Energy M&A deals have become more realistic after an initial focus on environmental, social, and governance factors aimed at eliminating fossil fuels.

“It’s fair to say there’s been an ESG backlash,” says Atman Shukla, a partner at the Houston office of law firm Sidley Austin, specializing in energy M&A. “We’re now at a point of more equilibrium for energy companies. It’s not all things ESG at the expense of fossil fuels.”

Texas, in fact, has been in the forefront of opposing any financial boycott of fossil fuels. More to the point, there’s a huge concentration of infrastructure on the U.S. Gulf Coast for exporting energy – everything from liquefied natural gas to blue ammonia, a low-carbon alternative fuel that can be converted into clean-burning hydrogen.

Blue ammonia relies on carbon-capture technology to reduce emissions. Production emits much less carbon dioxide than grey ammonia while it is not as expensive as producing green ammonia or green hydrogen through electrolysis. The Inflation Reduction Act passed last year provides tax credits and other aid both for carbon capture and ammonia production and firms are scrambling to get a piece of the action.

Blue, grey, green and other assorted colors are used to describe hydrogen production, resulting in the hydrogen rainbow moniker. “There’s a lot of interest in investment in hydrogen,” Shukla affirms.

As the energy market matures, there is a realization that fossil fuels will be around for some time despite the growth of clean energy. “They can coexist for a very long time,” says this energy lawyer.

“An initial wave focused on ESG through rose-colored glasses,” says Shukla. Companies have now come to accept different timelines for ESG factors and this has impacted M&A dealmaking.

There is a surging demand for “all of the above,” even as companies work to mitigate carbon emissions. “Emerging economies have a thirst for fossil fuels,” says Shukla. “Growing economies need access to energy.”

Nonetheless, companies are more sensitive to heightened regulatory scrutiny of deals. Government agencies have zeroed in on competitive overlap and are pursuing potential mergers more aggressively. Hot-button issues range from noncompete clauses to interlocking directorates, and this has made companies more cautious.

The Committee on Foreign Investment in the United States, CFIUS, has also become more active as energy security gets more attention. This interagency body chaired by the Treasury secretary can slow down talks on outbound investment deals, says Shukla.

But the demand for energy has made for a robust investing market. The war in Ukraine and the disruption in Russian energy supplies have forced global markets to find new energy sources, driving numerous cross-border deals.

“I don’t see a reason why that would cease,” Shukla says.