PETALING JAYA: Environmental, social, and governance (ESG) arbitrage opportunities may be present on the horizon for the oil and gas sector, especially given the high oil price environment.

       This is due to upstream oil companies, especially those from developing nations, likely expanding their capacities to capitalise on the lucrative oil revenues.

       The geopolitical tensions and their lingering effects such as the elevated oil price will likely outlast the war itself, according to Hong Leong Investment Bank (HLIB) Research.

       The research house said this possible outcome would then be similar to how the global shipping container disruption had persisted long after the post-Covid reopening.

       “Fossil fuel-reliant nations are likely to continue tapping on their fossil fuel reserves, as the reward to the countries are perceived to far outweigh the risks of doing so,” the research house said.

       It noted that the Paris Agreement’s regulations are still quite lenient at this point in time.

       “The lack of shareholder scrutiny and the lack of stringent loan financing standards allow these companies to continue to invest and expand their capacities in capitalising on the regulatory and ESG standard shortfall,” HLIB Research said.

       It cited a recent South African listed stock, Thungela Resources, a coal miner which had risen more than 900% in its share price since its listing in June 2021.

       This was driven by a 260% increase in coal futures over the past year as well as rising demand especially from the European region.

       The rise in demand in Europe was due to the Russian-Ukraine war and the ongoing pressure to shut down coal companies in Europe, it said.

       “The case of Thungela highlighted an investment opportunity that emerges due to discrepancies in regulation and ESG practices among nations,” HLIB Research said.

       Other reasons that would perpetuate this arbitrage opportunity also include financial motivations due to earlier debt projections and expectations by financial companies.

       “For countries that have already taken on large amounts of debt with the expectation that the debt will be funded by fossil fuel revenues, these countries will be finding it difficult to fill the revenue gap left behind if they were to transition from relying on fossil fuel as their revenues,” the research house said.

       Meanwhile, an Intergovernmental Panel on Climate Change report earlier this year said that the world is now on track to warm by more than 3°C and this may indicate a lack of progress in achieving the Paris Agreement’s plan.

       “The road to meeting the Paris Agreement will likely remain an uphill task in the absence of a trigger event that could tilt the risk-reward climate change equation,” it said.