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Imagine, you are the CEO Of a major oil company, sitting in the boardroom discussing your ESG strategy with your colleagues. You are congratulating the technologists who have just come up with a ‘green’ fuel for Formula 1 racing or some such improbable contribution to the energy transition. All of a sudden. Ba-doom! The cops, deploying what the DHS calls ‘tactical entry equipment’ (a battering ram to you and me), swarm in. ‘What’s the charge?’ asks the CLO. ‘Greenwashing!’
Sounds ludicrous? Maybe not so much. Earlier this year, as the Financial Times reported, fifty police officers raided the Frankfurt offices of Deutsche Bank and its fund manager DWS, as part of an investigation into greenwashing. Elsewhere, the SEC has spoken out against ‘exaggerated claims about ESG strategies’. The SEC has also warned against ‘misleading or deceptive fund names’, suggesting that names that suggest a certain investment focus (like ESG) should direct at least 80% of their assets thereinto. ENI was fined for greenwashing a couple of years ago. Similar attacks for misrepresentation in advertising have been directed against oil companies for over a decade by the greens, particularly in Europe as the EU majors re-position themselves as ‘energy’ companies and downplay their fossil activity.
In my opinion, the EU majors are boxing themselves into a corner by adopting an ‘energy transition’ stance. Once you claim to be ‘transitioning’, you open yourself up to criticism and an evaluation of the speed with which you are transitioning. This will of course never be fast enough for the greens. Claims for ‘net zero’ at such and such a date may well fall under the scrutiny of the law as above. The confusion induced by oil companies that are not works both ways, as the kerfuffle of the UK’s windfall tax showed recently: ‘tax me and there will be less cash for our windfarms’ now cry the EU majors!
The best thing to do would be to stop oil companies from playing the energy transition game altogether. This involves two related considerations, the environmental case and the financial case. On the environmental case, oil companies, their employees and your humble servant are in a singularly bad position to pontificate on the ‘reality’ or otherwise of human-driven global warming. Whatever our opinions may be, any deviation from the consensus is going to be considered by society at large as ‘unreliable evidence’ from us folks with skin in the game. Society, governments will decide the speed at which the energy transformation will take place. This will then determine the financial case for oils.
How fast is the energy transition taking place? Our second* of three book reviews on the energy transition suggests that a complete shift over to electric power for just about everything is doable and could be painless (at least for the USA). But this would cost about as much as FDR’s New Deal and would see 1% of the US land surface occupied by wind and solar. This contrasts with the current powergen situation with 50% of France’s nukes out of action, ERCOT’s spectacular failure to keep Texans warm last winter and California’s failing grid in the 2020 heat wave. It is easy to be skeptical about the speed of the transition.
So what of the economics of the oil industry for the next few years? Buying shares in an oil means betting that the transformation will be slow, that there will be a continuing need for fossil fuels and that governments will have a hard time taxing fossil out of existence while society continue with its collective ‘green-lite’ posturing while driving SUVs. Not a pretty picture perhaps. How long will the rump/twilight oil business continue? Total CEO Patrick Pouyanné observed recently that even a 60 million barrel per day industry (i.e. a 40% decline) will require continued upstream investment. So there are a few years (decades?) left in the old dog.
How might this imagined world of pure-play oils come about? Well, there is always the possibility that the regulators that have been working on the ESG funds will wake-up to the similar obfuscation that the major oils are currently enacting but I am not holding my breath on that. Black Rock’s Larry Fink proposed a mechanism for a return to the pure-play with his idea of a ‘bad bank’ for fossil assets although he was more interested in redirecting monies from such a spin-off into green investment. We, as oil folks, are perhaps more interested in the fate of the ‘bad’ stuff.
The other route to the pure play is that advocated recently by Harold Hamm who recently has offered to buy out the other shareholders in Continental Resources and take the company private. His motive appears to be to plough Continental’s profits back into E&P rather than to pay dividends to shareholders. Hamm may not view E&P as ‘bad bank’ material, but the result is the same.
How does this play out for the climate? It could actually be positive. While investment in ‘offsets’, wind power and solar will be off limits, that leaves plenty of activity that should meet with environmental approval. Reducing flaring, venting and methane and other emissions reduction should be part of doing business right. CCS possibly, although that is really another one for ‘society’ to decide on. Energy efficiencies throughout the value chain? Sure.
With oils back in a pureplay posture it would actually be easier for investors, governments and society at large to ‘do something’ to reduce fossil use. Whether these stakeholders will move to action is moot. In any case pure play would be better than the status quo of greenwashing and energy obfuscation.
* See our review of Saul Griffith’s ‘Electrify’ in this issue.
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