Trump's Paris withdrawal a gift to China

US energy policy is being shaken up. First the domestic agenda, then the international dimension – pulling out of the Paris Agreement on global climate change late last month. An ‘America First’ energy policy is meant to be great news for US producers. But will these moves boost investment and company behaviour as much as the administration hopes?

What’s changed in US policy?

The March Energy Independence Executive Order included review of the Clean Power Plan (CPP). Other proposals relevant to the upstream industry are the direction to revise or rescind the Bureau of Land Management’s 2015 hydraulic fracturing rule; and the 2016 limits on venting/flaring of methane.

But these rules apply only to federal and Indian lands; the site of less than 10 percent of development activity. There’s not much meat on this bone. In any case, industry has already adopted both rules into best practice, and may be loath to change. Operators will come under scrutiny, watched like hawks for potential loosening of environmental standards.

Investor perception will influence corporate strategies

Shareholders want US companies to grow but not at all costs; and like the companies themselves should fear a punitive snap back by politicians down the line. The resolution last week requiring ExxonMobil to declare how it will prepare for a lower-carbon future is just the latest example of shareholders playing an increasingly important role in shaping companies’ approach to environmental issues.

State-level initiatives on the environment will be re-enforced, such as California’s existing policy on tougher auto fuel efficiency standards. A dozen other states have already adopted California’s standards, covering about a third of the car fleet. Auto makers won’t make different models for different states. Renewables and energy efficiency targets are also determined at state level and could be stepped up. Over 30 states, red and blue, have goals in place.

The US withdrawal from the Paris Agreement was touted as removing onerous energy restrictions from the American economy. A frustration is that international oil and gas companies players now have two sets of rules to deal with rather than one. The approach will be to embrace higher Paris standards and adopt globally. We’d expect any competitive disadvantage for those also operating in the US to be marginal and short term.

The market will continue to be the primary driver of the changing energy mix in the US, irrespective of Paris.

Coal has already been squeezed down by cheap gas, with the promise of more to come. Additional gas volumes associated with the doubling of Permian tight oil into next decade could help keep Henry Hub at or even below US$3/Mcf for years to come. Bullish for falling US emissions, but the renaissance in coal will never come.

Geopolitical implications of US withdrawal

The immediate reaction of the EU and China has been to rally the troops – the remaining 194 signatories. Each of the two big guns has its motives. The EU is the long-time evangelist of carbon emissions reduction, and has the regulatory policy in place to prove it.

The US exit provides a timely opportunity to galvanise the EU27, still adjusting to the prospect of Brexit. The UK of course remains in the EU – for now – and has been noticeably mute in its response to the US withdrawal.

The absence of the US creates a leadership vacuum which China fills.

There is a degree of irony, given that China’s economic growth depends on fossil fuels and coal in particular. As I write this week’s Edge from Beijing, the air pollution from motor vehicles, coal-fired power plants and from industrial output is all too apparent. China needs make the city good to live in again and stave off looming health problems in the decades ahead.

The country's leaders acknowledge the importance of the issue. The appetite for change is evident in the shift already underway to foster growth in renewables and gas at the expense of coal.

China is about to step up onto the world’s stage to drive decarbonisation. To be seen doing so as the US pushes in the opposite direction is a bonus.