The oil and gas industry today faces many tests and trials. With low commodity prices, reduced demand, changing geopolitical alignment, climate change challenges, regulatory uncertainty, investor rejection of fossil energy, decarbonization, Environmental, Social, Governance (ESG), and everything associated with the “energy transition,” many are asking how the industry will meet the daunting challenges of our time.
These threats are often described as existential, and for many companies, they will be. However, the reality is we will continue to need oil and gas for decades into the future. That said, given increasing regulatory, social and investment pressure on carbon content, emissions, and other ESG factors, the most successful energy companies of the future will be the ones that financially succeed in the low-carbon world of the energy transition.
There are two fundamental questions regarding the oil and gas industry’s ability to meet the energy challenge, and they both involve finance. Technologies already exist that can significantly mitigate greenhouse gas (GHG) emissions from fossil energy production, yet the technologies require large capital investments in a sector that is already experiencing low margins and low commodity prices and utilizing a large and often aging energy complex and infrastructure. Thus, the fundamental question for the United States and the rest of the developed world is how to pay for the needed investments and obtain an attractive return.
For the developing world, the challenges are even more daunting. Populations are massive and growing, with many having little or no access to electricity. The existing energy portfolio tends to be high-carbon and heavily reliant on coal and the direct burning of biomass. Transmission infrastructure is scarce; credit is poor, corruption is high and political instability rampant. Therefore, a fundamental question for non-developed countries is how to modernize their electricity infrastructure in a low-carbon manner that provides reliable and affordable energy.
Some wonder why we concern ourselves so much with the emerging world. In that regard, it is important to remember that if we flipped a switch tomorrow and made the developed world zero-carbon, it would have little impact on future global greenhouse gas emissions. Driven by their growth and need for power, as demonstrated in the chart below, the emerging world — India, China, Southeast Asia, Africa and Latin America — is rapidly increasing its GHG emissions. Specifically, the number of coal-fired power plants in the emerging world is increasing on a massive scale. Vietnam alone has more than 50 new coal-fired power plants in the works.
Imagine if we could reduce greenhouse gas emissions, decarbonize and embark on a sustainable energy transition by focusing on eliminating flaring and methane emissions, ramping up carbon capture usage and storage projects, decommissioning and plugging old wells and idle iron, bringing LNG to the developing world to replace current and planned coal projects, and increasing hydrogen use. These things can be done with current technology, and all are economically feasible with the right financing mechanisms and incentives and capital, and all present sustainable solutions that could provide the biggest return on investment.
Green financing is a particularly effective tool to decarbonize the current energy complex to address greenhouse gas emissions and climate change. While many of the currently financed projects are important and make us feel good, positively impacting the planet will require green investments that include a focus on the fossil energy sector.
While climate change factors have put severe pressure on the oil and gas sector, especially when it comes to investment capital, trillions of dollars in investment capital are available in funds to support green projects, sustainability, and ESG goals. The investment tenet of ESG investment funds reflects a growing investor demand to deploy capital with long-term horizons mirrored with sustainability objectives. ESG investment funds target investments to companies with certain ESG performance standards, while green funds are investment vehicles that specifically only invest in companies that promote environmental responsibility or meet defined environmental criteria and long-term objectives.
Green bonds, another investment tool, are fixed-income instruments designed to raise money for climate and environmental projects and are backed by the issuer’s balance sheet, with credit ratings linked to the issuer’s ability to meet defined ESG benchmarks.
The value of global asset managers applying ESG data to drive investment decisions has almost doubled over four years and more than tripled over eight years to $40.5 trillion in 2020, according to Pensions & Investments Magazine, and in 2019 the number of green bonds issued worldwide nearly doubled to 479. A report by the Climate Bonds Initiative identifies $1.45 trillion in climate-aligned bonds currently outstanding that have been issued since 2005 and estimates that $350 billion in green bonds will be issued by the end of 2020. In short, there is a substantial supply of available capital.
Traditionally, green finance tends to focus on direct projects such as renewable energy, battery storage, sustainable agriculture, and fisheries management. However, to make progress with the energy transition, some of these funds must be directed toward oil and gas industry-related projects. Projects in the United States can focus on reducing emissions and flaring, plugging abandoned wells, performing carbon capture and storage, and increasing efficiency in the field, helping America produce the cleanest oil and gas in the world. Certification and global marketing of U.S. oil and gas as clean would further aid the energy transition. ESG performance by oil and gas producers can further verify performance and enhance the value of U.S. energy commodities. Further downstream, U.S. refineries and chemical plants, using green financing tools, could take important steps to reduce GHG emissions and increase efficiencies and environmental performance. New opportunities like hydrogen could be part of the mix as well.
As the cleanest oil and gas producer in the world, the United States is positioned to provide the world with plentiful clean energy through LNG exports. The opportunity is underscored by the fact that electricity and heat production constitute the largest source of GHG emissions, at 25% of all emissions, with coal comprising about 40% of global electricity generation and coal-fired electricity on the rise in China, India and Indonesia, the three largest countries in Asia.
Sustainable investors keen on investing in projects and activities that reduce GHG emissions are no doubt evaluating opportunities to invest in bringing the cleanest LNG to the developing world. Green funds and green bonds can play a role in making this happen, as can development banks like the World Bank and the U.S. International Development Finance Corporation.
Recent developments have highlighted this approach. For example, in 2017, Repsol became the first major fossil fuel company to utilize green bonds to reduce GHG emissions. It received 500 million euros through a bond issuance that funded upgrades at its refinery and chemical facilities in Spain and Portugal, resulting in increased efficiency and lowered GHG emissions using innovative technologies. Repsol applied an integrated ESG approach to its operations, and a Green Bond committee oversaw the project and selected the funded activities. Such projects can be repeated in the United States and globally.
An energy system built on natural gas, renewable energy, and hydrogen facilities can help meet future energy needs and support the retirement of existing coal-fired plants when feasible. The United States has the gas supply, LNG facilities and renewable energy technology to make this vision a reality. The combination of green financing, U.S. technology, and clean natural gas can help build and support the LNG regasification, pipeline and electricity infrastructure at the demand sources needed to make it happen.
About the Authors: Jack Belcher joins Cornerstone in 2019 with over 25 years of experience in energy and energy policy. As senior vice president of Cornerstone Energy Solutions, he provides strategic and tactical advice to energy and transportation companies and financial institutions, focusing on government relations, regulatory affairs, public policy, strategic communications, situational risk management, and Environmental, Social, and Governance (ESG) performance. Jack also serves as managing director of the National Ocean Policy Coalition.
Brent Greenfield serves as Vice President and Counsel at Cornerstone Energy Solutions. He provides clients with strategic policy and management guidance, research, analysis and communications support across the upstream, midstream, and downstream segments of the energy industry. In addition, Brent serves as executive director of the National Ocean Policy Coalition, an organization of members representing sectors including energy, fishing, waterborne transportation, construction, agriculture, and critical infrastructure.