A few days ahead of the 5th anniversary of the Paris Agreement, 18 NGOs released Five Years Lost – How Finance is Blowing the Carbon Budget. The report highlights 12 of the most devastating fossil fuel projects that are either on the drawing board or under development. “These expansion projects alone would use up three-quarters of the total remaining carbon budget if we are to have a 66% probability of limiting global warming to 1.5° Celsius,” says the report. And yet, against this backdrop of fossil fuel expansion, there are signs that investors are slowly backing away from fossils as outlined in the following piece first published in Yale Climate Connection.
Are Investors Backing Away from Fossils?
Even as Earth’s climate has warmed, years of lackluster profits have cooled the investment climate for oil and gas producers.
While climate advocates have long had science on their side, Big Oil has relied on leveraging its financial might and political clout to cast doubt on the practicality of moving the global economy away from fossil fuels and toward a more sustainable path of renewable energy. But that financial might has been eroding for a decade, and in 2020 it took its biggest hit yet.
As the coronavirus pandemic prompted lockdowns, work-from-home arrangements, and curbs on travel and recreation, fuel demand tanked and oil prices collapsed. Traditional energy companies suffered staggering losses and their stock prices slid. Producers walked away from exploration and drilling projects, and banks and portfolio managers looked elsewhere for sound investments.
The traditional energy industry has been the worst-performing sector on Wall Street for a decade even before the pandemic hit. In 2020, its backslide was historic. The Energy Select Sector SPDR Fund, whose holdings include ExxonMobil and Chevron, lost more than 50 percent between January and October. By some measures, Big Oil’s downturn, compared to the broader market, was the worst performance of any sector going back to before the Great Depression.
Financial hits are coming from several directions at once, with investment firm Goldman Sachs deciding for the first time to allocate more toward renewables than fossil fuels; automakers following the lead of Tesla and pouring money into developing electric vehicle technology to replace internal combustion engines; and the prices of solar and wind coming down as improvements in batteries and storage technology make them ever more practical.
As more movers and shakers begin to agree with climate advocates for financial as well as environmental reasons, a permanent shift within the energy industry seems to be taking shape.
Financial support from banks is waning
Hopes for climate action are most commonly pinned on election outcomes and public policy successes, but investment banks and fund managers are growing more wary of fossil fuels after pumping more than $2.7 trillion into financing fossil fuel, exploration, production, and infrastructure in the five years since the signing of the Paris Climate Agreement, according to data compiled by the Rainforest Action Network and other advocacy organizations.
Financial support for fossil fuel projects has waned for both environmental and financial reasons. The return on investment of carbon-intensive fuels is no longer the guarantee it once was.
The six largest banks in the U.S. have publicly stated they will not back oil and gas exploration in the Arctic. In December 2019, Goldman Sachs was the first major American bank to announce such a decision, as it also backed away from any new thermal coal mines worldwide.
Morgan Stanley, JP Morgan Chase, Wells Fargo, and Citi all followed suit. Bank of America was the holdout among major U.S. banks, until mounting pressure from indigenous groups, environmental advocates, and shareholders prompted it to announce in early December that it too will withhold funding for Arctic drilling projects.
These commitments apply not only to the wildlife refuge but anywhere in the Arctic, illustrating how market pressures can make an end-run around energy policy. Without financing from investment banks, new infrastructure projects are unlikely to get off the ground.
Worldwide, 66 financial institutions and insurance companies have formally decided to eliminate or significantly reduce their financial support for oil and gas drilling, and 131 companies are divesting from coal mining and/or coal-fired power plants. The tallies are maintained by the Institute for Energy Economics and Financial Analysis.
Looking forward into 2021, Goldman Sachs forecasts that renewable energy will become its largest area of investment within the energy industry, surpassing oil and gas for the first time in the company’s history. It is not an altruistic move: Fossil fuel projects are viewed as high financial risks, making the cost of borrowing money to finance hydrocarbon infrastructure around four times larger than the cost of capital for clean energy projects.
Oil company stocks flounder
Shares of ExxonMobil have lost 47% of their value in the past five years. Over that same time span the S&P 500 has gained 84%. These crippling losses once seemed unthinkable for this titan of industry, but in 2020 alone, the company’s market value withered from $300 billion to $176 billion.
ExxonMobil’s poor performance led to the company’s being dropped from the Dow Jones Industrial Average last summer. The company had been part of the index since 1928 and was the oldest stock among the index of 30 large American corporations.
The story repeats itself across the oil, gas, and coal industries. BP, Shell, Conoco Philips, and Marathon Oil have all netted double-digit losses in their stock prices since 2016. Chevron remains the best performer with a mere 6% loss over five years.
Coal companies have returned even less to investors. The stock price of Peabody Energy fell by 91% since 2017. In November of last year, the company announced major cuts in health care and life insurance benefits for its retirees, after determining those programs were “not sustainable.”
Cutting costs and cutting jobs
ExxonMobil, the largest energy company in the U.S., recently announced that the company is walking away from natural gas projects in the Appalachian and Rocky Mountains, Oklahoma, Texas, Louisiana, Arkansas, western Canada, and Argentina. In a press release, Exxon Mobil euphemistically characterized these projects as “less strategic assets,” acknowledging the value of these ventures is $17 to $20 billion less than previous estimates. In other words – these gas plays are classic examples of stranded assets.
With reduced oil prices, ExxonMobil revised its plans to spend $33 billion in capital expenditures in 2020, lowering that to $23 billion while pulling back on projects in Africa and the Permian Basin. Sharp reductions in spending will continue into 2021, with only $16 to $19 billion of capital spending planned, potentially cutting the company’s capital development projects by up to 50% in just two years. These reductions in capital spending will slow exploration, postpone the development of new oil and gas fields, and put other long-term projects on the back burner.
ExxonMobil also plans to shrink its global workforce by 15%, which translates to 14,000 jobs. The layoffs, described by the company as “efficiencies,” could make it harder for opponents of renewable energy to argue credibly that a green economy is a job killer, suggesting that Big Oil no longer necessarily equates to Big Jobs.
Exxon’s losses add to the growing pool of red ink among oil majors in 2020. Shell lowered its valuation by $23 billion, BP by $15 billion, and Chevron by $5.7 billion. Across the industry, these “write downs” have surpassed $100 billion since the end of 2019.
Analysts point out that oil companies are facing challenges from multiple directions. The world is beginning to shift away from fossil fuels, and continuing prospects down the road for a carbon tax makes the future of the industry uncertain. Furthermore, oil prices are low, making sales less profitable. At the start of 2020, the price of oil had fallen by more than half from the 2008 peak of $166 per barrel, and a price war led to overproduction and a glut of supply. The worldwide pandemic gutted demand and temporarily rendered oil worthless. Oil prices recovered somewhat through late 2020, but a barrel of oil was worth 21% less at the close of 2020 than it was at the start.
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