Corporate Europe take heed: climate lawsuits are coming

One thing to start: Royal Dutch Shell was the latest supermajor to report brutal financial results from last year.

Welcome back to Energy Source. Anjli Raval focuses on the significance of climate litigation in the EU in our first note, with an explainer to follow on why oil prices are soaring again.

And don’t miss the latest energy-related Big Read — a deep dive from the FT’s Lex team explaining how carbon pricing is about to transform industry and “supercharge investment in greener technologies”.

Thanks for reading. Please get in touch at energy.source@ft.com. You can sign up for the newsletter here. — Derek

The amplifying effect of climate litigation

As corporations’ impact on climate change has been thrust into the mainstream, companies are also becoming familiar with the business of litigation related to it.

And all sorts of “ripple effects” can stem from increased climate lawsuits, Donald Pols from the Dutch arm of Friends of the Earth told the FT.

First, companies could be forced to pre-emptively adopt policies and make investments in cleaner forms of energy to avoid future legal cases. Second, lawsuits might start being brought against a broader range of companies, beyond Big Oil. 

More interesting was a point Mr Pols made about regulations and initiatives that governments might accelerate or make even more aggressive.

Front and centre in Europe is the prospect of an import duty, known as a “carbon border adjustment”. The tariff aims to ensure companies on the continent that are increasingly forced to take greater action on climate change can stay competitive against foreign rivals that do not have to play by the same rules.

Just as many EU producers of energy intensive goods such as steel, aluminium and petroleum products have to buy carbon allowances, under the EU Emissions Trading System, importers would have to do the same. By increasing the price of the imported goods, local producers of metals and other goods can stay in business.

After much debate and resistance from other parts of the world, the European Commission plans to propose a bill for the duty this year, with a view to introduce it at the beginning of 2023. It could prove to be a game-changer for climate policy because it sets a precedent for how this might play out globally — just as the EU led with data protection. 

Mr Pols said the commission’s push to protect domestic companies from outside competition, against the backdrop of a more aggressive push to take action on climate change, means that the ambition of the policy will be “increased”.

“From the level of the CO2 price, the breadth of the policy and how many industries it covers as well as the enforcement of it . . . all of it will be elevated,” he said.

(Anjli Raval)

Why are oil prices soaring?

At just below $60, oil prices are at a 12-month high and the market is “close to a frenzy”, said Bjarne Schieldrop, chief commodities analyst at SEB. Goldman Sachs reckons Brent crude will hit $65 by summer. What is driving this, and will it last?

Start with supply. Opec is showing unusual discipline in complying with its 7.2m barrels a day of cuts. Even Libya’s supply surge and signs of rising Iranian exports have not threatened the producer group’s restraint. Kpler, a data provider, said seaborne exports across the whole Opec+ group, including Russia, dropped by 1.8m b/d in January.

American shale is not roaring back — yet. At current prices, shale operators can turn a profit. But the publicly listed ones swear blind that they will resist the siren calls of another drilling binge. Even output from the prolific and relatively low-cost Permian is likely to have declined again in January, reckons Morgan Stanley.

Then there’s oil demand, which is rising. Bullish Goldman Sachs thinks consumption will hit the pre-pandemic level of 100m barrels a day by August — far earlier than many analysts expected last year.

Tight supply and rising consumption are draining global oil inventories — they fell by more than 1m b/d last month, said Kpler. Stockpiles shrank in the US yesterday too.

“If there is something bullish traders love, that is stock draws and deficits, and today there is strong news on both to trade on,” said Bjørnar Tonhaugen, Rystad Energy’s head of oil markets.

The tightness is visible in the market’s backwardated structure — where spot prices are trading for more than contracts to have oil delivered later. That’s a price signal for traders to bring oil out of storage ASAP. It’s also deterring longer-term spending.

“The flip side of crude oil markets going into backwardation is that, while spot oil prices have rallied, long-dated Brent and WTI prices are now lower than they were in June last year, keeping a lid on new investment,” wrote Francisco Blanch, Bank of America Global Research strategist.

The macro backdrop, as the traders refer to it, is also supportive. Vast stimulus spending this year should drive an economic recovery — and weaken the dollar. Both are positive for oil prices.

Vaccine developments are driving bullish sentiment too. News yesterday that the Oxford/AstraZeneca vaccine also reduced viral transmission was a “game changer”, one investor told ES.

The bigger picture is that many traders think oil’s crash last year has sucked so much investment out of the industry, that supplies will eventually come up short.

As energy majors such as BP and Royal Dutch Shell start to focus more of their investments in renewables, a supply gap could emerge in the next couple of years. Even if oil demand peaks in the next decade or so, if supply falls faster than demand, oil prices can still rise.

What might kill the rally?

Rising prices encourage Opec producers to cheat on quotas. While discipline is holding for now, the Saudi-Russian price war 11 months ago shows how fast things can unravel. If the Opec dam burst again, the supply wave would inundate the market.

Further price rises will sorely test US shale operators’ discipline too. The rig count has already jumped by about 70 per cent since mid-2020. More of that, and the market will get spooked.

Meanwhile, the mother of all price movers from 2020 — the virus — has not gone away. Traders are banking on vaccinations allowing global mobility to return to normal later this year. If that is delayed, all bets are off.

“Hopes for the vaccine rollout underpin all these rising oil-price expectations,” said Bill Farren-Price, a managing director at Enverus. “But a lot rides on that. Lockdown measures need to ease significantly in the coming months for a broad-based economic rebound to occur. And Opec+ needs to stick to its guns.”

Longer-term, not everyone is buying the supply gap thesis. Crude’s last great rally in 2003-2014 was underpinned by the emergence of China’s economy as an energy-hungry superpower, following a decade of under-investment in the oil sector.

This time, oil companies have a running start, because so many oil deposits — from shale to ultradeep water reserves — were discovered during the boom years. They just need the right incentive to tap them. That may mean higher prices short-term, but it’s less likely to prove sustainable.

A significant jump in oil prices would also be a gift to the electric car industry. It’s not clear that oil producers such as Saudi Arabia would really benefit from one last giant hurrah for the crude price. (Derek Brower and David Sheppard)

Data drill

Wind power’s meteoric rise in the US continues. Daily wind power generation spiked to 1.76m megawatt-hours on December 23, accounting for around 17 per cent of total national power generation, compared to an annual level of around 9 per cent. It smashed the previous record of 1.42MWh set in April 2019.

Those records look unlikely to stand for long as the build-out of wind capacity continues. The EIA expects another 12 gigawatts of capacity to be built by the end of this year, mostly in Texas and Oklahoma, a 10 per cent expansion from 2020.

Power points

• Automaker GM’s plan to go fully electric by 2035 “was more than a surprise; it is a game changer”, argues Harvard law professor Jody Freeman.

• The FT’s Lex weighs in on ExxonMobil — which, alongside its peers, has been left “squarely on the defensive” by the alignment of asset managers, governments, and advocacy groups over reducing emissions.

• America’s cities may be undercounting their own emissions by as much as 20 per cent, according to a paper in Nature that compared self-reported data against independent measurements.

• S&P Global interviewed Allison Clements, a new commissioner at the Federal Energy Regulatory Commission, where she pegs overhauling the US’s “broken” process for permitting pipelines as among her highest priorities.

Endnote

The US’s Energy Information Administration released its Annual Energy Outlook, in which it has tried to divine what the energy world will look like in 2050, a task made all the more difficult amid the disruption of the pandemic.

The agency’s “reference case” sees oil and gas remaining at the centre of America’s energy system through the middle of the century, a stark contrast to President Joe Biden’s green ambitions. Here are three things that caught our eye:

• Carbon emissions from the energy sector have probably peaked, but the US is not charting a course to zero emissions. The EIA sees energy-sector carbon emissions declining gradually after this year, before starting to climb again after 2035 and ending up at roughly 2021 levels in 2050.

• Fossil fuels continue to dominate in 2050. Oil and liquid fuels are the most consumed fuels followed closely by natural gas, although their growth over the next three decades is modest. Wind and solar continue their rapid ascent but still only provide half as much fuel as natural gas by 2050.

• Electric vehicles, like renewables, grow fast but have a relatively limited impact on the market even by 2050. The EIA says petrol-fuelled cars will still account for nearly 80 per cent of new car sales by 2050.