Fossils Must Face Their Future as a ‘Declining Industry’, Investment Execs Assert
Oil and gas must prepare to “face its future as a declining industry” and leave it to finance and investment professionals to allocate the US$29 trillion that will be needed by 2050 to decarbonize the global energy system, two senior investment executives argue in a recent post for the Financial Times.
Capital investment markets, in turn, will need the policy certainty to get on with the job, write Chief Investment Officer Anton Eser and fund manager Nick Stansbury of Legal & General Investment Management (LGIM), an arm of the UK’s Legal & General insurance company.
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“Whilst the 2015 climate agreement in Paris offers some help, we still lack clear policy signals on what the long-term price for carbon is going to be, and when there will be an effective mechanism to implement it,” they write. “Without this certainty, pricing carbon risks and opportunities is going to remain highly complex.”
While the biggest challenges facing oil and gas are “a reasonable distance in the future”, Eser and Stansbury say the industry will no longer be able to rely on growing demand and production declines in mature oilfields to keep global markets in balance. Peak demand, in particular, is on the way, and “will have a big, and under-appreciated, destabilizing effect” when it arrives.
That leaves two choices for oil and gas companies—trying to reinvent themselves as renewable energy businesses, or beginning to ramp down their investments and return more cash to shareholders. But the two analysts declare themselves skeptical that fossils can make the transition to the renewable energy sector.
“The business models are very different, and the oil industry is likely to have a different cost of capital to the renewable sector,” the write. “We see few oil companies with a record of creating real shareholder value in this area.”
In that light, they see the second option as more promising. “The time to stop investing is not today,” they write, “but that point is coming. The industry needs to be clear that its future is one of long-term decline—whilst returning increasing sums of cash to investors. There is a possibility that the industry over-invests as we reach that point of peak demand, leaving an oversupply that persists for a long time. Fighting for market share in a declining market would be even worse.”
To maintain a place with the growing number of investment funds that emphasize environmental, social, and particularly climate strategies, Eser and Stansbury say oil and gas companies will have to “articulate a much clearer long-term strategy and the role they have to play in the energy transition.” More realistically, they say fossils can play a “positive part” as a “cash-generating engine that can be used to power the transition when the time comes, and we urge the industry to make a clear commitment to this future.”