Carbon investor stampede can't be stopped

This article was first published in Australian Energy Daily © Peter Milne.

Hydrocarbon companies’ increased focus on gas and petrochemicals and forays into renewable energy will not stop investors fleeing the sector, a conference in Perth was told yesterday.

The world’s hydrocarbon-focussed “energy establishment” was “seriously underestimating the speed and depth of the transition” to a less carbon-intensive world, according to Paul Stevens, a Chatham House energy specialist.

Stevens said the energy establishment - that he defined as the big oil companies, the International Energy Agency, the OPEC secretariat, and the US Energy Information Administration - portrayed the view that “hydrocarbons are going to continue to play a huge role in the global energy mix” as they had a vested interest.

"What else are they going to do, write a letter to the shareholder and say ‘it’s been nice knowing you, goodbye,’" Stevens told the Energy in WA Conference.

While climate change was the initial trigger for the energy transition Stevens said air quality was increasingly driving the change, especially in Asia.

"The reason for this is that you don't need a panel of international scientists to tell you its a bad thing, just try and walk down the street," Stevens said.

Geopolitical risk, highlighted by the recent attack on the Saudi oil refinery, would hasten the move away from hydrocarbons.

Oil demand lost to electric vehicles would not be replaced by the needs of the petrochemical industry as the industry hoped Stevens said as petrochemicals “were becoming the new tobacco.”

Stevens said the investments in renewable energy by the big oil companies were “almost doomed to fail” as it was a lower margin and more competitive industry.

“People make money investing in renewables but not the sort of economic rent that the oil companies were able to capture in the 20th century.”

"The question is how much longer will shareholders retain loyalty to the companies, because at some point the penny is going to drop and there is likely to be a rush to the door," Stevens said.

Role of gas questioned

Stevens said gas would likely be “last man standing for hydrocarbons”, but questioned the long-term future of gas as a “transition fuel.”

“Given the falling costs of renewables what I am seeing is people moving from coal directly to renewables without going through the gas phase."

Woodside chief executive Peter Coleman is an advocate for the emissions benefits of gas but warned the gas industry not to “feel superior” and assume the community accepted the argument.

“We risk lulling ourselves into a false sense of security,” Coleman told the Gastech conference in Houston this week.

The LNG boss warned that gas producers were at risk of unpredictable regulatory clampdowns.

“It would only take one cataclysmic weather event in the developed world which, rightly or wrongly, is attributed to climate change, for governments to act in a way that industry may not be ready for,” Coleman said.

Woodside plans to sanction the Scarborough and Browse LNG projects next year.

Stevens said the long-term nature of LNG investments made them potentially risky in the current environment and he queried the appetite from investors “especially at the moment given the potential oversupply.”

Energy industry research firm Rystad expected $US103 billion to be committed this year to expand global LNG production by more than 100 million tonnes a year.

Robert Sims, head of Asian gas research for energy industry consultancy Wood Mackenzie, told the Perth conference that the LNG market would be oversupplied to 2022 and after a few years of price recovery would again be oversupplied until the late 2020s.

Investors pushback

Bloomberg New Energy Finance head of Australian research Leonard Quong said the capital markets had an increasing appetite for low carbon assets.

Today the AGL board faces pushback of its rejection of a shareholder resolution for it to reduce emissions in line with Paris Agreement.

Market Forces legal analyst Will van de Pol said major investors that have repeatedly backed the Paris Agreement could put their pledges into practise by supporting a resolution calling on AGL management outline to outline how they would manage the energy transition in line with Paris.

“While the Australian Government continues to debate the shape of the earth, investors must get on with the serious business of managing material climate risk,” de Pol said.

Quong told the Energy in WA conference that the energy transition needed to accelerate beyond BNEF’s most bullish forecast for fossil fuel reduction to meet the Paris Agreement target of limiting global warming to two degrees C.

There was a real chance of much higher climate risk for investors.

“By the latest IPCC report, if we are to limit the runaway effects of climate change we might need to limit global to within a 1.5 degree pathway,” Quong said.

The bleak outlook for hydrocarbon investments is not good news for Australia as the world’s third-largest fossil fuel exporter due to its coal and LNG exports.

Stevens said Australia had suffered badly from the “resource curse” and the government needed to push the development of renewable energy technology.

“There is always more money from exporting technology than from exporting resources.”

Main image: Pump-jack producing oil. Source: Zbynek Burival on Unsplash