns in the renewable energy market immediately,” the report added.
In light of these concerns, the government said that its overseas fossil fuel ban would come with “strong mitigating and supportive actions that respond to the evidence provided through the consultation process”.
Alongside a one-year exemption from the policy shift for SMEs, to ensure the “most vulnerable firms” have time to adjust, the government announced that it would also create the new transition EDG.
Loan parameters on the new product are set to be “more restrictive” than if UKEF were financing green investments or clean growth. Nonetheless, the transition EDG will be available for an initial period of three years and will see UKEF guarantee up to 80% of a commercial loan for working capital, capital expenditure or research and development funding.
The loan tenor can last up to one year, with a repayment length of as much as four years, which UKEF notes is shorter than the standard EDG product launched in 2020.
Applicants will need to be able to prove that they are a UK exporter and that they have a credible climate transition plan, as judged by the government and an independent consultant.
A UKEF spokesperson tells GTR that the ECA will expect a transition plan to include specific targets, such as reducing emissions consistent with Paris temperature goals.
As part of the 2015 Paris Agreement, countries pledged to limit a rise in global temperature to no more than 2 degrees Celsius above pre-industrial levels. Various ECAs, namely those in Asia, have been called out for straying from such targets.
The UKEF spokesperson adds that the new facility will “contain reporting and monitoring obligations so that progress against milestones in the transition plan can be tested at regular intervals over the life of the loan”.
“If the borrower falls behind these monitoring targets, drawings on the facility can be suspended and the borrower will pay an increased interest margin until agreement is reached with UKEF and the independent consultant on a remediated transition plan,” they add.
To date, with the product having only been announced in March, the spokesperson notes that UKEF is yet to back any facilities through the transition EDG. “There has been interest in the product, but we cannot disclose more information until support has been provided.”
Response to the transition EDG?
Within the exporting industry, UKEF’s decision to launch the scheme has been welcomed as a useful new tool.
The British Exporters Association (BExA) says in a statement to GTR it is “supportive of all instruments that enable UK exporters to remain competitive and the transition EDG, in addition to supporting businesses focusing on achieving alignment with the Paris agreement, certainly appears to do that”.
Though BExA adds that the EDG is still in its “early stages”.
It is anticipated that the new transition EDG will predominantly be used by sizeable oil and gas firms, with UKEF’s spokesperson confirming that the product – as with the existing EDG – will likely be “more suitable for larger, more established exporters”.
Launched in 2020, the standard export development guarantee scheme can provide partial guarantees covering up to 80% of the risk to lenders for a maximum repayment period of up to five years.
UKEF’s spokesperson says that by and large, the new transition version is “effectively the same” as the existing EDG, but will allow the UK government to provide support to transitioning companies that would otherwise have been excluded.
As with the original product, UKEF will consider transactions from a minimum of £25mn, while the average value of transactions is anticipated to be between £100mn and £500mn.
As UKEF works to establish the new scheme, analysts have warned that campaigners will need to keep a “close eye” on the export credit agency’s latest guarantee offering.
Adam McGibbon, formerly senior climate campaigner at campaign group Global Witness, urged the government in a report last year to halt fossil fuel funding overseas.
Speaking about the new transition EDG, he tells GTR: “There’s a role for funding a transition of big oil and gas companies away from fossil fuels, but it has to be a real transition – and that means an end to all extraction of fossil fuels on a timeline consistent with what scientists and the IEA [International Energy Agency] tell us.”
The International Energy Agency – an influential intergovernmental agency that works with countries around the world to shape policy decisions – sent ripples through the global energy sector in mid-May, when it released a report arguing that firms must stop all oil, gas and coal exploration if the world is to reach net zero carbon emissions by 2050.
“It [transition] doesn’t mean handouts to companies to switch from dirty coal to dirty gas, or to fantasy technologies that will never work at a scale enough to make a difference, like carbon capture and storage,” McGibbon adds.