Category: Oil & Gas

California public utility P.G.& E. filing for bankruptcy protection should be a wakeup call to corporates and investors on climate risk

California public utility P.G.& E. filing for bankruptcy protection should be a wakeup call to corporates and investors on climate risk

By Will Bugler

Last year the Intergovernmental Panel on Climate Change (IPCC) issued a report that outlined the potential impacts of climate change should temperatures rise to 1.5˚C above pre-industrial levels. The report surprised some by highlighting many serious risks even if the world meets this highly ambitious target. Last month, the World Economic Forum’s 2019 Global Risk Report listed the two most severe risks to global economic stability as extreme weather events, and the failure of climate change mitigation and adaptation.

If these warnings were too abstract for governments, corporations and investors to take note, then it did not take long for a real-world case-study to emerge. Just days after the Global Risk Report was released, Pacific Gas and Electric (P.G. & E.) announced that it was filing for bankruptcy protection. The California-based utility company faced huge liabilities resulting from two successive seasons of devastating wildfires that burned large swathes of the state in 2017 and 2018.

The utility company said that it is facing as much as US$ 30 billion in liabilities as its equipment is said to have been the cause of over one thousand separate wildfires across the state. The fires, of course, were exacerbated by the extreme heat and tinder-dry conditions made more likely due to climate change.

Foreseeable risks

However, the company’s protestations about its role in the fires is unlikely to get them off the hook for the damage. During a hearing in January, federal judge William Alsup, pointed to the scale of the damage saying “in two years, three per cent of California burned up” and adding “P.G. & E. is not the only source of these fires, but it is a source, and to most of us it’s unthinkable that a public utility is causing that type of damage.”

Alsup also pointed out that P.G. & E. had failed to take sufficient action to prevent its equipment causing fires, despite paying US$4.5 billion in dividends to shareholders in the last five years. The clear implication of this is that the risks posed by climate change are reasonably foreseeable, and therefore companies have a duty to act.

The implications of this are wide ranging. Public utilities are put in a very difficult position, as they have a high level of exposure to climate risks and have legal duties to supply homes in remote areas, where risks are highest. The ratings agency Standard & Poor’s said that a second electric utility in California could well face a devastating wildfire this year and therefore it could lower the credit ratings of the other two major investor-owned utilities in the state, Southern California Edison and San Diego Gas & Electric.

Existential threat

For investors, investments in regulated utility companies suddenly don’t look as rock solid as they once did. Traditionally thought of as ‘perpetual investments’ that need little scrutiny climate change is now challenging the thinking. As climate impacts intensify, they pose an existential threat to such companies, who will not be able to cope with the mounting legal liabilities unaided.

The scale of the threat is likely to require governments to step in. In California, state officials are considering creating an insurance fund that will help cover the cost of such events, lifting some of the burden from corporations. However, governments will certainly want to avoid creating perverse incentives that lead to inaction on the part of private companies. Therefore, if public money is going to be used in this way, it is highly likely the governments will also demand that companies do far more to increase the climate resilience of their operations.

Cover photo by Joanne Francis/Unsplash
Oil and gas sector confidence is soaring… and it’s down to climate change.

Oil and gas sector confidence is soaring… and it’s down to climate change.

By Will Bugler

When all is said and done, tackling climate change will require a sustained transition away from fossil fuels. Coal and oil will have to be left in the ground. So why then, in the face of this inescapable reality, does a recent study suggest that confidence levels amongst senior oil and gas executives have nearly doubled in the last 12 months?

The findings come from a survey from the Norwegian global quality assurance firm DNV GL, who interviewed 800 senior oil and gas executives and found that confidence has risen from 32 percent in 2017 to 63 percent today. This optimism is backed up by company plans to increase capital expenditure, with 66 percent of companies planning to invest in the coming year. More than a third of respondents (36 percent) also expect to increase research and development spending – the highest number in four years.

Embracing transition

The reason for the upsurge in confidence appears to be based on a belief that oil and gas companies are preparing well for the transition to a low carbon economy. Tellingly, for the first time in eight years, industry confidence is rising faster than the global oil price. High fossil fuel prices, it appears, are no longer the sole driver of industry prosperity. This suggests that many executives are confident that their businesses have evolved enough to thrive even when fuel prices are low.

Maria Moræus Hanssen, CEO of Dutch oil and gas firm DEA says that the transition is underway in the sector, “the majors will turn into energy companies – they will broaden their portfolios” she said, “partly because there are strong investment opportunities outside oil and gas, and partly to position themselves for a changing future.”

This sentiment was echoed by many respondents to the DNV GL survey, with several predicting more regulatory and social pressure for firms to make a transition to clean energy. “The greatest looming challenge for oil and gas companies is how they adapt to the energy transition,” says DNV GL’s Bente Pretlove, “there will likely be greater regulatory and social pressure forcing the industry towards decarbonisation. To succeed, the industry will need to make the right investments and harness technology and innovation more than ever.”

Opportunities for investment

While the transition to a low carbon economy is often cast as a risk to the sector, this research suggests that there will be significant opportunities for those firms who take early action to invest in low-carbon energy, and in measures to increase the resilience of their operations to climate change and its impacts. “We see the future for cost-effective, low-carbon power generation as really about renewables plus gas.” Mark Gainsborough, executive vice president of New Energies at Shell, “a challenge going forward will be to invest more consistently, to maintain our purpose over time, and not be too disrupted by short-term changes.”

The fact that oil and gas companies are taking a long-term view with regards to climate change is a promising sign. It is difficult to imagine a scenario where energy security can be maintained in the face of climate impacts that does not involve the cooperation, skill and power of the oil and gas majors. Their willingness to embrace the energy transition and drive systemic change in the sector is significant for sectoral climate resilience.

A copy of the report “Confidence and control: The outlook for the oil and gas industry in 2018″ can be downloaded here.

Cover photo by Berardo62/Flickr (CC BY-SA 2.0): Oil rigs moored in Cromarty Firth. Invergordon, Scotland, UK.