Investors exert their influence over the energy transition

“Capital… is a social power,” wrote Karl Marx and Frederick Engels in the Manifesto of the Communist Party. You don’t have to buy into their world-view wholesale to recognise the truth of that observation. When controllers of capital exercise their influence, they can have a big impact on the economy and on society, as the oil and gas industry has found. Pressure from investors has been one of the main forces pushing companies to address climate change and the transition to lower-carbon energy. The responses have ranged from assessments of the possible impact of the Paris climate agreement, to diversification into renewable energy, to new goals for cutting emissions. 

This year, that pressure from investors has stepped up several gears. A new group of large investors, called the Net Zero Asset Managers initiative, was set up in December with the aim of supporting the goal of net zero emissions by 2050. This spring BlackRock, Vanguard, State Street and dozens of other fund managers joined the initiative. It now has 87 signatories, including the world’s six largest investment companies, with a total of about $37 trillion under management. That is nearly 40% of all the assets under management worldwide. 

The members of the initiative have pledged, among other things, to set targets for the proportion of their assets under management that are aiming for net zero emissions by 2050. Their aim is to ratchet up that proportion every five years, until 100% of their assets are aligned with that goal. 

This week BlackRock gave a presentation to its own investors, citing its understanding and sustainability in general and climare risk in particular as one of the "key investment areas driving future growth". Its sustainable ETFs and index funds have grown twelve-fold since 2018, from $11 billion to $129 billion. Its letter to its clients in January was headlined “Net zero; a fiduciary approach”, and set out its plans for helping them “be at the forefront of that transition” to low-carbon energy.

Paul Bodnar, BlackRock’s global head of sustainable investing, said in the investor presentation that the firm was building tools to help answer questions such as: “How would one oil company fare versus another, in a rapid shift to low-carbon policies?” He added: “Sustainability is not a flash in the pan. It’s the driver of a fundamental reshaping of the global economy now well under way.” 

An indication of what that implies for oil and gas companies came at the annual meetings of ExxonMobil and Chevron last month. At Chevron, shareholders backed a proposal calling for the company to “substantially reduce” its Scope 3 emissions, “in the medium- and long- term future,” while at ExxonMobil they voted on to the board three directors nominated by the activist fund Engine No. 1. BlackRock backed both the proposal at Chevron and the appointment of the three successful new directors at ExxonMobil. 

This is an approach to managing climate risk that is very different from the divestment strategies backed by some climate campaigners. BlackRock is an important investor in the oil and gas industry. It controlled 6.7% of ExxonMobil’s shares at the end of last year, according to the company’s proxy statement. 

Larry Fink, BlackRock’s chief executive, last week raised concerns about the prospect of publicly held oil and gas companies being under greater pressure to cut emissions than privately held businesses. There was a risk of a "huge capital markets arbitrage" in carbon-intensive assets, he warned, with no net benefit to global emissions. "If we are really sincere about the world having net zero carbon in 2050, we cannot move these parts of the economy out of public entities into private hands,” he told a Reuters conference. 

Retaining large holdings in oil and gas companies, and in some coal producers, will bring BlackRock in for more criticism from environmental campaigners. But it will also mean that through its engagement with companies, its views will continue to be an important factor in shaping the industry’s future. 

End of the line for Keystone XL

The writing had been on the wall for the Keystone XL pipeline project from the point when President Joe Biden was elected last year. He made clear on the campaign trail that he planned to block the project, and revoked its presidential permit as one of his first acts in office. TC Energy, which had been attempting to build the pipeline since 2008, this week formally confirmed that it was dead. 

François Poirier, TC Energy’s chief executive, said in a statement that the plan for the pipeline had included innovations that the company would benefit from in the future. “Through the process, we developed meaningful Indigenous equity opportunities and a first-of-its-kind, industry leading plan to operate the pipeline with net-zero emissions throughout its lifecycle,” he said. “We will continue to identify opportunities to apply this level of ingenuity across our business going forward.” 

The impact on Canadian oil producers from Keystone XL’s termination is likely to be small, as Wood Mackenzie analysts explained last year. With two other oil export projects — the expansion of the TransMountain pipeline and the replacement of Enbridge’s Line 3 — making progress, Keystone XL had come to look like a “luxury” rather than a must-have for the Canadian industry. Our projections suggested Canadian production would have been little different whether Keystone XL had gone ahead or not. 

The replacement and expansion of Line 3 is facing mounting opposition. Protests against the pipeline in Minnesota this week caused extensive damage to property and resulted in 179 arrests. But Wood Mackenzie analysts expect the project to be completed by the end of the year. 

Rising commodity prices squeeze solar projects 

US consumer price inflation hit 5% in May, its highest rate since August 2008. The rate excluding food and energy hit 3.8%, its highest since June 1992. There are some specific factors driving up inflation, including rocketing prices for used cars and trucks, which are having an impact in the US, the UK and Germany. But there are also signs of broader-based price pressures, including the surges in many metals markets. The June contract for US Midwest hot-rolled coil steel, for example, has more than doubled since January, rising from less than $800 per ton to about $1,650 this week. 

Soaring prices are starting to have an impact across the energy industry. Solar power developers are slowing down project installations because of surging costs for components, labor and freight, Reuters reported this week.  

About 60% of the cost of a typical utility-scale photovoltaic solar development is exposed to commodity and freight prices. The rapid rises in prices for polysilicon, steel, copper and aluminium threaten to slow the pace of cost declines for PV solar over the next few years, according to Molly Cox, a Wood Mackenzie analyst. The rise in steel prices alone could increase average single-axis tracker prices in 2021 by 30% or more compared to 2020, she said. Component manufacturers, particularly module makes, have become more aggressive in their price increases than they were three months ago. 

Developers with utility-scale PV projects entering commercial operations this year will generally have procured their modules already, so will be shielded from the latest price increases. But for projects for 2022 and 2023, there will have to be decisions made about how much of the increase in costs developers should absorb, and how much they should pass on to the customer. 

Xiaojing Sun, Wood Mackenzie’s principal analyst for solar, said: “This is not a good time to be a solar project developer anywhere. Especially if you are a developer who had assumed aggressive cost reduction for the next few years.” 

In brief 

Investment in low-carbon energy in emerging and developing economies needs to increase seven-fold to over $1 trillion per year by 2030, to put the world on track for net zero emissions by 2050, the International Energy Agency has said. In a joint report with the World Bank and the World Economic Forum, the IEA set out proposals for how those economies could overcome the hurdles they face in attracting financing for low-carbon energy systems. “The world’s energy and climate future increasingly hinges on whether emerging and developing economies are able to successfully transition to cleaner energy systems,” the IEA said.  

Ben van Beurden, chief executive of Royal Dutch Shell, has set out the company’s response to the Netherlands court ruling last month that the company had “a significant best-efforts obligation” to cuts its Scope 1, 2 and 3 carbon dioxide emissions by 45% by 2030. The company still expects to appeal against the ruling, and he feels “disappointed that Shell is being singled out by a ruling that I believe does not help reduce global CO2 emissions”. However, he added that he and his colleagues felt “a determination to rise to the challenge”, even for an order that they disagreed with. 

El Salvador is on course to become the first country to adopt Bitcoin as legal tender, after lawmakers this week backed a proposal to that effect from President Nayib Bukele. The move will make it easier for Salvadorans living abroad to send payments home, create jobs and boost investment, the president argued. He also addressed the mounting concerns about the cryptocurrency’s energy consumption and environmental impact, saying that miners’ demand for electricity could be met through increased geothermal energy production. El Salvador is situated in a volcanic region with good resources, and two geothermal plants provide about 27% of its electricity. 

US investigators managed to recover millions of dollars worth of cryptocurrency that was paid to hackers to end the shutdown of the Colonial pipeline system last month. 

Cheniere Energy, the largest producer of LNG in the US, has announced a new collaboration with five upstream operators and several leading academic institutions to implement quantification, monitoring, reporting and verification of carbon emissions at natural gas production sites. The producers joining the new alliance include EQT and Pioneer Natural Resources. The move is the latest sign of how US oil and gas producers and exporters are increasingly focused on their emissions performance, under pressure from regulators, investors and customers. 

Jennifer Granholm, the US energy secretary, launched her department’s Energy Earthshots Initiative, intended to accelerate breakthroughs in affordable clean energy. The first of these Earthshots is targeted at hydrogen, with the goal of cutting the cost of clean hydrogen by 80% to $1 per kilogram within a decade. The department is seeking ideas, including for specific locations, that can “help lower the cost of hydrogen, reduce carbon emissions and local air pollution, create good-paying jobs, and provide benefits to disadvantaged communities.” 

Hopes of the US developing its own supply chain for battery raw materials took a blow, when a lithium mine in Nevada being developed by Australian company Ionee was hit by a government order to protect a rare flower, the Financial Times reported. 

And finally: a spectacular interruption to a football match. This video shows the demolition of the four colling towers at the Rugeley coal-fired power plant, which was closed down in 2016. The site will now be developed to build 2,300 homes, a school, and a country park. The shutdown of Rugeley was part of a wave of closures of coal-fired plants in Britain over the past decade. In 2012 coal provided about 40% of Britain’s electricity, but by 2020 its share had dropped to just 1.6%. 

Other views 

Simon Flowers — Has the oil and gas industry changed forever? 

Gavin Thompson — Asia’s frozen upstream M&A sector begins to thaw 

Molly Cox — Why floating solar has an important role to play in the energy transition 

Ben Gallagher — Why green hydrogen is reaching a tipping point 

Timur Zilbershteyn — How will reuse models change the plastic packaging industry? 

DJ Gribbin — Environmental permitting might block Biden’s clean energy targets 

Michael Patrick Flanagan Smith — I joined the oil rush to an American boomtown. Guess who got rich? 

Helen Thomas — Miners’ troubles show the need for climate “bad banks” 

Quote of the week 

“The development of technology like electric vehicles, or green hydrogen for that matter for heavy transport, is vital for maintaining the health of our world for future generations, something I am only too aware of today, having recently become a grandfather for the fifth time. Such happy news really does remind one of the necessity of continued innovation in this area — especially around sustainable battery technology — in view of the legacy we bequeath to our grandchildren.” — In a speech at the Mini car factory in Cowley, Prince Charles, heir to the throne of the UK, talked about the importance of energy innovation. He came in for some mockery over linking such a serious subject to the birth of his granddaughter Lilibet, but he was absolutely right. Energy innovation is one of the critical factors that will shape the lives of children being born today. 

Chart of the week 

This comes from a note by Mfon Usoro, Wood Mackenzie’s senior analyst for the US Gulf of Mexico Upstream. It shows a plot of installations in the gulf, highlighting the relationship between utilisation rates and the carbon intensity of production. Utilisation rates are on the y-axis, and emissions intensity is on the x-axis. The inverse relationship is clear: facilities continue to run regardless of the volumes of oil and gas hydrocarbons processed, which means their emissions are mostly fixed. Lower output means a higher emissions intensity. As emissions performance increasingly becomes an important issue for oil and gas producers, these data provide an additional reason to improve utilisation rates. Assets in the US Gulf of Mexico already have some of the lowest carbon emissions intensities in the industry worldwide. However, Usoro comments: “There is always room for improvement, and operators recognise the opportunity.”