What’s complicating Big Oil’s investment decisions?

First things first. From one half-Canadian to the world: have a good Canada Day! But stay cool.

The brutality of climate change is all too visible in the country’s west, where some interior British Columbia towns are recording temperatures of almost 50 degrees Celsius. Even Winnipeg — home town for yours truly, where the biggest summer danger was always mosquitoes — set a new high temperature record this week.

Today’s newsletter marks a full year since we relaunched Energy Source in June 2020. Thanks to all of you for reading, writing and supporting us over the past 12 months. As we push into the second year of the rebooted newsletter, are there any topics you think we should be paying more attention to or would like us to dig into further? Get in touch at derek.brower@ft.com and myles.mccormick@ft.com.

Up first today is a column from Amy Myers Jaffe, managing director of the Climate Policy Lab at Tufts University’s Fletcher School. We’ll be running more guest columns periodically in future.

Our second item is on a new study from Irena showing that clean energy deployment will add more vim to the global economy.

As for news: the White House does, indeed, plan to extend tax credits for renewable energy producers. It’s also devising a clean energy standard as part of the “additional congressional action” needed to tackle the climate crisis. All this was in a memo that seemed designed to answer criticisms that the president’s bipartisan infrastructure bill was light on climate measures. Now the effort will be made through the budget process, requiring a vote on party lines in the Senate.

And Opec meets later today to decide whether to keep production cuts in place or begin phasing in more supply. Oil prices were strong on Thursday morning, amid expectations that the group would keep the market tight. But predicting outcomes while Saudi Arabia’s energy minister Prince Abdulaziz is running the show has become difficult even for the most experienced Opec watchers.

Happy July 4 in advance. We’ll be taking a break for the holiday and will be back in your inbox next Thursday.

Thanks, as ever, for reading.

The uncertainties of our time put Big Oil in a bind

In a world with few certainties, oil demand’s untrammeled march higher has always been one thing the industry could bank on.

But times have changed. The Covid-19 pandemic and the need to tackle climate change have left that certainty in tatters, muddying the industry’s ability to make confident investment decisions.

Here’s a closer look into why:

1. Scrambled demand forecasts

Forecasting future oil demand trends and prices using financial models has always been difficult. Few agencies have been correct in the short run, much less over a 25 to 30 year timescale.

The confluence of Covid and climate change has made this exercise even harder:

• Basic inputs such as the rate of economic convergence between developing and developed economies via trade are harder to calibrate in a world where Covid-19 outbreaks and the impact of severe weather are unpredictable.

• Demographic trends, which tend to be the most influential input to oil use forecasting, may also be changing, with some populations like China’s now shrinking and the future of urbanisation also in flux.

• And the basic premise of the last decade’s rising oil use narrative is based on expectations of a soaring entry into the middle classes by citizens of the global south. Inequities in vaccine distribution call this trajectory into question, as does the fact that climate change will not affect each geography equally.

One reason BP’s oil demand forecast is lower than those of its peers, for example, is that its model accounts for the negative impact of climate catastrophes and economic slowdown under high emissions scenarios.

A recent study on post-Covid oil-demand scenarios published by Columbia University’s Center on Global Energy Policy shows the range of uncertainty out to 2030. If the pandemic lingers and green technologies flourish, oil demand could slide by 8.4m barrels a day. But if vaccines bring a stable recovery in economic growth across the developing world, oil use could soar, at least temporarily.

All this uncertainty leaves oil companies in a bind.

The industry is also under pressure from shareholders to increase its transparency on climate risk disclosure. Soon, the US Securities and Exchange Commission (SEC) will weigh in.

One proposal is for the SEC to “require” companies to follow the recommendations of the Task Force on Climate Related Financial Disclosures (TCFD), which recommends that companies stress test corporate strategy and businesses, taking into consideration different climate scenarios. Many oil companies already comply with the TCFD scenarios proviso. In some cases, it has led to sales of far-flung assets, changes in capital deployment, and, certainly, greenwashing.

2. IEA “net-zero” scenario undermines investment case

Then there is the IEA’s latest “net-zero” report, which said energy groups would have to stop all new oil and gas exploration projects from this year if global warming is to be kept in check.

This complicates matters further for oil and gas companies.

Managements set on resisting large scale strategy change have long relied on the IEA’s history of traditional and persistent warnings about a shortfall of investment in future oil supplies.

But the IEA’s new pathway leaves little justification for any increase in future investment by oil companies in new oil and gasfield development, arguing that future upstream spending would have to be focused on maintenance of existing resources.

The “net-zero” scenario will make it harder for companies to justify business-as-usual investing. That’s causing a bit of a dust cloud in Texas, where there’s a mad scramble afoot on carbon sequestration and offset certification, especially among natural gas companies.

For Big Oil, whose raison d’être has been massive oil and gas infrastructure mega projects, a major paradigm shift could be in order.

The oil patch is now on notice.

Amy Myers Jaffe is author of “Energy’s Digital Future: Harnessing Innovation for American Resilience and National Security”, and managing director of the Climate Policy Lab at Tufts University’s Fletcher School.

The return on investment in the energy transition

Switching to clean energy pays off. A global energy transition that limits global warming to 1.5 degrees will create 122m jobs and reap as much as $165tn in benefits by 2050, according to a report from the International Renewable Energy Agency (Irena).

But despite significant expansion of clean energy capacity in recent years, the world is still far from hitting that temperature target, Irena says.

The report estimates that another $33tn of investment is needed in energy-transition technologies, and that public financing will need to nearly double. But the benefits greatly exceed the cost of investments. Every dollar spent on the energy transition returns $2 to $5.50 worth in cost savings related to human health and the environment.

The report urges governments to offer greater market incentives for renewable energy, infrastructure upgrades and expansions, and protections for workers and communities affected by the transition.

“Energy transition is a daunting task but can bring unprecedented new possibilities to revitalise economies and lift people out of poverty,” said Francesco La Camera, Irena’s director-general.

(Amanda Chu)

Data Drill

The Pacific north-west is sweltering in record-breaking temperatures this week. What’s worse is that many in the region lack air conditioning.

To get ahead of the “mind-boggling” heatwave, last weekend people rushed to buy A/C units. Online prices soared and units became difficult to find as they sold out in stores across the area.

As chilled air becomes a greater necessity in the region, energy supply concerns will grow. The North American Electric Reliability Corporation said the region is at an elevated risk of disruption during times of above-normal heat. Indeed, some residents are already suffering from heat-related power outages, rendering those prized A/C units useless.

On the other side of the country, New Yorkers on Wednesday afternoon were urged to conserve power in order to avoid disruptions as the temperature reached into the high 90s.

Power Points

• Despite ESG claims, Samsung increased its greenhouse gas emissions by 5 per cent last year.

• A shock increase in carbon prices could wipe 20 per cent off global equity prices, a new analysis finds. 

• The Supreme Court ruled in favour of pipelines, allowing federally approved infrastructure projects to acquire state land without the state’s consent. 

• South Korea is a key player in the global green-bond boom.

• A secret recording by Channel 4 and Greenpeace showed an ExxonMobil lobbyist boasting of the company’s efforts to water down US climate legislation.