A Victim of the Climate Wars: A Warning from the U.K.
National Review Online, December 31, 2021
Shell’s decision to pull out of the Cambo North Sea oilfield-development project in early December — which could have also provided enough natural gas for 1.5 million homes for a year — may not seem like something that should concern Americans. Check a little more closely, though, and this grim tale begins to look a lot like an example of how our own oil and gas production is going to be — or is already starting to be — constrained, not necessarily by legislation but by a combination of regulatory overreach, activist agitation, and the increasingly malevolent influence of financial institutions. Many of those in the last group on that list are major institutional investors out to advance a socio-political agenda unconnected, whatever they may claim, to the generation of financial return for their clients. This agenda is often sold under the guise of “socially responsible investing” (SRI), and particularly these days, as “ESG,” a peculiarly virulent variant of SRI under which actual or prospective investments are not only assessed for the money they might make but also for how they score against certain environmental, social, and, much more reasonably, governance benchmarks.
In other instances, the pressure will be from banks, unwilling to help fund fossil-fuel projects that may cause them difficulty with activists, ESG-touting institutional investors, and, before too long, regulators, specifically central banks citing “climate risk.” That this risk is illusory doesn’t matter; that the illusion is useful does. It should be stressed that “illusory” refers not to the question of climate change but to the danger it might pose to our lending institutions.
Economist John Cochrane addressed this issue in a recent article for Capital Matters. Here is an extract:
If we use plain English, a “climate risk to the financial system” that “financial regulators” can contain must mean the climate might change so drastically, so abruptly, and so unexpectedly, in the next five years, that the economy tanks so terribly that financial institutions blow through the cushions of equity and long-term debt, to spark a widespread systemic crisis like 2008 or worse.
The trouble is, there is absolutely nothing in even the most extreme scientific speculations to support that possibility. Climate is the probability distribution of weather: the chance of heat and cold waves, floods, fires, and so forth. We know with great precision what the climate will be for the next five years. Nobody writing insurance in Florida is unaware of the chance of hurricanes. The chances of extreme weather are not going to change unexpectedly in even ten years. The sea level is rising. It will continue to rise, about 4 millimeters per year – 2 cm in the next five years – slowly and predictably. Risk is the unknown. This is known.
Moreover, even weather extremes just don’t move the economy that much. We have had many financial crises in history. Not one was sparked by an extreme weather event. Our modern, national economy is remarkably immune to weather.
It is simply not true that the economic damage of extreme weather events is either large or substantially increasing . . .
Cochrane’s argument is logical. Then again, in light of the opposition that Shell was either facing or could expect to face, its decision was nothing if not logical too. The company, which had a 30 percent stake in Cambo (with the balance owned by Siccar Point Energy), understands the name of the game being played, which is either to deny fossil-fuel companies the capital they need, or, more often (as a starting point), to increase its cost. As Saule Omarova, the Biden’s administration’s now-withdrawn nominee for the position of comptroller of the currency once put it:
A lot of the smaller players in [coal, oil, and gas] industry are going to probably go bankrupt in short order. . . . At least we want them to go bankrupt if we want to tackle climate change, right?
To take a step back, Cambo may have been, as noted in Bloomberg Green (yes, yes, I know), “a relative minnow globally.” Nevertheless, it is (or was) one of the largest potential oil and gas projects in the U.K., a country currently facing an energy crunch due, if only in part, to a poorly thought through and, given Britain’s effect on the global climate, almost entirely pointless dash to net-zero greenhouse-gas emissions by 2050. This has included an immense and wildly premature investment in renewables, which has left the U.K. with energy supplies as unreliable as they are costly (directly or indirectly). The sun doesn’t always shine and the wind doesn’t always blow, both of which are unsurprising inconveniences that are politely referred to as intermittency. This autumn, North Sea winds were well below what they should have been, creating an energy crunch that was compounded by a fire at the main interconnector with the continental grid, as well as by the way that, with quite remarkable irresponsibility, the U.K. has adopted something close to a just-in-time system when it comes to gas reserves.
This mess ought to have been a wake-up call to Britain’s ruling Conservatives. It is a good sign that nuclear power appears to be coming back into favor with the government, but if the ultimate goal is to hit net zero without an intervening energy crisis, there will be no alternative other than to stick with fossil fuels for quite some time. Nuclear will (to put it mildly) take quite a while to scale up even if its proponents can overcome long-standing environmentalist taboos, and renewables’ intermittency problem isn’t going away anytime soon. While (natural) gas, with its lower carbon emissions, is a superior “bridge” fuel to oil (the U.K may have as much as 30 years’ worth under the North Sea, even without considering what could — even on a crowded island — be extracted by fracking), oil will have to be part of the mix. If that is the case, is it better that such fuel comes from regulated markets (where, for example, steps can be taken to minimize methane leakage) and from geostrategic allies, or should we turn to OPEC and/or Russia for a helping hand?
While the answer ought to be obvious, it seems to have largely eluded those running the U.K. — despite a partial acknowledgment of these issues from the British government late last month. In October, British regulators rejected a plan by Shell to develop the North Sea’s Jackdaw gas field, a decision that may help explain why Shell believed that it could not rely on official support for Cambo as what would still be a lengthy approval process dragged on. Well, that and the fact that when it comes to anything concerning “climate,” the Tory leadership combines cowardice, sanctimony, scientific illiteracy, and the absence of strategic vision. As it is, Shell was reportedly already unhappy with the British government’s reluctance to stand behind Cambo.
That unhappiness can be detected in the reasons given by the company for not proceeding any further. It included not only “the economic case” but the “potential for delays” (which would also have weakened the economic argument for moving ahead), delays that would be made worse by Cambo’s having been in activists’ sights for some time.
But it’s easy to suspect that something else was at play, which is of relevance here in the U.S. as well. A hint of it can be glimpsed in a Reuters report from a few weeks back:
Adam Matthews, chief responsible investment officer at Church of England Pensions Board, a shareholder which leads engagement with Shell over its energy transition strategy, welcomed [Shell’s abandoning the Cambo project].
“The message is clear to the U.K. Government (that ultimately decide[s] if the field is exploited) that companies beginning to transition will not allocate the capital to such projects,” Matthews said in a tweet.
This brings us back to the way in which fossil-fuel companies’ approach to investing in new production is now being influenced by institutional investors. In the age of ESG, Shell’s management would have known that if they had proceeded with Cambo there might have been trouble with some major shareholders. Under already-unpromising circumstances, it made sense to move on. That would not matter overmuch if this were a unique situation, but we may be moving to a state of affairs in the West (different rules apply elsewhere) where such battles may become more rule than exception.
Speaking in October, Steve Schwarzman, the chairman and CEO of Blackstone, a private-equity group with over $700 billion under management, warned where this was going.
CNN:
It’s getting harder and harder for fossil fuel companies to borrow money to fund their expensive production activities, especially in the United States. And without new production, supply won’t keep up.
“If you try and raise money to drill holes, it’s almost impossible to get that money,” Schwarzman said, adding that this is happening on an “extremely wide-scale basis.”
Perhaps tellingly, Siccar Point Energy is a private company, backed by private equity (including Blackstone), and thus, in theory, freer to ignore the politically driven demands of a burgeoning number of institutional investors active in the public markets.
As I wrote in a recent Capital Letter, such companies (and their backers)
are typically better placed to concentrate on financial return rather than political activism (and less subject to regulatory interference) [and thus] to pick up pariah assets, such as oil fields, and, incidentally, to do so at a discount price.
The thought of this infuriates ESG’s oligarchs, such as BlackRock’s Larry Fink, perhaps the most important of all those in Wall Street’s corporatist elite (as a reminder, BlackRock is the largest asset manager in the world, with nearly $10 trillion under management).
Larry Fink said too narrow a focus on the climate policies of public companies risks undermining the green agenda and is potentially creating “the largest capital-market arbitrage in our lifetimes,” as hydrocarbon assets move from public to private hands . . .
Certainly, there have been signs that this has been happening, and it has also been encouraging to see some substantial private-equity groups keeping their distance from the “greening” of much of the financial sector that is now under way. Nevertheless, a good number of them include among their clients many of the same (or similar) institutional investors that are now pushing public companies to be run for more than financial return. Such investors will be likely to exert similar pressure on the private-equity firms they have entrusted with some of their (clients’) cash. Indeed, a number of these firms are at least nodding to ESG — evaluating this, or committing to that. Hopefully these will remain purely decorative declarations and private-equity businesses will stick to their primary purpose: to make money for those whose assets they manage. But that may be to be too optimistic. If they succumb, the result will reduce the pool of available capital for nonpublic fossil-fuel companies, too — many of which, like their listed counterparts, may also be forced to cope with the growing unwillingness of banks to lend to them.
As if to emphasize the point that privately held companies may not be able to come to the rescue, Siccar Point has since announced that it is pausing development of the Cambo field, as Shell’s withdrawal means that it cannot proceed on the original timescale. This decision may relate to some of the specifics of the project (the current phase of its license will expire in just a few months), but it also is a reminder of the difficulties that smaller companies will have to overcome if they try to fill the gap left by oil and gas majors’ increasing reluctance to invest in new production under the North Sea.
Those eagerly awaiting the jobs bonanza that green new deals will supposedly bring will probably want to avoid any discussion about, according to Siccar Point, the loss of “over 1,000 [new] direct jobs as well as thousands more in the supply chain.” Many of those, of course, would have been well-paid — which is a loss that has not escaped the attention of GMB, a union representing many workers in the British energy sector. GMB has, reported The Guardian, described the pause in work on Cambo (a pause that may well be permanent) as a “surrender of the national interest” as, indeed, it is. In comments that echo others from unions elsewhere on what current climate policies might mean for their members, GMB’s general secretary paid his respects to net zero but not to the way that the transition to this glorious future is being handled: “The cheerleaders for Cambo’s shutdown aren’t just throwing energy workers under the bus, but also our security of supply for the gas we will still need on the road to 2050.”
One of those cheerleaders, Tommy Vickerstaff, a campaigner with 350.org, was thrilled by the news of the pause (“huge and brilliant news”) but went on to say that “we need to see real, concrete investment in retraining and good jobs for these workers.”
Quite where those “good jobs” will be found remains, as yet, a mystery.
A sad story, but at least, we have no need to worry that anything like this could happen in the U.S., so long, that is, as we don’t stop to think about the implications of the Keystone pipeline decision, the Biden administration’s proposals regarding oil and gas leasing on federal land, moves by the Fed to get involved in climate policy, the maneuvers of ESG-happy Wall Street oligarchs, and, well, you get the picture.
Oh yes, there’s also this (from Andy Puzder in the Wall Street Journal on December 15):
“The reality is the Biden administration is not standing in the way of increasing domestic oil production to meet today’s energy needs,” Deputy Energy Secretary David Turk asserted at the World Petroleum Congress in Houston last week. Really? He might want to check with John Kerry.
The president’s climate envoy has been pressuring banks and financial institutions to reduce their commitments to U.S. oil and gas companies and join the Net-Zero Banking Alliance, which would hobble the ability of oil and gas companies to increase production. Citi, Wells Fargo, Bank of America, Morgan Stanley, Goldman Sachs and JPMorgan Chase signed on to the alliance this year.
In the long term — or perhaps not even the long term — that’s not going to bode well for U.S. energy prices. Greenflation is coming.
Editor’s note: The following is partially based on the Capital Letter published on December 5, 2021.