KUALA LUMPUR (June 25): With the growing emphasis being put upon the oil and gas (O&G) industry to ensure a low-carbon future, experts believe O&G companies may be hit with financial pressure, sooner than many have forecasted.
In a panel discussion at the Asia Oil & Gas Conference 2019 today, panelists pointed to disruptive forces and megatrends that continue to alter the industry landscape, despite the continuing dominance of fossil fuels in the energy mix. More specifically, during the panel session entitled “Towards a Sustainable Energy Future”, the panelists discussed how climate risk poses financial risk to investors within the O&G industry.
Senior reporter and analyst for Energy Intelligence, Philippe Roos, said energy transition — where the industry is moving away from conventional fossil fuels to renewable energy — is already happening, although still in its preliminary phase.
“There are a number of signs that show it (energy transition). For example, there is the penetration of renewable energy, as well as the penetration of EVs (electric vehicles) in many countries in the world,” he said.
Roos predicted that by the year 2100, 100% of the world’s energy needs will be sourced from renewable energy. He said the leading energy by that time will most probably be solar energy.
“I’m pretty confident about this prediction; I just don’t know for sure [as to] how will we get there,” he said.
In parallel with the prediction, Roos said O&G companies will start to feel financial pressure, i.e. the impact on share price, availability of capital, and difficulty to obtain financial services, even before the industry’s market share is eroded.
“One could say that O&G companies will feel the financial pressure. when its market share starts to get substantially smaller. And that’s after its demand has peaked — say after 2040 or 2050 — until then, everything’s fine, financially speaking.
“But that’s not how financial markets and financial institutions behave. They will probably start to revisit the perception they have of the industry, not when its market share gets lower, but when its growth rate gets smaller,” he explained.
Ross said the energy sector has in fact already seen this happening. Case in point; the coal industry in the US.
“We saw that happening in the US coal industry, which still exists — coal is still mined in the US, and it is still burned in power plants — but financially, the US coal industry has collapsed. Many of the companies went through bankruptcy,” he said.
“Investors and bankers are starting to realise that climate risk is a serious financial risk, and it is also an unpriced financial risk. And they may want, at some point, to reprice their assets. They will reprice their loans accordingly to avoid being caught by surprise, when all this happens,” Roos added.
Another panelist, vice president of IHS Markit Energy-Wide Perspectives Susan Farrell, said there is a great deal of financial risk that is associated with climate change that has not been made transparent to investors.
She pointed to a report by the Task Force on Climate-related Financial Disclosures (TCFD), set up by the G20’s Financial Stability Board, which revealed companies were failing to disclose sufficient detail about how exposed they are to the potential risks of climate change.
In the report, many investors have called on companies to provide better communication on how climate change could impact their businesses, amid concerns assets are being mispriced, because the full scale of the risk is not being factored in.
“The financial stakeholders will want more transparency, because they want to understand whether the company is going to be competitive or not. They want to see growth and returns, and how does the company achieve that,” Farrell, who is also IHS Markit’s head of Global Energy Scenarios, Energy Transition and Executive Briefing services, said.
“For companies that cannot self-fund, capital availability is a real concern,” she added.
“Yes, it is starting to become an issue for mostly European international financial institutions, but it is also spreading all over the world,” Roos chimed in.