Amid a pandemic and an unfolding global energy transition, the U.S. oil and natural gas industry today is facing some of the most daunting challenges in its history. Low commodity prices led by COVID-related demand destruction, OPEC instability, dwindling availability of investment and operating capital, and increasing regulatory and operating pressures are among the primary factors that are driving up costs and further eroding profit margins for an industry whose 21st century achievements enabled the United States to become energy self-sufficient.
Looking ahead, continued investments in innovative technological solutions will be even more timely and critical in order to successfully emerge from the current crisis and meet the sustainability expectations that are increasingly being required by investors, governments, and the public alike. To that end, in recent months there have been many discussions in corporate boardrooms about committing to environmental solutions such as investing in carbon capture use and storage, offering certified green natural gas, eliminating flaring, recycling water, and pursuing hydrogen-based solutions. While sustainable development solutions are varied, however, they are not without costs. With the energy sector already facing massive budget cuts, restructuring, and widespread layoffs, many rightly ask how such forward-looking solutions can be paid for.
As the global push for sustainable development has gained momentum in recent years, investment dollars have been significantly reallocating away from fossil energy in favor of solar, wind, and biofuel portfolios, socially responsible funds, and green funds.
Regarding the latter two alternatives, the investment tenet of Environmental, Social, and Governance (ESG) investment funds reflects a growing investor demand to deploy capital with long-term horizons mirrored with sustainability objectives. ESG investment funds target investments to companies with certain ESG performance standards, while green funds are investment vehicles that specifically only invest in companies that promote environmental responsibility or meet defined environmental criteria and long-term objectives. Green bonds are fixed-income instruments that are designed to raise money for climate and environmental projects, and are backed by the issuer’s balance sheet, with credit ratings linked to the issuer’s ability to meet defined ESG benchmarks.
The value of global assets applying ESG data to drive investment decisions has almost doubled over four years, and more than tripled over eight years, to $40.5 trillion in 2020, according to Pensions & Investments magazine, and in 2019 the number of green bonds issued worldwide doubled to 479 or nearly double the previous year. A report by the Climate Bonds Initiative identifies $1.45 trillion climate-aligned bonds currently outstanding that have been issued since 2005 and estimates that $350 billion in green bonds will be issued by the end of 2020.
Green finance tends to focus on direct projects such as renewable energy, battery storage, sustainable agriculture, fisheries management, and in projects such as retrofitting a refining process to address carbon capture and implementing a grey water system. Interestingly enough, the projects that could have the biggest impact on climate are those that involve fossil energy.
Imagine if we could reduce greenhouse gas emissions, decarbonize, and embark on a sustainable energy transition by focusing on eliminating flaring and methane emissions, ramping up carbon capture usage and storage projects, decommissioning and plugging all the old wells and idle iron, bringing LNG to the developing world to replace current and planned coal projects, and increasing hydrogen use. All of these things can be done with current technology, are all economically feasible with the right financing mechanisms and incentives, and all present the sustainable investment solutions that could provide the biggest bang for the buck. What is needed, however, is the investment capital.
Green financing, applied to decarbonize the current energy complex, is by far the most effective way to address greenhouse gas emissions and climate change. While many of the currently financed projects are important and make us feel good about the world, positively impacting planet earth will require that green investments include a focus on the fossil energy sector.
If a switch were flipped tomorrow that made North America and Europe net zero carbon emitters, it would have little impact on global greenhouse gas emissions. That is because the emerging world, India, China, Southeast Asia, Africa, and Latin America are all rapidly increasing their GHG emissions. Driven by their growth and need for power, the number of coal-fired power plants in the emerging world is actually increasing – not by a little, but by a lot. Vietnam alone has over 50 coal-fired power plants on the books. Natural gas is the key to ensuring more sustainable growth in the emerging world because it will enable wind and solar power underpinned by a secure and clean gas baseload.
An energy grid built on gas-fired plants, renewable energy, and hydrogen facilities can meet future energy needs and support the retirement of existing coal-fired plants when feasible. The United States has the gas supply, LNG facilities, and renewable energy technology to make this vision a reality. What is needed is the infrastructure LNG regasification, pipelines, and transmission and power plant infrastructure at the source of demand. This is the blueprint for the future.
Utilizing green financing instruments, including green bonds, to fund solutions to decarbonize oil and gas operations globally and replace coal-fired generation in the developing world with natural gas-fired generation, renewables, and hydrogen will give investors the opportunity to fund those activities that have the most significant impact on reducing greenhouse gas emissions. The technology, know-how, and financing instruments to make it happen are already in place. All we have to do now is act.
Brent Greenfield contributed to this article.
Jack Belcher is a principal of Cornerstone Government Affairs’ Advisory Services and advises energy, transportation and financial services clients on government relations, regulatory affairs, risk management, ESG management, coalition building and stakeholder relations. He is also managing director of the National Ocean Policy Coalition.
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