Energy transition before 1914
The mews houses in picturesque London streets that now command astronomic prices once were the stables for the horses owned by the residents of nearby mansions. However, the arrival of the internal combustion engine at the start of the 20th century led to the collapse of London’s horse population within a decade.
The world’s oldest oil companies have their foundations in this energy transition from horse to engine power in the past century.
Is a century of success leading to a blind spot?
In a recent meeting with one of the largest US oil and gas majors, we made the point that it was rightly proud of the conservatism with which it runs its business: its balance sheet, capital discipline and commitment to minimising operational and project risk. But we highlighted that this conservatism could actually be its blind spot in relation to the energy transition that the global economy is facing in the next two or three decades if the world is to avoid the worst effects of climate change.
We reminded the company that the industry had done a great job after the Deepwater Horizon oil spill in the Gulf of Mexico in 2010 in reviewing, improving and above all rehearsing for possible catastrophic accidents. By doing this work, we believe that the industry as a whole has worked well to improve its risk management and operational standards. The industry accepts that this type of scenario planning is a vital part of the risk management it needs to conduct.
Climate change risk scenario planning
Scenario planning around climate change is even more important to the companies and investors in them. While no one can predict precisely how the energy transition will unfold, it is true to say that the industry needs to prepare for spectacular changes affecting it and demand for its products. Asset owners are increasingly concerned about a collapse in the value of their investments in the oil and gas industry, as the energy transition to low and zero greenhouse gas emissions gains pace and the sector potentially faces an existential threat.
While the industry is right to point out that natural gas will have a role to play in the energy mix for possibly a prolonged period, it needs to accept that the zero carbon equivalent to the change from horsepower will profoundly disrupt the business models of energy companies.
Institutional investor response to shareholder proposals on climate change
Shareholder proposals, such as those filed at Shell and BP in 2015 and this year at Exxon Mobil and Chevron, are seeking reassurance from companies that climate change scenario planning work is taking place in as much earnest as the remedial work that the industry conducted in the aftermath of the Deepwater Horizon disaster.
The energy transition may put the fossil fuel investments of institutional investors and those of their clients at risk. So what will their response to the shareholder proposals be? If they do not plan to support these resolutions, what would their rationale be? What is it in these modest proposals seeking disclosure on various possible scenarios that may take place in the energy landscape that is not helpful to them as they navigate this momentous change to the global economy? How do they otherwise obtain reassurance that the companies are beginning to plan for this momentous change? What do they think about fossil fuel exposure in their portfolios?
Those who do not vote in favour of the resolutions at US companies must publicly explain why they are not doing so, especially if they have supported more rigorous resolutions at the UK oil and gas majors. Many institutional and retail clients will want to know the answer to these questions.