Tag Archives: climate change

Green-minded Investor Activists – 5/25/16

Oil firms are finding it harder to ignore environmental activists nowadays, especially when they represent trillion dollar pension funds.

Recently, ExxonMobil and Chevron came under pressure from the California state pension fund to assess climate-change policy risks to their business plans. ExxonMobil has argued that cutting back on fossil fuels runs counter to economic growth while claiming that technology and carbon taxes are enough to negate the environmental impact of its operations. But shareholders have more than a few reasons to distrust and resent the managers giving those excuses. Many see the constant drive of companies to expand their oil reserves and tap new resources as wasteful spending. After all, in a world where affordable electric cars are coming out in less than five years, buying up new reserves looks more like a corporate governance failure benefiting the managers who want a bigger company rather than a good investment for shareholders who would prefer the safety of dividends.

Institutional investors in the U.K. successfully prodded Royal Dutch Shell and BP into revealing how stringent climate-change policies would affect their projects. In America, however, weaker shareholder rights make it harder to challenge boards. Managers will not be able to ignore those shareholders for long, even if investor activism is relatively weak in America. If times ahead are going to be as tough for oil and gas as expected, then they little sympathy from the people they ignored.

In a growing trend, large shareholders are seeking the right to nominate board members and install “climate-competent” boards at major companies like ExxonMobil. Though managers continue to reject such measures, trends in public opinion are not in their favor. American’s are as worried about climate change as they were before the 2008 financial crisis, an eight year high.

US worry

Yet even when firms are forced to disclose risks, the results are often unsatisfying if not purposely misleading. When Shell issued a report on its assessment of climate-change risks, shareholders found that the report was full of barely relevant pictures and revealed little about how climate policies would alter future plans for developing oil- and gas-fields. At best, the report is appeasement and, at worst, a distraction from the very real threats to the long-term value of the company.

The same day the report was published, Shell announced that it was creating a “New Energies” business to invest in green technologies.

Still, Shell insists that hydrocarbons will still account for at least 75% of the world’s energy for decades to come and, inexplicably, the report shows oil demand rising significantly between 2030 and 2060. That could have made sense in the context of rising demand from emerging markets, but 70% of crude oil consumption goes to transportation and Bloomberg expects hundreds of millions of electric vehicles will be on the road by 2040. Yet, Shell’s reports seem to come from a fantasy world where threats from technological change don’t exist.

rise of electric cars

Total SA is one of the few companies that has provided satisfactory plans to develop an energy mix consistent with Paris-style global-warming limits, including a pledge to invest $500m a year in renewables and to increase them from 3% to 20% of its portfolio by 2035. The company acquired SunPower, an American solar-energy company, in 2011, and launched an offer this month to acquire Saft, a battery company.

Obama Pushes Forward With Emission Rules – 5/23/16

In its latest attempt to meet environmental policy goals, the Obama administration has set forth limits on methane emissions from oil and gas wells. The emission rules would, in theory, reduce methane emissions by 40% to 45% from 2012 levels by 2025. The EPA estimates that the cost of the rules will come to $530 million in additional upgrades and “green completion” technology per year by 2025 with a net $160 million gain in value from avoided costs related to healthcare, pollution, and climate change.

Naturally, the oil and gas industry is unhappy with the changes. The regulation comes at a time when energy companies are already cutting back on investment in fossil fuel-related activities. Companies in opposition to new rules critique them by citing work already done to cut methane emissions, the way added burdens would exacerbate damage done by low oil and gas prices to jobs, and the disproportionate impact the rules would have on small, independent producers.

Oil-and-gas producers do have some financial incentive capture methane and cap leaks since the gas itself is worth something, but the new rules come at a painful time: Oil hovers around $50 a barrel and natural gas fairs about the same. With a shift away from heavy industry in China, renewable energy reaching competitive cost levels, fuel efficiency standards rising, and the prospect of affordable electric cars, many companies are already facing existential crises without help from the government.


The significance of the methane rules pale in comparison to the carbon dioxide rules in the Clean Power Plan (CPP). EIA’s Annual Energy Outlook 2016 (AEO2016) shows that trends in carbon dioxide (CO2) emissions from electricity generation through 2040 depend significantly on whether or not the CPP rules are ultimately enforced. The EIA provides two AEO2016 cases: a Reference case assuming implementation of EPA’s final CPP rule and a No CPP case assuming it never comes into effect as shown below.

Co2 and clean power plan

In the Reference case, power-sector emissions are projected to be 28% lower in 2022 than in 2005 with a further falls to 35% lower overtime. Under the plan, the power sector’s share of total energy-related CO2 emissions would fall to 31% from 36% by 2030, accomplished via switching to natural gas and renewables like solar and wind, as well as increased efficiency.

Significant coal retirements are expected regardless of the CPP’s fate due to pressure from other environmental regulations and low-priced natural gas.

Clean power effects

The Reference case also assumes remaining coal power plants are used less intensively resulting in a decline of 34% from 2015 to 2040 in coal consumption by the electric power sector.

US coal production w clean power

Waning Political Power of Oil – 5/5/16

The political power of the oil industry is deeply tied to its importance to the economy.

Historically, oil prices would take the stock market down with them, but the correlation between the two has started to breakdown during the most recent drop. The correlation, caused by the damage low oil prices does to commodity focused economies reducing foreign incomes and therefore income from foreign markets going to U.S. companies, was the major reason the Fed was hesitant to raise rates earlier in the year.

Stock oil disconnect

Yet when key oil producers failed to reach an agreement in Doha over even the most tame price control measures, U.S. stocks pushed higher.

Of course, there could be many reasons for a short-term breakdown ranging from confounding variables like the labor dispute in Qatar around the time of the meeting to pipeline disruptions in Nigeria and Iraq. The more interesting angle would be a long-term break between the two measures caused by the introduction of electric cars or increased fuel efficiency from self-driving trucks, which are expected to come into the mass market around 2020 if you’ll look at my articles from earlier this week.

A lot of the oil industry’s lobbying power comes from its seemingly essential role in fueling economic growth. Without the revenue streams, populous payrolls, and general clout that come from being the fuel of choice for transportation networks, oil companies are going to find it difficult to fight the environmental policies the Obama Administration has set into motion. Not only must oil companies deal with the slide in oil prices in the short term; they must fight off risks to traditional business models in the form of climate change, pollution and the falling costs of alternative energy and electric transportation that threaten to undercut popular support for fossil fuel use.

Although members of congress like Steve Scalise fight to persuade legislators to overturn rules related to oil work, their work being eclipsed by the uncertainty associated with the presidential candidates: Donald Trump, who has disparaged the sector as a “special interest,” and Hillary Clinton, who has promised to block offshore drilling in the Arctic and Atlantic. Obama’s influence over the energy industry exerted via executive action should be evidence enough of of that. And let’s not forget that there is still an empty seat on the Supreme Court waiting to be filled, a filling that could mean the court tips to a liberal majority for years to come.

Congressmen, like Scalise who represents areas of heavy oil and gas development and whose career was funded by energy interests, may be much needed friends in Washington for oil companies; however, they can only do so much. The House Republicans have already had trouble coordinating their own members during the current era of gridlock.

In a House where even Paul Ryan’s modest budget blue plan can’t be agreed upon, what hope do controversial ideas from Scalise, such as a non-binding resolution asserting that a carbon tax would be “detrimental” have?

Energy Bill Passes with Bipartisan Support – 4/22/16

Congressional deadlock is considered par for the course nowadays, but occasionally a much needed piece of legislation will manage to dodge the riders and partisanship that usually kill off bills in the House and Senate. Fortunately, the Senate recently pass in 85-12 vote one such bill concerning energy that would create modest renewable energy initiatives and update oil and gas infrastructure; its success is attributed to a lack of items usually causing partisan conflicts. A similar bill was passed in the House, but included measures that led the White House to threaten a veto forcing more debate. A compromise between the two energy bills is now in the works.

Though not as dramatic as the end of the oil-export ban or the extension of tax credits for wind and solar power projects, measures in the bill are expected to have a significant effect on energy in America. Items on the bill include: a review of mandates to incorporate biofuels into gasoline, infrastructural improvements in response to the oil and natural gas boom, policies on the incorporation of rising electricity from renewable energy, and many others related to energy efficiency and the power grid.

The chances of a bill reaching Obama’s desk while remaining palatable enough to avoid a veto have been boosted by increasing support for renewable energy among Republicans since falling costs and a rising number of jobs are giving impetus to the shift to clean power which was long derided as expensive and job destroying. Climate change believers or no, the cost of wind and solar power is plummeting. And from the drop in prices, market forces are creating some counter-intuitive situations where red states, like Texas, are leading in new projects simply because access to high wind speeds and sunlight make them tantalizingly profitable.

by state

According to Bloomberg, the average long-term contract price for wind power paid by utilities has dropped 60% since 2009. Including subsidies, the prices are on par with off-peak power prices in some regions, BNEF analyst Nathan Serota said. The solar price drop has been even steeper, falling 65% with contracts as low as $37 per megawatt hour, Serota said.

Screenshot 2016-04-23 at 8.29.16 PM

So while Donald Trump, Ted Cruz, and most GOP party leaders reject the fact that humans have played a role in climate change, many Republicans are ready to consider renewables an investment with great tangible returns. They grow less inclined to toe the party line on clean energy as they realize the benefits of cheap electricity, increased energy independence, and economic development, especially in impoverished rural areas, outweigh the costs of breaking with an outdated expectation of opposition.

Screenshot 2016-04-23 at 8.33.36 PM

Republican districts as seen above are benefiting greatly from wind and solar companies. Such companies employ nearly 300,000 people in the U.S. in 2015, or roughly 400% more than the number employed by the coal industry, according to the American Wind Energy Association, so dissent from elected officials whose constituents benefit much more from wind than coal is understandable. For instance, though Republican Senate Majority Leader Mitch McConnell has rallied his party against the “war on coal” affecting Kentucky’s coal industry, Republicans from states in the Plains region where wind power is cheap and coal production is minimal might easily resent being railroaded into an anti-renewable position.

Screenshot 2016-04-23 at 8.35.00 PM

Climate Change Litigation Lights Up Exxon – 4/12/16

Climate change legislation and litigation are set to make 2016 an especially contentious year for the U.S. court system. In his last year as president, Obama has pushed forward some of the most far-reaching and comprehensive measures against climate change ever seen with the Clean Power Plan, passing significant powers to the EPA while avoiding a adversarial, deadlock-prone Congress. Opposition to the new regulations has come swiftly with a number of states and industry interests bringing lawsuits to the Supreme Court such as State of West Virginia, et al. v. EPA, which challenges the first-ever federal rule cutting power-plant carbon emissions. The coalition managed to secure a unexpected stay on the rule in early February until litigation around the rule has been resolved in court.

A D.C. Circuit court will rule on the regulation in June. Though the loser of that hearing is likely to appeal to the Supreme Court, the current line-up of justices is likely to be split since the spot left vacant by the sudden passing of conservative Justice Scalia split the court evenly between liberal- and conservative-minded justices. It is expected that the regulation, which would require a 32% cut in power-plant carbon emissions by 2030 disproportionately harming coal interests, will survive the challenge given past precedents, statements by Justice Roberts, and the current state of the Republican Party’s November prospects. Rulings on mercury pollution from coal power plants have already passed through the court system intact resulting in many older facilities being shut down.

On the state level, Massachusetts was added to the list of states investigating Exxon Mobil Corp. for supposedly misleading investors and the public about climate change. The company has funded its own research into climate change since the 70’s initially recognizing the potential dangers of emissions only to later show results in support of skepticism. This court battle is drawing comparisons to the litigation against tobacco companies that ultimately showed that executives were aware of the health risks associated with smoking but buried important evidence that would have harmed their business. Similar accusations have been drawn against the coal giant Peabody Energy. The company reached a settlement last year over its financial statements and disclosures with regard to climate change without substantial repercussions; however, Peabody Energy is at risk of bankruptcy related to a lack of long-term viability.

Climate Change Legislation – 1/23/16

Following the Paris Climate Talks, nearly 200 countries agreed to a pact many hope will stop the worst effects of climate change. The pact itself relies on domestic implementation since there is no international agency with the power necessary to enforce the rules set forth so, for the US especially, compliance will rely on political whim.

Last Thursday, a federal court refused to temporary block new carbon-emissions rules pushed by the Obama administration without actually addressing their legality. The regulations set a national standard for power plant carbon pollution: a 30% cut to 2005 levels by 2030. The leaders of the opposition to the new rules are, of course, states like West Virginia which are set to lose the most from a switch from coal to renewables. These states will now pursue other legal options and seek more favorable rulings from higher courts until the case reaches the Supreme Court or a new President enters the picture and uses their power to revoke the rule. In the meantime, the deadline for companies to submit plans to meet the rules approaches.

Climate change is an increasingly polarizing issue in America as environmental regulations grow more and more burdensome for pollution-intensive industries. As fear of climate-based disaster or job loss via environmentalism grows, it is likely that environmental policy will be one of the most debated issues of the next few years. It seems that, at the moment, environmentalists are making their case effectively. The EPA and White House have managed to set in motion plans to make increased energy efficiency and emissions limits the new normal, while public opinion appears to be turning against climate skeptics as evidence for man-made climate change grows. Given the disarray the Republican party is facing so close to the presidential election and a potential backlash against embattled GOP candidates, the Democratic party may soon be in a better position to solidify current climate change policies. Four more years of a Democratic executive branch and its control over appointment of supreme court judges could prove devastating to the agendas of climate change skeptics.

The development of alternative energy technology will have a large impact on how successful attempts to reduce emissions will be be. In spite of bankruptcies forcing the bankruptcy and consolidation of many solar companies between 2011 and 2013, solar energy has come a long way. The reinstatement of tax credits for investment in solar and wind energy was led to increased installation projections. Decreasing “hard” and “soft” costs, increasing lobbying clout of the solar industry, and rising support from the general public are leading solar closer to a competitive position rivaling traditional producers. The real turning point will come when solar reaches grid parity and can generate power at a levelized cost of electricity less then the price of purchasing power from the grid. To have solar compete on price point alone, without reliance on political support, would be a victory beyond victories for environmentalists.

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