Student body presidents from eight top US universities came together recently to endorse a statement on fossil fuel divestment drawn up by Harvard University’s Undergraduate Council.
The statement calls on the Ivy League universities, widely regarded as the “most powerful and privileged institutions in the world”, to commit to “climate-conscious investments” and pull their investments in fossil fuel companies by 2025.
The elitist Ivy League, otherwise known as the “ancient eight” and which also includes the likes of Princeton and Yale, contributes about $135 billion in collective endowments to the fossil fuel industry, which comprises nearly 25% of all American university endowment funds.
The first significant Ivy League move towards fossil fuel divestment happened in May last year, when the Cornell University Board of Trustees voted for a moratorium on energy investments.
The university said that instead of backing fossil fuels it would grow its $6.9bn endowment portfolio by investing in alternative energy sources.
A month prior to the Harvard statement, another Ivy League member, Columbia, announced its plan to divest from publicly-traded oil and gas companies and that it too would go green.
The Columbia portfolio has huge oil and gas content with investments in the top 200 fossil fuel companies publicly traded on Wall Street.
In the US context, this is ground-breaking stuff, but it is years behind Europe, where around half of the UK’s universities have already committed to at least partially divest from fossil fuel companies, according to People & Planet, a pressure group that has co-ordinated climate protests by students.
A year ago, under pressure from the student body and immediately prior to Cornell’s move, Oxford University unveiled plans to formally divest its endowment from the fossil fuel industry and ask its endowment managers to engage with fund managers to request evidence of net-zero carbon business plans across their portfolios.
What is significant about this is not so much the huge sums of money being pulled from fossil fuels investment into low carbon energy and climate alternatives, rather it is the smart student minds that are forcing the collective universities establishment in Europe and the US especially to dump Big Oil from their investments.
In fewer than five years, many of them will graduate into highly paid stock exchange jobs on Wall Street, London’s Square Mile, in Frankfurt and so-forth, or within leading banks, insurers and pension funds, many of which are revisiting their relationships with the petroleum industry.
Although this is an untested supposition, they could precipitate an energy transition acceleration.
That in turn might land Big Oil in a much worse place than currently anticipated, with little or no consideration for the impacts this may have on the petroleum-derived feedstocks market upon which, ironically, Big Wind and Big Solar are becoming increasingly heavily dependent for raw materials
The collective power of this pipeline of Ivy League, Oxbridge and other leading European university graduates should not be underestimated.
Big Oil is already having to fork out a premium for the money it borrows compared with windfarm developers.
The pendulum has swung a long way in the past five years, much further than had been broadly anticipated
According to analysts at Rystad, “capital expenditure for renewable energy projects is set for a new record this year”.
Spending is forecast to reach $243bn, so narrowing the gap with oil and gas capex, which is projected to be relatively flat this year at $311bn.
Last year, oil and gas capex was some $306bn, representing a massive drop on the $422bn pumped into exploration and production in 2019.
The Covid pandemic coupled with two quickfire commodity price collapses are blamed for much of the sharp drop in upstream oil and gas investment.
The investment situation in particular could be worse but for the fact that the majority of oil and gas reserves are controlled by national oil corporations.
In its 2020 energy investment report the International Energy Agency (IEA) said that the share of NOCs “in investment” remained more than 40% in 2019, though spending in the Middle East and Russia, where NOCs dominate, increased less than in other parts of the world, notably in the US and especially in shale, where private companies are more important.
The IEA said this share was higher than before the oil price collapse in 2014 as large private oil and gas companies and majors cut back spending more heavily in 2015 and 2016, a trend that has persisted throughout the Covid episode.
As for the situation today, the agency is clear that it is publicly listed and privately-owned Big Oil that have borne the brunt of capital cuts to date.
The IEA warns: “Still, some indebted and poorly performing NOCs are also being hit very hard by the current crisis, with knock-on effects on host governments that rely on oil and gas revenue to provide essential services.”
Despite their troubles, the agency reports that many majors are in fact diversifying spending into non-core areas.
Renewables and other clean energy technologies now account for up to 5% of their capital expenditure, and they are also acquiring existing non-core businesses, for example in electricity distribution, electric-vehicle charging and batteries, while stepping up research and development activity.
However, these non-core activities are not yet at a scale or level of profitability to provide much of a financial buffer in the current crisis.
Nor are they likely to yet persuade lenders to change their minds about setting borrowing premiums.
Service sector travails
In the UK, where the North Sea industry has been especially badly hammered of late, analysts at EY reported last month that “challenging market conditions, debt and equity investors have forced greater capital discipline on operators (and contractors)”.
“We expect this to continue in 2021, with companies focused on lowering their debt levels, reducing their asset intensity and remaining highly focused on returns and free cash flow generation,” EY said.
“Throughout the pandemic, companies have benefited from support from government, lenders and other financial stakeholders, which has provided protection for many against the economic challenges brought on by the pandemic and oil price fall.
“As a result, corporate insolvencies in 2020 have been below typical levels seen even in normal economic conditions.
“However, unless there are further extensions, repayment of the financial support put in place during the pandemic is likely to commence during 2021, just as businesses experience the working capital stretches typically seen as market downturns ease and companies strive for growth.
“These challenges, when coupled with the uncertain shape of the sector’s recovery from the pandemic, the lasting challenges from the previous oil price decline and the increased focus on environmental, social and governmental risks, are likely to result in lenders increasingly taking a more conservative approach to lending to existing and new customers.”
Taking a global view of the supply chain, Rystad said: “After a lamentable 2020, the financial results of some companies suggest more needs to be done.”
It compared the revenues of 170 listed suppliers exposed to the upstream oil and gas, wind and solar markets. Its analysis revealed that while oil and gas-focused businesses on average saw revenue drop 23% in 2020 from the previous year, wind and solar PV-focused businesses enjoyed an 18% growth in sales.
“Quarterly revenue for service companies exposed to the upstream sector has seen a massive deterioration, with fourth-quarter revenue last year slumping 25% from a year earlier amid a lack of new contracts and slow execution of backlog work,” Rystad said.
“Revenue from well services and seismic segments fell last year by 35% from 2019 levels, while drilling tools revenue shrank 25%.”
Speed of transformation amazing
Graeme Sword, founder of UK private equity investor Blue Water Energy, has huge experience of the North Sea oil and gas supply chain and had read the transition runes long before many others.
“We came into 2020 pre-Covid with an overall portfolio already in transition,” Sword said.
“Fund one covering investment 2013 to 2017 then derived about 85% of its revenue from upstream oil and gas activity, while fund two covering investments made since 2018, stood at around 50% upstream.”
Under the original Blue Water strategy developed over a decade ago, the focus was already stated as being energy rather than just oil and gas.
“With people looking for cheap energy first and foremost, that pushed us down the hydrocarbon route,” Sword said.
“Today, though opportunities remain in oil and gas production, the bar is undoubtedly much higher with fewer sources of capital prepared to engage.
“The biggest change is under way in oilfield services, which has broadly now become energy services. Oilfield storage and logistics has become energy storage and logistics and which also encompasses batteries.
“We came through the third and fourth oil downturns pretty well. We had 23 portfolio companies, two of which breached bank covenants and where we needed to put in a small amount of equity to repair their balance sheets.
“But our issue was, those companies don’t have liquidity concerns, they’ve survived the downturns, how are they going to create equity value?
“The conclusion was that there had to be more consolidation within the supply-chain so where we’ve been busy is trying to identify combinations with the potential to deliver more value through having greater scale.
“That removes some of the risk and gives a broader service, customer or geographic offering.
“So we’ve been pursuing a fleet of acquisitions. But like everyone else investing in the energy sector, we’re amazed at the speed with which this transformation is now happening. It’s remarkable.”
The situation for low carbon is certainly highly positive compared to Big Oil, with both state-owned and public energy companies benefiting greatly from markets now increasingly disposed towards offering better borrowing terms, coupled with a variety of different fiscal and other support stimuli offered by countries now investing heavily in low carbon projects, especially wind.
That said and according to Imperial College research commissioned by the IEA last year, notwithstanding the enormous advances in the cost-competitiveness of renewables over the past decade, investments in clean energy are still falling short of the level needed to put the world’s energy system on a sustainable path.
This is despite the fact that renewable power generation capacity has risen more than 8% per annum over the past 10 years, or that McKinsey estimates that around $1.6 trillion of renewable power investments will be made available to institutional investors by 2030.
And there’s something else. Charles Donovan, director of Imperial’s Centre for Climate Finance and Investment, warned in June that while renewable power is outperforming financially, it had still not attracted sizable support from listed equity investors.
“Our analysis demonstrates the challenges to investors of accessing, from a listed markets perspective, the growth potential of the renewable power sector,” Donovan said.
“Existing norms in the investment industry will have to change to provide savers and pensioners with better ways to participate in the upsides from a clean energy transition.”
Which rather begs the question as to how sound the collective research, thinking and decision-making made thus far by the Ivy League and at Oxford actually is.
That said, North Sea Big Wind is clearly booming. The UK patch is a marketplace that is especially lively and about to get even busier.
It could even overheat, judging by the keen competition reported for the Round Four licences being offered off England and Wales and which represent just under 8GW of potential new offshore wind generating capacity.
Such was the interest shown that it precipitated Crown Estate Scotland into a rapid review of its current ScotWind Round bidding terms for fear of losing out on licence bid revenues.
Moreover, on March 25, the UK’s Offshore Wind Industry Council (OWIC) forecast over 69,000 jobs and £60bn of private investment in domestic offshore wind by 2026. The industry apparently accounts for 26,000 direct and indirect jobs today.
However, such numbers fall a very long way short of the 400,000 people accounted for directly and indirectly by the UK’s offshore oil and gas industry 20 years ago.
And the prediction remains well short of the current total which is still likely to be well north of 200,000 despite the ravages of Covid and the two back-to-back downturns. The 2019 tally was 269,000.
We conclude with an intriguing warning from Imperial and which is buried deep within its report: “The renewable power portfolio is not a perfect substitute for the fossil fuel portfolio. Coal, oil and natural gas companies operate in different parts of the energy value chain, often with only a loose relationship to the power sector.”
It suggests that those who would wish to shut down Big Oil tomorrow, or unreasonably view it as an investment risk to which a costly premium should be applied perhaps need to reflect very carefully before making further decisions.
Such a practice could even damage the hugely important transition role which the North Sea oil and gas industry is now gearing up for and which the UK Government has finally recognised through the just confirmed transition deal.
