ESGRisk Management

Reading the Tale of the Tape on Energy Transition

By July 22, 2021July 29th, 2021No Comments

Economist Ed Hirs shared his perspective on the energy transition with NeuGroup Oil & Gas treasurers.

By Joseph Neu

“There is nothing you can do to fight the tape,” University of Houston Energy Fellow and Zero Carbon Cycle LLC co-founder Ed Hirs said recently. Energy transition is here, with more than 75% of the public now wanting to reduce carbon emissions, he noted.

  • But the tape, or market trend, also points to the need for energy to support economic and population growth—in developing markets especially.
  • Total energy demand will continue to grow by 25% to 30% over the next 50 years.

Carbon calculus. There are really two ways to cut carbon emissions according to Mr. Hirs: reduce fossil fuel combustion that produces carbon; or find environmentally friendly uses of the carbon (like hand sanitizer or vodka; see Aircompany.com). (He also noted efforts to increase agriculture and plants to capture carbon.)

  • The latter is the story that members of NeuGroup for Oil & Gas Treasury will want to get behind. It is the best way to sustain growth and help the developing world escape from poverty (part of the S, social justice, in ESG).

This was the key takeaway from the opening session of the group’s second meeting, part of a pilot series focused on energy transition sponsored by Societe Generale. Key context:

  • Renewables are expensive and typically offer lower returns on investment offered by conventional oil and gas projects.
  • This is even more true in developing markets that need the investment proceeds the most. Villages in Ghana are helping lead the way thanks to recent projects, including sub-Saharan Africa’s first liquefied natural gas-to-power project. This lowers greenhouse gas emissions vs. coal by 50% or more.
  • If supply projects in the US and EU are cut back, they will migrate to places where emission standards and environmental and safety conditions are worse (Mr. Hirs calls this “hydrocarbon imperialism”).
  • If oil and gas companies exit high-return projects, other players including hedge funds will enter the picture and this will change the environment for traditional debt investors.
  • Meanwhile, if oil and gas companies continue to produce and invest in profitable fossil fuel projects, with good cash flow profiles, yield-seeking investors will welcome their lowered credit ratings and show high demand for their debt.

Climate club? For further context, Mr. Hirs provided statistics showing how global carbon emissions have risen in linear fashion from 1900 to 2018, citing a 2018 Nobel lecture by Yale Professor of Economics William Nordhaus. Fortunately, the ratio of carbon emissions to GDP is also falling in linear fashion. But because these trends have not been impacted by prior climate agreements in Kyoto or Paris, Mr. Hirs anticipates a draconian change in worldwide carbon policies to break these trends.

  • Professor  Nordhaus was awarded his Nobel prize for his concept of  a “climate club,” with participating nations setting a price for carbon emissions to limit them and then penalize with tariffs and other sanctions nations that do not join the club (see here). 

Take the initiative. Whether advocating for such a club or an EU-style carbon boarder tax, oil and gas companies should lead with their own initiative, leaning in favor of a carbon tax, as opposed to cap and trade. (Cap and trade is inefficient because the trading pricing and emission allowances tend to be arbitrary.)

  • Cap and trade imposed by the EPA is more likely than a carbon tax in Mr. Hirs’ view.

Coherent messaging. This gets to the other tale of the tape that member companies should grasp: They need to move out of the defensive posture of the last 50 years (ever since the Nixon administration tried to blame oil companies for the OPEC embargo and its own wage-and-price controls that caused the long gasoline lines).

  • They must come out with coherent and standard messaging on reducing carbon emissions while allowing oil and gas products to continue to play a significant role in the energy transition.
0
0
Antony Michels

Author Antony Michels

More posts by Antony Michels