In the years ahead, 2019 could go down in the history books as a pivotal year in the energy transition.
This year may be a “tipping point when global capital markets accepted the technology-driven inevitability and grid parity cross-over from polluting thermal coal and the increased uptake of sustainable clean renewable energy,” Tim Buckley, Director Energy Finance Studies at the Institute for Energy Economics and Financial Analysis, wrote in a report.
It was the year in which the hype around U.S. shale finally burst, as debt-driven production growth finally lost its luster. Share prices for shale companies across the board were down sharply, and largely failed to rebound even as oil prices climbed. Coal has fared even worse, although the trouble for coal predated the latest downturn for shale.
Climate change became increasingly top-of-mind for the energy sector as well, even as governments continue their paltry efforts to arrest the rise of emissions. Various oil and gas companies have paid lip service to climate action, but are mostly just trying to stave off the backlash as they continue to search for new reserves.
The big change has been the shift in the capital markets. Investors are beginning to sour on fossil fuel stocks as they eye the clean energy transition. Renewable energy vastly outperformed fossil fuels in 2019, and “financial markets are not waiting to see if Paris targets might be met,” Buckley wrote. He singled out a handful of large renewable energy asset holders – NextEra Energy is up 38 percent year-to-date and Brookfield Renewable Partners is up nearly 80 percent, while the S&P 500 is up 24 percent.
Meanwhile, some notable fossil fuel companies did not fare quite as well. Peabody Energy is down 71 percent, Chesapeake Energy is down by 66 percent, Contura Coal is off by 91 percent, and even ExxonMobil is essentially back where it started at the beginning of the year, down 1 percent. They “have all destroyed shareholder value again in 2019,” Buckley wrote. Related: The 10 Most Important Oil Market Trends For 2020
Boosters of fossil fuels often note that the world will need coal, oil and gas for years to come. But consumption does not need to fall to zero for there to be significant upheaval in financial markets. The rate of growth only needs to slow.
“As the capital flow moves to predominantly bank-rolling renewable energy, the capital market derates the incumbent stranded industry players owning now stranded thermal power plants,” Buckley said, noting that investment in coal at this stage amounts to investing in stranded assets. “It will take decades to play out, but the equity market isn’t waiting around.” The meltdown in the share prices for Peabody Energy and Chesapeake Energy are perfect examples.
Big banks are starting to make a shift, although to date it is very little, and it is also getting very late in the game as the climate crisis worsens. Goldman Sachs recently announced a policy shift, ruling out new financing for coal and Arctic oil. That makes it one of the more progressive banks in the U.S., even as it still keeps the spigots open for most other types of extraction.
As Bloomberg points out, “the steps Goldman and other big banks are taking can also be seen as minuscule compared with the $1.9 trillion in financing they’re estimated to have extended to the fossil-fuel industry in the three years following the 2015 signing of the Paris climate accords.”
JPMorgan Chase has provided $196 billion in financing to fossil fuel projects from 2016 to 2018, making it the top financier of the industry, according to Rainforest Action Network. Wells Fargo came in second at $151 billion. Goldman Sachs, despite taking credit for its recent announcement, extended nearly $60 billion in financing to fossil fuels over that three-year period.
In other words, big banks have not turned their backs on coal, oil and gas, but equity investors have already started to look elsewhere.
By Nick Cunningham of Oilprice.com
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