What do they really mean?

We all suffer from miscommunication from time to time. Sometimes it is by accident and sometimes it is intentional. Nick Butler writes a good blog in the Financial Times about how to prepare ourselves when business speaks at the upcoming global climate change conference in Paris.

 

How to bridge the rhetoric gap

In a month’s time world leaders will gather in Paris and make solemn commitments to achieve radical reductions in carbon emissions over the next two decades.

What does that mean for existing energy businesses whose products generate those emissions? Are they entering their final phase as viable companies as the world slowly begins to decarbonise? Will the reserves they hold end up stranded and left unusable in the ground? Or will they dismiss the commitments as political rhetoric and carry on as normal?

Contrary to most of the noise from the campaign groups, there are now very few climate deniers left in the industry. Many will say that the science remains uncertain and provisional but most would say that the broad promises to be made in Paris are inadequate to meet the stated goals. Almost none will claim that climate change is anything other than a real and serious risk and that precautionary action is necessary. Most, after all, are engineers and scientists who can read the evidence in detail.

Strategically most of the companies are playing for time. Decarbonisation on this view will be a very long term process, especially in the absence of a carbon price that is sufficient to change behaviour. In the meantime, which amounts to at least the next 40 years, oil, gas and coal will still be needed in increasing volumes.

The latest projections from the International Energy Agency suggest that in 2040, even on positive assumptions, the world will still depend on hydrocarbons for 74 per cent of its total energy needs. In those circumstances there is still much business to be done.

Assets will only be stranded by either high production costs, which make them uneconomic, or if development is ruled out by regulation — which is the case for the huge volumes of shale gas and tight oil that exist in France.

Almost every company has a few stranded assets in its portfolio. But in a sector where technology continues to reduce development costs, few believe that any significant proportion of their reserves base will be undeveloped.

That view is entirely accurate. But this strategic approach, while understandable, does sit uneasily with companies’ statements of belief about climate change. To many, they appear to be walking and talking in different directions.

The rhetoric about stranded assets worries some investors. The companies themselves, while accustomed to being unpopular, will be concerned that the focus of climate lobbying will turn further against them.

Corporate executives are paid to have thick skins. But they also have families, and sustained attacks by a coalition that now ranges from the Pope and Hillary Clinton to activist and sometimes violent campaign groups are not fun.

What, then, can be done? Can anyone match the walk and the talk? The logic is that one or more will now differentiate themselves by adopting an approach that takes them, to coin a phrase, “beyond petroleum”.

There is now sufficient progress on costs and technology to justify the creation of some large global renewables businesses centred on wind and solar. Solar in particular has seen dramatic reductions in costs in the past two years. There are also possibilities to create business opportunities out of improvements in efficiency and energy management. To that base can be added a strong research component focused on areas such as advanced materials and storage technology.

The companies have the advantage of steady cash flow from existing business and global market reach. If they lack the technology and the specialist research capabilities, they have the capital to buy them in.

So, rather than waiting for politicians to define the future, the companies will take the initiative and define it for themselves. So far the climate change debate has focused overwhelming on public policy. Now the moment seems right for the private sector to take up the reins.

Such a transition would not satisfy the campaigners, or produce an instant transformation of the energy market. But it could demonstrate — again — that when faced with apparently insurmountable challenges such as war or expropriation, the energy business survives and thrives through adaptation.

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