14 July 2020

In a recent blog post: An unexpected event leading to long term change on emissions?, we explored the significant interruption to emissions and air pollution during global lockdowns. Notably, the marked reduction in nitrogen dioxide (NO2) levels observed. Nitrogen dioxide is an air pollutant formed when fossil fuels burn at high levels. The positive impact was demonstrated recently in images released by NASA of usually polluted cities’ clear skies, along with citizens sharing rare findings across social media channels:

Source: Twitter.com

Now in July as some countries exit their lockdowns, the focus turns to the recovery phase. While many applaud the emission reductions and aspire to continue with this momentum during the recovery phase and well into the future – others look to “fast recovery” options – in conflict with green recovery hopes. According to some, the latter will not only hinder climate emergency goals, many are arguably not commercially viable or “fast” compared to green, renewable alternatives.

Australia’s “gas-fired recovery” considered not viable

In May, the National COVID-19 Coordination Commission, — a hand-picked panel of business leaders and trusted bureaucrats charged with facilitating the "fastest recovery possible," announced that the key to kick-starting the economy and manufacturing would be cheap energy.² According to director and major shareholder of oil and gas company Strike Energy, “the best cheap energy is gas.”

Despite nationwide calls for new investment in clean energy to cut greenhouse gas emissions and revive the economy, the Government is looking to the committee, a panel of business leaders remarkably overweight in members from fossil fuel industries, and gas in particular.

In a recent webinar hosted by Climate Action 100+, an investor initiative to drive corporate climate action by engaging with some of the world's largest greenhouse gas emitting companies, guest Bruce Robertson from the Institute for Energy Economics and Financial Analysis explored the topic of this gas-fired recovery. Particularly, the concerns of ‘fugitive emissions’ from the oil and gas sector.³

Robertson explained that not only is the gas industry currently facing its “Volkswagen moment” by underestimating its emissions, the industry is not commercially viable. “A gas-fired recovery simply won’t work as the markets will not allow it,” he said.

The term “fugitive emissions,” refers to emissions of gases or vapours from pressurized equipment due to leaks and other unintended or irregular releases of gases, mostly from industrial activities. As well as the economic cost of lost commodities, fugitive emissions contribute to air pollution. Robertson discussed concerning reports that reveal the gas industry has generally ignored methane leakage to date, and claims that fossil gas has 50% fewer greenhouse emissions.

“If the renewably friendly Open Cycle Gas turbines (gas peaking plants) are used, the most common turbines in the Australian system, these are only 31% better than coal. This is before leakages and such fugitive emissions,” Robertson said.³

Adding to this, in May 2020 a study was released that shows fossil gas drillers in Pennsylvania in the US leaked more than 1.1 million tonnes of methane – 16 times the amount they reported to the state. The report also highlighted the “gaps” in greenhouse gas accounting. Methane emissions from almost 73,000 older, vertical, or conventional gas wells totalled 599,000 tons. The Department of Environmental Protection doesn’t collect fugitive emissions data on conventional well sites.

Qualifying Robertson’s argument, conventional or ‘natural’ gas use in Australia’s National Electricity Market (NEM) has fallen some 59% in the last five years due to massive overpricing and supply concerns, while renewables have grown strongly. Renewables now account for 23% of total generation in the National Electricity Market. The Australian Energy Market Operation (AEMO) – which manages the country’s electricity markets – sees a smaller role for gas in the future in a renewables rich grid in its Integrated Systems Plan.

Every state in Australia has a net zero emissions target by 2050, though the gas industry is planning to embark on long life projects embedding high emitting gas into the energy system past 2050. This signals that the industry does not consider itself a ‘transition’ fuel to renewables, but a long-term initiative.

In conflict with this long-term outlook, Santos and Origin will soon be forced to trim their exploration budgets. Santos has recently announced a $550million (38%) redution in 2020 capital expenditure. It has put its $7bn Barossa Field development on “ice.” Conversley, Woodside will reduce capital expenditure by $2.7bn, a 60% reduction.³

According to Rystad energy, at current JCC-linked netback gas prices, 42% of Australia’s gas resources as of 2020 would be marginal or uncommercial. There are global gluts in gas, ammonia based fertilizers and plastics.³

Globally, the gas industry is withdrawing from investing not expanding. Hardly the sturdy foundation for a ‘fast recovery’ the Morrison government was hoping for.

A global view: is the future finally looking green?

So with all of this in mind, it’s difficult to foresee a gas-fired recovery. So what’s the alternative?

The pandemic came at a time when the climate movement appeared to be gathering momentum – the bushfires in Australia had galvanised the public to lobby for climate change, Greta Thunberg became a household name, and central bankers began to talk about “climate stress tests” and “green quantitative easing”. Increasing investor demands for sustainable alternatives have grown at the same time as many sustainable investing strategies have proven their worth, as explored recently in our post: A harsh wind blows, but responsible funds set sail for calmer waters.

Looking at Europe, the introduction of an “EU green recovery package” has recently been a marker for the world. The package sets a high standard for other nations, using the recovery phase as a means to tackle threats over and above the pandemic. I.e. the imminent threat of the climate emergency.⁴

Central to the initiative is funding emissions-busting sectors: €91bn (£81bn) a year for home energy efficiency and green heating, €25bn of renewable energy, and €20bn for clean cars over two years, plus 2m charging points in five years. Up to €60bn will go to zero-emissions trains and the production of 1m tonnes of clean hydrogen is planned.⁴

The EU plan may also have a direct impact on the rest of the world, with a border tax on carbon-intensive industrial imports from other nations potentially raising up to €14bn.

Contrasting this recovery approach, the Trump administration in the US is slashing green protections while the biggest polluter, China, is sending mixed messages by backing coal power stations as part of its recovery.

So where to from here?

It’s clear that looking globally, there are conflicting recovery paths on the agenda.

The revelatory lockdown period demonstrated the possibilities of a green future and for some cities, the impact of emissions reductions was so marked – it’s impossible to ignore. This may be instrumental when votes are on the table.

For others, ‘transition’ fuels may be deemed the quick-fix economies were hoping for – though recent reports undermine not only their viability from an environmental stance, but a financial one. In terms of the gas industry, its plans look longer-term than for a transition phase, while companies within the sector are pulling the plug on projects as they foresee the industry’s downfall.

Recoveries that consider the longer-term impact, both environmentally and commercially will arguably be key. This is why many are turning to renewable options.

In the words of the EU commission president, Ursula von der Leyen: “Sooner or later we will find a vaccine for the coronavirus. But there is no vaccine for climate change. Therefore [we] need a recovery plan designed for the future.”⁵

At U Ethical, we have continued to evolve our investment policy over the years, from applying the first ethical screen back in the late 1970s to exclude nuclear mining, to the total exclusion of thermal coal and unconventional oil and gas extraction earlier this year. We’re proud that we continue to influence and be influenced by the world around us. Our concern about the use of fossil fuels has increased, and while we have up to this point viewed natural gas as a transition fuel, we’ve come to accept that the industry isn’t doing enough to realise that transition – this is reflected in our portfolios. You can read more about this here, or contact one of our team members to learn more about stocks within our portfolios and our unique investment approach.

²https://www.abc.net.au/news/20...
³https://us02web.zoom.us/rec/pl...
⁴https://www.theguardian.com/en...
⁵ https://www.weforum.org/agenda...