Thu. Jul 7th, 2022

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One geopolitical game changer to start:

Welcome back to another Energy Source.

US oil prices dropped below $ 100 a barrel on Monday, down from a recent peak of nearly $ 140 a barrel last week after American sanctions on Russian crude were announced.

What’s behind the sudden sharp decline in crude prices? Surging Covid cases in China spooked markets on Monday. Beijing’s moves to quickly contain the outbreak, including a lockdown in Shenzhena big global trading and tech hub, threaten to dent demand.

Traders have also become less worried about an imminent western blockade of Russian oil, especially as Ukraine’s leaders signal increased hope around ceasefire talks with Moscow.

But the wild price moves signal an oil market still in crisis.

On to today’s newsletter. Our first item dissects BP’s always closely watched long-range energy outlook. Among the takeaways: the oil major has changed tack, saying demand won’t peak for about a decade. In our second item, Myles previews proxy voting season, which has become a climate battleground for energy companies (think Engine No. 1 vs ExxonMobil). In Data Drill, Amanda shows how rising fuel prices are about to make your next Uber ride more expensive.

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Three takeaways from BP report

BP’s closely watched energy outlook has dropped in the middle of a generational energy crisis.

What does it have to say about how the outbreak of war in Europe will remake the future of energy? Unfortunately, not much. The report was prepared before Russian President Vladimir Putin launched his invasion of Ukraine.

Spencer Dale, the company’s chief economist, acknowledged the fallout could “have lasting impacts on global economic and energy systems and the energy transition”, but updates will have to wait until the fog of war clears.

Still, the report offers a valuable perspective on the state of the energy transition – from a global oil supermajor undergoing its own internal transition.

Here are three of our big takeaways, with some fresh questions raised by the current crisis:

Peak oil demand delayed

BP grabbed headlines in the depths of the pandemic when it said that 2019 might have set the high-water mark for oil demand. The rapid recovery in consumption as economies opened up from Covid-related restrictions proved this thesis untrue amid a big run-up in crude prices.

Still, BP is confident that the peak is coming – eventually. In its “new momentum” scenario, which tracks closest to the energy market’s current trajectory, consumption holds at just above 100mn barrels a day through to 2030, before finally starting to fall towards 80mn b / d by 2050.

That scenario keeps oil around much longer, and in much greater quantity, than BP’s path to net zero. To get to net zero emissions, BP argues the world would need to start immediately and dramatically reducing crude consumption. Demand would need to fall below 80mn b / d by the mid-2030s and for the global oil market to shrink to about 20mn b / d by 2050 – a fifth of current consumption. That is, of course, far from today’s path.

The big question now is how fuel prices, jumping in the wake of Russia’s attack on Ukraine, will alter the demand trajectory. Will record pump prices hasten a shift away from petrol?

Line chart of Global oil consumption, mn barrels per day showing BP's peak oil demand delayed

2. The carbon budget is being drained quickly

Like oil demand, carbon emissions have recovered from pandemic-lows much faster than expected. Rather, they’re headed on a trajectory far higher than what’s needed to climate-proof the energy system.

The “new momentum” scenario sees annual emissions plateauing around current record highs of about 40 gigatons of CO2 equivalent for the next decade or so before gently declining towards about 30 gigatons by 2050 – about three times higher than the net zero scenario.

BP argues the nature of the “carbon budget”, the maximum amount of greenhouse gas emissions that can be emitted while allowing the world to reach its climate goals, makes this a dangerous path.

It says a scenario in which the world dithers on our current path until 2030 before suddenly trying to rapidly cut emissions towards net zero levels would be far more painful for the global economy and require far deeper cuts to total energy consumption to offset higher emissions this decade .

“The carbon budget is finite, and it is running out: further delays in reducing CO2 emissions could greatly increase the economic and social costs associated with trying to remain within the carbon budget,” Dale says in the report.

Whether the current energy crisis ultimately accelerates a shift to greener energy or further entrenches fossil fuels, will go a long way toward answering that question.

Line chart of Global annual greenhouse gas emissions, gigatons of CO2 equivalent showing Emissions far from net zero path

3. The energy transition needs a much bigger capital transition

From 2015-19 there was more than twice as much spending on global oil and gas than there was on wind and solar. That needs to be reversed to dramatically reduce emissions, BP says. In BP’s two low-carbon scenarios, wind and solar spending rises to between $ 500bn- $ 800bn a year – two to three times higher than current investment, and likely higher than the $ 650bn in annual oil and gas spending from 2015-19.

But, BP notes, even in the lowest-carbon scenarios, the oil and gas patch continues to need significant financing. “Although the demand for oil and gas falls in all three scenarios, natural decline in existing production implies that continuing investment in new upstream oil and gas is required in all three scenarios, including net zero,” says the report.

Depending on the pace of emissions reductions, BP believes the world still needs anywhere from $ 250bn- $ 550bn of annual spending to keep pumping oil and gas.

It points to one of the thorniest issues facing oil companies – they are being called upon to accelerate investment and production to head off a damaging oil price leap, but face huge questions about the future demand and spending for their product. (Justin Jacobs)

Investors have oil in their sights as proxy season nears

Activist investors are plotting a barrage of new climate resolutions in upcoming annual shareholder meetings, with oil and gas groups firmly in the line of fire.

Motions targeting refiner Valero and Imperial Oil, ExxonMobil’s Canadian oil sands subsidiary, were among those flagged by Climate Action 100+, the world’s biggest investor climate initiative, to its members on Tuesday morning.

More than 615 institutional investors managing $ 60tn in combined assets are signed up to the campaign, which aims to pressure companies into cutting emissions and strengthening climate-related financial disclosures.

Activists hope they can build on their success in 2021 annual meetings, which saw a doubling in successful climate resolutions as some of the world’s largest asset managers threw their weight behind the votes.

“Investors have advanced so much, even in just one year, and I would expect to see flagged votes get really high support,” said Morgan LaManna, director of investor engagements at Ceres, one of the co-ordinating groups behind Climate Action 100+ .

By highlighting – or “flagging” – resolutions to its signatories, which include the likes of BlackRock, Fidelity and State Street, Climate Action 100+ aims to rally support to force companies to up the ante on climate. Tuesday’s motions are the first in a long list it plans to flag, with additional company names to be released weekly.

A resolution filed with Valero, the world’s largest independent oil refiner, criticizes the company for only publishing short-term greenhouse gas reduction targets, which do not cover scope 3 emissions from the burning of its products. The motion calls on Valero to publish a long-term plan to slash emissions within the next year.

A separate resolution filed with Imperial Oil calls on Canada’s second-biggest integrated oil company to halt all new exploration projects.

In a sign of growing investor pressure on climate, the number of motions backed by a majority of shareholder votes jumped from seven to 15 last year. BlackRock voted in favor of 41 per cent of climate resolutions, up from 10 per cent the previous year. At Vanguard, that figure jumped from 14 to 37 per cent.

The biggest activist win against fossil fuel producers last year saw the installation of three new directors on the board of ExxonMobil. A vote calling on Chevron to “substantially reduce” its scope 3 emissions also passed by a solid margin.

With oil and gas prices soaring this year, market watchers will be keeping a close eye on whether bumper profits lessen investor pressure and buy energy executives some leeway on the climate front. Campaigners are hoping investors’ self interest motivates them to keep the pressure up.

“Oil and gas companies are the most exposed to climate risk and to the potential of an energy transition to cause them to lose a lot of value,” said LaManna. “Since last year, we’ve seen a lot of companies set additional targets. . . But there’s definitely a lot more to do. ”

An Imperial spokesperson said the company would be responding to the motion soon, noting that “oil and gas is seen as a key part of the mix for decades to come” and that “Canada can play a key role in providing future energy demand while supporting efforts to lower emissions ”.

Valero did not respond to a request for comment.

(Myles McCormick)

Data Drill

Customers in the US and Canada will soon be paying a fuel surcharge when they ride with Uber and Lyft.

Starting tomorrow, Uber customers will pay a surcharge of either 45 cents or 55 cents for each trip. Surcharges on Uber Eats orders would be either 35 cents or 45 cents, the company said in a press release. Lyft said they would be announcing details about their surcharge “shortly”.

The fuel surcharges come as the price of petrol has soared to record highs. Costs at the pump are averaging $ 4.33 a gallon, up from $ 3.49 a month ago, according to the American Automobile Association. Both companies have said 100 per cent of the surcharge would go directly to drivers.

A survey conducted last week by The Rideshare Guy, an industry blog, found that 38 per cent of drivers for companies such as Uber and Lyft were driving less due to high petrol prices, and 15 per cent stopped driving entirely. (Amanda Chu)

Bar chart of showing Over 50 per cent of rideshare drivers report driving less or not driving at all due to high gas prices *

Power Points

Energy Source is a twice-weekly energy newsletter from the Financial Times. It is written and edited by Derek Brower, Myles McCormick, Justin Jacobs and Emily Goldberg.

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