Oil companies: Pivot or die

Climate Economy

Oil companies: Pivot or die

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Climate & Capital Media’s Blair Palese has virtual beers with Australian energy expert Tim Buckley and discusses the country’s troubled fossil fuel industry

Climate&Capital’s “Beers with Blair” is a regular column where global climate editor Blair Palese explores the latest trends and developments with the world’s leading climate scientists and climate action advocates.

In these trying times, “let’s grab a drink” has quickly become “let’s grab a Zoom drink.” Fortunately, that didn’t bother my old friend, Australian energy market analyst Tim Buckley. Buckley is a charter member of the Institute for Energy Economics and Financial Analysis, an independent global research organization that monitors the Climate Economy. He also is the former head of research for Citigroup Australia and co-managing director at clean energy investment fund Arkx Investment Management

As we sip our virtual beers, I ask him about the impact of coronavirus on the already struggling fossil fuel industry, which has also been hit hard by the Saudi-Russian oil trade war. 

“I think this is a fork in the road,” Tim tells me. “Time for an absolute strategic pivot.” 

“The oil price is down more than 50 percent in 2020, and the liquid natural as (LNG) price has dropped 80 percent in the last six years,” he continues. LNG prices are linked to oil prices, and if the price of one tanks, so does the other. So skyrocketing LNG exports from the United States are causing even more market havoc. “Put these two together with the corona economic impact and it’s totally disrupting the global energy market.” 

Fossil fuels in turmoil

“Italian oil major ENI said recently their average break-even is $20 on their existing portfolio, but the break-even price for new exploration and development is $45. The company had announced a five-year, 15 billion euro work program. Overnight, that work program is now totally unbankable, totally unviable.”

“Put that in terms of all of the oil majors. Total, BP, Chevron, Exxon, ENI, these guys all have five, ten-year plans, and they were planning to spend $1-2 trillion on [capital expenditure] that is now 100 percent unviable. And today they don’t have the money to even pay their dividends.”

“When you’re bankrupt, your ability to bribe governments, make political donations, all of it stops. This is not a depression. It’s a short term freezing of the global economy.”

I asked Buckley the obvious: Will this accelerate the transition to non-carbon energy sources?

“Look at BP. The new CEO, Bernard Looney made the focus of his maiden speech 100 percent about climate change. He committed to investors an emissions target of ‘net-zero by 2050, or sooner,’ and announced ten steps on how to get there. One of those steps is to cut all funding of fossil fuel lobbyists who deny climate change. Within a day, he’s cut [lobbyists from] three US fossil fuel companies. A week later he cut [pro-fossil fuel lobby group] the Minerals Council of Australia. A brand new CEO making carbon reduction his main priority? I’ve never seen it before in the fossil fuel industry.”

The following month, Buckley traveled to India to meet with executives from Shell’s new energy division there. He left with the message that Shell would also be divesting in fossil fuels. 

“The risk profile of oil and gas is huge, off the charts,” he says. “I think they now actually have no choice. Either pivot or die.”

Coal: energy’s biggest has-been

Buckley says coal is already too expensive to remain in the game. In fact, it’s the most expensive form of energy after nuclear power. 

“We saw 2018 was the peak year for coal-fired power generation. In 2019 there was a record-breaking three percent decline globally, and in 2020 we can expect that decline to be repeated. This could well allow for a real re-think,” Tim says. “Blackrock has been forced kicking and screaming to recognize the end of coal but at last their shift seems real. JP Morgan Chase, however, looks like their rhetoric is total greenwash. It shows they aren’t listening to customers and investors; they don’t care about social license.”

I’m well into Zoom beer number two now, and I have more follow-up questions than I count. I start with the biggest one: 

Could the coronavirus impact help change the way we do things for the better?

“There’s no doubt this has given the world the chance for a global rethink. The importance of understanding science is being newly appreciated by the mainstream media and the public. If we know we now have to listen to our doctors with the threat of this virus, how can we continue to ignore climate scientists? We’re all rethinking how the world functions and looking at the bigger issues, like, What is a sustainable economy? What is a sustainable lifestyle?”

Not surprisingly,  Buckley suspects the widespread lockdown measures may kick-start a trend of climate-friendly personal choices. 

“We are already re-engineering how we work, stopping travel, learning to work from home and use video conferencing and finding it can be very effective and save time…We are re-examining how supply chains work and moving away from globalization. It’s a sensible trend.”

Who is successfully riding the new energy wave, not just swimming against the tide? 

“I look at where the smart success stories are. People like Jim Robo,” Buckley answers, referring to the CEO of NextEra Energy, the largest utility provider in the United States. “His company is now the biggest investor in renewable energy worldwide over the last 15 years, with $11 billion of capital investment in 2019 alone. Those who are able to make the transition and ramp up in this new energy market will be the new energy majors.”

I ask Buckley which countries have been the most surprising in their response to the energy situation. He names South Korea, Vietnam, and India.

“The conservative sitting government in South Korea is about to go to an election and they’ve put forward Asia’s first Green New Deal proposal,” he says. “It’s brilliant. If re-elected, they will stop all new coal financing, drastically cut emissions and back renewables. For Australia – Korea is [its] third biggest coal importer – this should be a wakeup call.”

He also mentions Vietnam, which he names the fastest-growing large economy in the world. “Last week Vietnam announced scaling back coal-fired power and upscaling wind and solar with 20 gigawatts of solar and 10 gigawatts of wind power by 2030. The country had virtually zero prior to 2019,” Buckley says. “Vietnam is showing the world how fast this change can happen. It’s been the last bastion of growth for imported coal and it’s evaporating before our eyes.”

I asked him why it has taken investors so long to recognize the shift, especially given how fast the cost of renewables and battery storage has dropped. 

“I look at India, a place I spend a lot of my time, and I see the global energy lesson playing out there.” 

India, Buckley explains, imports a staggering $250 billion in fossil fuels. Replacing that with domestically-produced sustainable energy could transform its economy. In fact, in the last 12 months, India has axed 46 gigawatts of coal-fired power projects.

“That is why Prime Minister Narendra Modi is so keen on electrification. Modi wants to cut fossil fuel imports and build domestic jobs and industry while cutting pollution. Renewables in India have gone well below grid parity with fossil fuels without subsidies, so it’s a benefit across the board for them to make the jump.” 

How can we better adapt to climate change in the future? 

“This is really why IEEFA [Institute for Energy Economics and Financial Analysis] was formed, to put forward the financial case for change,” Buckley says. “It won’t be concerns over the climate that changes bankers’ minds, it will be finance and technology. Bankers don’t have ethics. Their focus is making money for this quarter to maximize their personal bonuses.” 

Buckley said that was a lesson he learned while working at Citigroup, when he heard Citigroup chief executive Chuck Prince say,  “As long as the music is playing you’ve got to get up and dance.” Soon after, Citigroup’s shares dropped 98 percent in the worst financial crisis of our generation. 

He expects Chinese and Japanese banks to lead the migration from fossil fuels. 

“Chinese banks fund half of the world’s coal fired power financing along with Japanese and Korean public banks, but their numbers are dropping, Buckley says. “The biggest funders are turning before our eyes.” 

He says we should watch closely to what the market does after the pandemic finally dies down. Whatever happens, Buckley is convinced the age of fossil fuels is coming to an end. 

“Banks will be embarrassed to report the losses they have to carry in fossil fuels. I doubt they will double down again on this industry, and it’s the same for big funds management. Energy was the worst performing sector in a decade to 2019. How long do you lose money before learning? There’s no going back. They should have divested a decade ago.”

“Fossil fuel companies like Whiting Petroleum are going under. Good riddance,” He continues. “Without a doubt, it’s the best thing for our future.”

Written by

Blair Palese

Blair Palese is co-founder and managing editor at Climate & Capital Media. She is also director of philanthropy at Australia's oldest ethical financial adviser. Previously she co-founded 350.org Australia and was CEO for ten years. She was head of PR for The Body Shop and communications director at Greenpeace internationally and in the US. Blair has worked for media outlets including Greenpages Magazine, the Washington Monthly and ABC in the U.S.