‘Don’t be fooled that the long-term gas market is here to stay’: Carbon Tracker

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The COP28 climate summit in Dubai, scheduled to take place from 30 November until 12 December, is approaching. World leaders and environmental activists are bracing for a new round of negotiations that is set to be centred on the global phaseout of unabated fossil fuels. However, criticism is mounting over the lobbying action of the fossil fuels industry, with oil and gas producing countries pushing back on attempts to agree on stricter phaseout timelines. While investments in renewables are accelerating, driven by the need to triple global renewable power capacity by 2030 to meet climate action goals, the past year has seen a buoyant market for fossil fuels-related projects, caused by security of supply fears.

Gas Matters spoke with Mark Campanale, founder and director of Carbon Tracker, an independent financial thinktank focused on the impact of the energy transition on capital markets, on the sidelines of the Reuters IMPACT climate conference that took place in London last week. Campanale, a sustainable investment analyst with over 25 years of experience and co-founder of some of the first responsible investment funds at Jupiter Asset Management, NPI Global Care Funds, AMP Capital and Henderson Global Investors, reflected on the impact of the Ukraine crisis on the energy transition and how the Paris Agreement targets may already have been breached.

There’s been a major U-turn in the commitments of energy companies recently. Up until the outbreak of the Covid-19 pandemic, there seemed to be a real concern among the oil and gas sector over their inability to obtain financing for projects, and companies were setting ambitious net zero targets. A few years later, the energy crisis has resulted in companies doubling down on investments in fossil fuels and decarbonisation goals are being watered down and put on hold. How do we come back from that?

I would be cautious in saying that everyone is doubling down on fossil fuels investments. Banks have become more hesitant, particularly in the bond markets, and there’s reluctance in the equity market for new offerings. Also there’s concern about the obvious long-term viability of fossil fuels.

Goldman Sachs published a study recently saying that banks and investment firms withdrawing from funding oil and gas has meant that the life of reserves has fallen from 50 years to 25 years because they’re not investing in replacing oil and gas current production. The reason is much higher climate concerns by climate investors.

What you have got is a year and a half of super windfall profits from the Ukraine crisis, but how sustained would that be in the years ahead? OPEC – Russia, the Saudis – has announced production cuts. If you’re making cuts to keep up prices, that tells you there’s real sensitivity regarding demand. So you have to separate investors’ returns from oil and gas from companies’ commitments to net zero – they’re not the same thing.

Energy companies have certainly backtracked from net-zero commitments. Companies are sensing that if they’re breaching net zero commitments, or if they are diluting them, there won’t be such a big reaction from their shareholders. Shareholders are less likely to vote against them and less likely to create problems in the public domain for that.

The second reason is that there’s a sense among oil and gas companies of a dilution of political will: they don’t believe that governments are going to stick to the Paris agreements of well below 2 degrees Celsius. And of course the oil and gas companies are not innocent in their own role in this. In the US, for example, big oil is spending hundreds of millions – USD 112 million in 2020 – on lobbying activities to actively open up new supply, while influencing new bills like the IRA and delaying policies like gas stove bans and the phase out Internal Combustion Engine (ICE) vehicles in the bid to curb oil demand. 

Big institutional investors in oil and gas don’t believe that the Paris Agreement goals will be met. 

They’re also listening to the big investors who don’t believe governments are going to stay below the threshold of 2 degrees. That’s what I’ve heard from many big institutional investors: we don’t believe that the Paris Agreement goals will be met, and we’re investing for 2.3-2.7 degrees Celsius – that’s the world that we think we’re in, and we’re not expecting governments to succeed. That gives companies more bandwidth to support what you would ‘call business as usual’.

Is this mainly due to the war in Ukraine and resulting energy crisis?

It’s partly political – a change in the political environment – and partly the war in Ukraine.

So, the fact that conservative governments – for example, right-wing parties such as Giorgia Meloni’s in Italy – are coming to power is playing a role?


In your view, is the political class fit for purpose then? For example, the EU took a strong stance against Russia, with the goal of stopping all gas imports within the next few years. However, Russian gas and LNG is still flowing into Europe, and long-term contracts are being signed with global suppliers for more LNG imports in the coming decades. There seems to be a mismatch between political statements and reality.

It’s what we at Carbon Tracker call ‘energy security washing’: using the energy security narrative as a frame to revert to business as usual by conservative political forces. It’s the same old fossil fuels lobby dominating politics and using energy security as a screen for what they’re doing, when actually the most important thing you should be doing for energy security is getting away from fossil fuels.

Roughly 80% of the world’s population lives in energy importing countries. With that level of dependency, if you want a secure economy you don’t become dependent on Russia or the Middle East for your energy. The whole thing about moving towards energy independence through renewables is precisely because of energy security. If your energy depends domestically on wind, solar and energy storage, and you electrify transportation, you won’t suffer the political consequences of volatility as we’ve seen with gas prices.

At the same time, there is concern over the dependence on fossil fuels being replace by a dependence on the critical minerals that are needed to support the energy transition…

That’s only at the manufacturing phase, but once you’ve extracted the metals, they can be recycled and repurposed. The only critical dependence is on the production and refining phase. We’re already moving into the phase of recycling batteries in the next decade, so I’m not concerned about that.

Long term, I believe renewables will win, as it’s the cheapest from or electricity generation. Grid and storage issues will be resolved.

The other thing about renewable energy versus fossil fuels, is that with fossil fuels you have multiple buyers and few suppliers. In the case of renewable energy, it’s more balanced: you’ve got multiple suppliers and multiple users. Wind and sunlight are free. Once you’ve got the technology, you can build a company on it. It’s not the same with oil and gas: you’ve got to acquire a licence to extract it, and you’ve got to control the supply so you can scale up and become a predominant player. With renewables you have multiple suppliers, and that keeps prices competitive.

At the same time, renewables are currently struggling in many parts of the world. For example, Orsted announced it may see impairments of some offshore wind assets it is developing in the US. It’s difficult for projects to raise capital, and there are permitting and grid issues still unresolved.

It’s a different business model. At a time of scarcity or upheaval, suppliers in oil and gas can set prices, which is what is happening as a result of the Ukraine war. In the case of renewables, the market trends towards the lowest cost supplier because the marginal cost of wind and solar trends towards zero. If you’re a traditional utility and generating 5% return per annum over the long term, you only need an increase in labour costs, or at construction phase with materials costs, to destroy the business model. That’s what’s happening with wind: governments have sold on long-term power purchase agreements, which are no longer competitive, so renewable energy companies want to renegotiate the prices they’re going to sell the power at, quite rightly, as material and labour costs have gone up.

How optimistic are you that these issues can be overcome?

If you can produce oil at USD 7/barrel and sell it at USD 80/barrel, that’s very different from producing electricity and selling it at a few cents/kWh. You’re never going to get big margins. In that sense, it’s a very difficult business. At the same time, a lot of wind and solar has been built and is operated without subsidies, and subsidies are gradually disappearing in many markets.

Long term, I believe renewables will win, as it’s the cheapest from or electricity generation. Grid and storage issues will be resolved. But from an investor point of view, they are not going to get the same returns from a renewable electricity power purchase agreement, compared to a short-term transportation fuel or heating fuel for which you can pretty much charge whatever you like.

Meanwhile Europe is locking itself into more long-term LNG contracts...

I think it’s delusional – it’s completely wrong. In the longer term, I believe that renewables and storage are going to come in below LNG. It’s going to lead to stranded assets in the future, for example in Germany, where they’re building long-term to solve a short-term problem. They think gas and LNG is the solution, while the long-term solution is renewable and storage. So they’re building a lot of capacity that’s not going to be needed.

At COP28, which has been called the ‘fossil fuels COP’, they’re going to make sure that nobody talks about contracting fossil fuel use.

What kind of situation are we facing for the coming winter?

The expectation is that unless we can speed up the installation of heat pumps, natural gas and LNG are going to be needed. The good news is that heat pumps are doing well in many countries – France, Poland… I think domestic heat pumps are the long-term solution to domestic heating needs. But we need to scale that rapidly. The potential to replace natural gas in heating is definitely there.

What role do you see for natural gas moving forward?

We’re investing too much. We’re basically saying that the short-term need is the long-term trend, and that’s wrong. My view is, don’t invest in overcapacity and infrastructure associated with gas in the long-term. Don’t be fooled into a sense that the LNG market, or long-term gas market, is here to stay. I expect over the next decade to see a major decline in gas demand, both for power and for heating.

How optimistic are you about COP28? Can anything meaningful be agreed?

The whole COP process is problematic. I’m more interested in the global stocktake, a sense of where we are. But from the point of view of supporting the energy transition, I don’t really think that COP is doing much. Far more significant things are happening from a regulatory point of view, such as the cross-border carbon adjustment mechanism and the US Inflation Reduction Act. I think they’re far more significant right now, and actually making the transition happen, rather than the COP, which I’m sceptical about. The reason for this is that any country that is a fossil fuels producer can veto any agreement that happens at the COP. At this COP, which has already been called the ‘fossil fuels COP’, they’re going to make sure that nobody talks about contracting fossil fuel use.

Can the target of keeping global warming below 1.5 degrees Celsius still be met?

No. We’ve burst through 1.5, we’re on it now. That doesn’t mean we shouldn’t aspire to 1.6 or 1.7 degrees Celsius warming. And it doesn’t mean we can’t get ourselves back on a pathway to 1.5 Celsius by 2100 if we overshoot.  Every percentage degree of warming avoided is better for the future. - BB

Contact the editor:

Kostya Tsolakis
[email protected]

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