04/10/2023 Climate change first emerged as a
political issue in the 1970s, but in recent years especially, the climate movement has
prompted many companies and governments to focus on being more environmentally conscious in
their operations and strategy decisions. The Paris Agreement legally bound governments to
global climate pledges in 2015, and companies like Apple are proudly touting developments
towards carbon neutrality as selling points for their brands. However, while strong
messaging on net-zero goals is certainly fashionable, the global fossil fuel energy market
is projected to reach over
$10.6 trillion by 2031
,
expanding at a CAGR of 5.3%, while renewables still account for less than a fifth of the
global energy market. How does fossil fuel dominance fit in with climate commitments? And
what does it mean for investors?
Recent UK government policy decisions in late 2023 are being brought
into question by environmental groups as fossil fuel investors benefit from pro-oil
approvals from regulators. The move to approve the Rosebank field; a planned oil and gas
field west of Shetland in the North Sea is likely to put the gas back on the –
12% production
for
primary oil reported by the Department for Energy Security & Net Zero in its late June
report. Critics argue that the decision contradicts the UK’s commitments to net zero goals,
as it paves the way for the development of one of the UK’s largest untapped oil and gas
fields. On one hand the UK government has publicly committed to ‘significantly reducing
emissions from traditional oil and gas’ in The North Sea Transition deal. While on the
other, regulators and officials are clearly willing to take steps to accommodate rising oil
demand – predicted to reach 109.8 million barrels per day by 2045 by OPEC. The UK asserts
the necessity to bolster its energy security through sustained fossil fuel production in the
wake of Russia, a major producer, invading Ukraine. Following the news, emergency protests
are set to take place as well as the promise of resultant legal action against UK
Government’s regulator, the North Sea Transition Authority (NSTA) from activist groups. This
just one instance where climate goals are being pushed aside in the favour of economic
incentives; continuing to reinforce the foundations for companies like Equinor; Suncor and
Siccar Point Energy to thrive.
Swiss Re, which pledged in 2018 to stop insuring
companies and projects with more than 30% exposure to thermal coal, maintains that it
adheres to its thermal coal policy, planning a total phaseout by 2030 in OECD countries and
by 2040 worldwide. Despite this, Swiss Re Corporate Solutions America has agreed to provide
cover for claims of up to $20 million to Buckskin Mining Company from March 2023 until March
2024. Swiss Re said that it “fully adheres to its thermal coal policy,” but would not
comment on individual transactions. Charles Boakye, ESG strategist at Jefferies, notes the
difficulty for US coal mines to access insurance due to climate commitments, potentially
creating a business case for providing coverage at higher prices despite the associated
backlash with net zero backtracking. However, he also added, “shareholders still expect
companies to follow through when they say they’ll do something. From a management
perspective, reversing commitments opens up credibility questions.” Are credibility
questions enough to deter investors? Paul Murray, CEO of Life and Health Reinsurance at
Swiss Re commented that macroeconomic tailwinds were ‘very good’ for reinsurance companies,
in spite of acting against its pledges.
Shell is also among those facing
criticism
for
backtracking on its climate commitments as CEO Wael Sawan shifts focus back towards oil and
gas operations. Two employees issued an open letter expressing concern over Sawan’s
strategy, after he revealed plans to slow investment in renewable energy in an attempt to
benefit the company’s bottom line. The company has also split its low-carbon business,
removed the ‘Global Head of Renewables’ position, and saw several key employees in renewable
and low-carbon divisions resign – further raising alarms about its commitment to a green
energy transition. Despite all of this, investors remain unshaken; with Shell stock up over
10% YTD entering Q4 2023 and over $5bn in profits reported in the last earnings report. All
this underpinned by a ‘booming’ and ‘robust’ recovering demand for oil from China according
to Goldman Sachs; no doubt another big green tick for Shell’s earnings.
Another offender is Saudi Aramco, which pledged net zero
carbon emissions by 2050 and yet is still making strategic moves that increases its carbon
footprint. According to Carbon Tracker, Aramco has the weakest climate proposition among
major listed oil and gas companies. Saudi Aramco is actively seeking more acquisitions in
the liquefied natural gas (LNG) sector, following its recent debut deal in the industry. The
company entered the market by purchasing a stake in a firm acquiring interests in four
Australian LNG projects. Nasir Al-Naimi, Aramco’s Upstream President, emphasised the
company’s ambition to become a leading global LNG player, citing viable long-term growth in
the LNG market. Aramco is also embarking on a multibillion-dollar project in the Jafurah
Basin, with expectations to yield 2 billion cubic feet per day by 2030. This initiative
would increase the company’s gas production by 50%. It seems that no matter how loud the
public outcry, the global hunger for energy is still incentive enough for companies to
ignore potential ramifications in favour of performance.
With nary a sanction in sight, it is muddy waters indeed.
While unpopular with some, the signal for non-renewable energy is still overwhelmingly
positive – for now. The International Energy Agency warned in late September that oil and
gas demand is not due to peak as early as previously hoped. Juliet Davenport, President of
Energy Institute, stated, “Despite further strong growth in wind and solar in the power
sector, overall global energy-related greenhouse gas emissions increased again.” The fact
remains that while renewable energy is growing, when faced with energy insecurity,
persistent inflation, and weak growth, the demand for fossil fuels is not going away, and
neither is upside for the companies and governments that endorse them. Current energy
demands dictate that global energy policy cannot, and will not, be dictated by the climate
movement. Is it even foolish to try? The IEA estimates that fossil fuel demand will need to
plummet
over 75%
in
order to reach net-zero by 2050.
A cautious nod to investors: fossil fuel providers will
not be fossilised themselves anytime soon.
Neil
Wilson
Chief Market Analyst at Finalto
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