We repeat some of the commentaries from yesterday's ESG piece as we do not believe this risk can be highlighted too much.
In today's ESG and Climate report we discuss the issues facing the oil industry and present several possible scenarios focused around activist behavior and government behavior – none of the outcomes are pretty and the most likely one is quite concerning. The activists seem to be laser-focused on reducing the production of fossil fuel, but they are arguing for a timeline that is impractical and very inflationary – right now they are winning and they are changing the hearts and minds of investors, both public and in some cases private, but perhaps more important, they are influencing insurers. The fossil fuel industry needs to clean up its act, no doubt, and based on the chart below it is trying harder, but a transition period is necessary to prevent hyper-inflation not just in fossil fuel prices but also in renewables, as they would not be able to keep up with an aggressive cut back in fossil fuel production today – which is what activists are pushing for.
We talked about the Dutch ruling against Shell in yesterday's report and the latest refinery sale in the US is another indication of one of the risks of unilateral court-based decisions. Shell could easily get to lower emissions by divesting assets, as can anyone else with a medium-term emission target on the books. We have written previously about the possibility of an energy equivalent of the “bad bank” structure that was set up during the financial crisis, where emissions challenged assets are divested into either private entities or public holding companies that have mandates to improve excessive emission pools but also have significant cash flows and pay investors to wait.
The “adapt or die” headline targeting the US oil industry which was featured in our Daily report yesterday is a bit extreme, especially for an administration that does not believe it can enforce a carbon tax or cap and trade system. If the investment community were to make that statement frankly today it would have more credibility. There is talk about a Senate-sponsored bill to ban methane emissions or at least aggressively penalize them – which would be a better approach. Putting a high price on methane could encourage the use of some interesting small-scale technologies to turn local methane supplies into LNG, or methanol, or ammonia/urea. We have discussed all of these technologies in prior work and are happy to discuss them with anyone interested.
The other more interesting take on “adapt or die” might be “adapt and thrive”, which is likely a more palatable message to give to the energy industry. While the US seems to have limited teeth from a regulatory perspective, the rest of the world does not, and the ability for the US to produce lower carbon fuels may give US producers a competitive edge globally – see our ESG and Climate piece from Wednesday