Not long after the meetings in Glasgow in November 2021 we suggested that the aspirations and targets set at COP-26 were lofty, albeit understandably so.
They assumed a period of calm waters ahead (‘transition’) and clearly did not allow for a disruptive event on the scale of the Russian invasion of Ukraine in February.
The imposition of sanctions against Russia is everywhere felt, either generally through the soaring price of crude oil and gas or directly as a result of contractual obligations and dues to Russia.
Policymakers in many developed countries have doubts they can access energy supplies in any form to keep the lights on in homes and industries.
The energy landscape has changed in several ways as a result of the price surge and the conflict. The changes are negatives for the agenda of COP-26. The shale industry in the US is enjoying a new lease of life.
Having suffered a near-fatal decline in 2020, the industry is reporting a pick-up in drilling in the Permian Basin. The listed independents such as Pioneer Natural Resources and Devon Energy are leading the way.
Prices are back at a level where the better-managed companies can pay dividends and raise output without damaging balance sheets under a mountain of debt. However, their budgets this time project modest increases in production.
The two majors with sizeable investments in the Permian, Chevron and ExxonMobil, are also boosting output.
The shale industry is in better shape after consolidation in 2021, when transactions totalling $65 billion were booked.
Total US production is still running about 1.4 million barrels per day (mbpd) below the pre-pandemic high of 13.0mbpd but a recovery is discernible.
Coal, widely viewed as the most harmful source of energy, is part of the ‘transition’. Its use was termed a “deadly addiction” by the UN secretary general before the conflict.
China is said to have made substantial recent purchases of Russian coal at a discount (created by the conflict). The Chinese government has approved hundreds of new coal ventures and existing project extensions in response to a tightening of fuel supplies in H2 2021.
Glencore, the London-listed commodities house, has the more difficult task of explaining its coal strategy to its investors.
Its production will rise by 17 percent now that it has bought out its joint-venture partner in Columbia and the company indicated in February that coal is likely to account for about 40 percent of its pre-tax profit in 2022.
Glencore can argue that its ownership of coal assets is preferable to their sale to private operators that avoid public scrutiny and may extend the life of mines beyond the deadlines it set within its target of net zero emissions.
It will take more flak from activist investors and proxy advisors but will surely survive the experience.
There are some (smaller) successes to share in the movement away from coal use. We highlight an agreement between South Africa and four Western governments as well as the EU. Under the Just Energy Transition Partnership, signed in Glasgow, the donors will initially provide $8.5 billion to help transform South Africa into a clean energy economy over five years.
The funding may just rescue Eskom, the state-owned producer, and the government’s energy strategy. Annual bailouts from the Treasury have saved Eskom, plundered in the process of ‘state capture’ and poorly managed for many years, from default.
Activist investors continue to make their mark, the best example probably being the success of Engine No. 1, a small hedge fund, in securing three seats on the main board of ExxonMobil in mid-2021.
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We do not think that their efforts have slowed following the surging energy prices and the conflict. That said, those two developments have reinforced our argument that the ‘transition’ to a cleaner future will be rather longer than widely assumed.
Our main point is that the listed oil majors are operating in very different circumstances to the state-owned producers that dominate OPEC+.
It may be that the Russian government’s plans for a petro-city in the Arctic have been killed off by sanctions but it has no intention of scaling down its oil and gas industry. (Russian exports of manufactures and services are negligible.)
On a per head basis, four Gulf states are the world’s leading carbon emitters. Saudi (not one of the four) plans to spend $187 billion to meet its own net zero target.
Some of its targets (such as for the share of electricity generated from renewables) are dizzy, and the plan itself lacks a year-by-year roadmap.
The road ahead is long when we recall that Saudi is said to be the fourth largest consumer of oil. The delivery of the government’s plan hinges upon oil revenue.
Saudi probably has better prospects of achieving economic diversification than most OPEC + partners but must nurture its oil industry.
Aramco pays out very large quarterly dividends on the orders of its predominant shareholder (the government).
The ‘transition’ to clean energy has been lengthened by the conflict. It will come, indeed it has to come, but we must all be patient.
The obstacles have increased and the hand of those resistant to the change has been strengthened.
