Impact of climate change on the oil industry

Climate change is a major influence on behaviour for many investors, and oil companies are adapting to ESG – environmental, social, governance – considerations. interactive investor’s Lee Wild asks Panmure Gordon’s oil & gas analyst Ashley Kelty how he sees this playing out over the next 5, 10, 20 years.

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Lee Wild, head of equity strategy at interactive investor:Hello. With me today I have Ashley Kelty, director and oil & gas research analyst at Panmure Gordon. Hi Ashley.

Ashley Kelty, director and oil & gas research analyst at Panmure Gordon:Hi, how are you?

Lee Wild: Very well. Ashley, climate change is a major influence on behaviour for many investors now and oil companies are adapting to ESG - environmental, social and governance considerations - so how do you see this playing out over the next five, 10, 20 years?

Ashley Kelty: I think the key is that there is a growing understanding of the energy transition and what is actually needed. I think ESG has certainly been important for a number of years, and I think the oil sector has been a bit slow in reacting to that. I think they have been on the back foot a bit in the past.

However, I think COP26 was key in making people recognise that this was not an overnight fix and that renewables are not the instant panacea that people thought. And this was demonstrated last winter by the fact that prices rose so much. If renewables had been able to meet that, you would have seen prices remain low.

But it’s quite difficult. I mean I think we need to remember that the energy crisis that we’ve had is actually a consequence of the huge move into ESG a number of years ago and people not understanding the ramifications of that. An example of that would have been the likes of BlackRock, major institutions telling major oil companies such as Shell (LSE:SHEL) and BP (LSE:BP.), not to invest in new projects and to undertake returns to shareholders or share buy backs, which those companies duly did.

However, then when we saw a crisis such as Ukraine and everyone wanted BP and Shell to deliver more fuel. They couldn’t because these projects take a number of years. It will take five years to get all of the projects that would have received funding in the past and now we’re sort of seeing the impact of under-investment for a number of years.

However, investors seem to understand the energy transition. They are looking at the transition fuels, so certainly gas is I think attracting a premium because that is recognised as being the key transition fuel.

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And there is also the understanding that renewables, while they do make a sizeable contribution to the energy mix, are not sufficient at this current time, to replace oil and gas.

And then another element which is less well understood is the ‘just transition’ and that I think largely focuses around the removal of oil and gas from the market and, if we stop using oil and gas, this does ultimately condemn a large number of African nations to perpetual poverty. So the just transition would allow for these countries to develop their economies to the point where they can start investing in renewables by using their natural resources that they have.

And this is, I think is garnering a bit more attention now and people are looking at which countries and companies and where they’re operating and how this actually impacts on both the wider energy transition and also the just transition.

But I think it’s worth recognising that the energy transition will take decades and to achieve it, it will require the usage of oil and gas for many years. And the only way to accelerate this is through a massive behavioural shift as the technology is not moving fast enough, at present, to meet the needs of the likes of the survey eco lobby.

And I think the behavioural shift required would mean no more foreign holidays, no flights, not using cars, having cold houses and I don’t think that that is achievable. I think last winter people realised that having a cold house is not much fun, and I don’t think people are willing to forego things such as holidays and so forth just to meet the needs of the energy transition, at least certainly not in the short term. 

Lee Wild: Great. Ashley Kelty, director and oil & gas research analyst at Panmure Gordon, thanks very much for joining me today.

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