Challenges From All Directions For Fossil Fuel Stocks

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Includes: AAUKF, BHP, BP, CVX, RDS.A, RDS.B, TOT, XOM
by: Keith Williams

Summary

Litigation by The Philippines for Human Rights abuse regarding climate change: 47 fossil fuel majors targeted.

Litigation in the U.S. regarding climate misinformation by Exxon Mobil.

India makes progress on renewable energy: it may exceed 100GW solar PV target by 2022; International Solar Alliance led by India.

24/7 electricity for all Indian citizens by 2019 (not 2022).

India offering to help developing countries with renewable energy expertise, to play its part in a goal for everyone to have access to electricity by 2025.

In recent months I've written several articles which address major threats to the oil industry. The first is fuel substitution in the form of Electric Vehicles. The second, involving international action to address CO2 emissions, is a more general threat to not only coal and oil, but also natural gas.

There is strong evidence of international action, which could lead to a legally binding agreement being ratified even this year. The COP21 agreement aims to contain global warming to less than 2C, with a goal of 1.5C. Many investors who are not following the details, don't take the prospects of coordinated international action seriously.

Much of the commentary on the fate of the oil majors Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX), BP (NYSE:BP), Royal Dutch Shell (NYSE:RDS.A) (NYSE:RDS.B), revolves around whether they can restructure and cut their costs sufficiently to ride out the current challenges until the inevitable recovery occurs.

It is becoming clear that this complacency is not well founded and that this isn't just about cyclical changes in supply/demand. Instead it is about exit from fossil fuels, and as such is a structural rather than cyclical shift. It is progressing rapidly in the coal industry now.

Here I discuss structural change that is either not acknowledged, or it is dismissed. I suggest that investors in oil and gas in particular pay attention to these developments as there is still time to preserve your capital.

While China and the U.S. are key players for major change, I suggest we are seeing evidence of strong political will and action from a corner that is often ignored as being without power (India and Asia).

Two recent developments indicate powerful forces are assembling and not from quarters that we are accustomed to. I note that the 1.5C goal in the COP21 agreement came from the Pacific Island states whose future is in doubt due to sea level rise.

The Philippines Government Human Rights actions concerning fossil fuel-induced climate change

In a December 2015 IEA report which indicated that the coal industry will recover through stimulation of coal based power generation in 10 SE Asian nations, the Philippines was indicated as one of the countries that will be a major contributor to coal expansion. With a change of Government and a new energy minister, The Philippines is no longer in the fossil fuel exploitation camp.

The Filipino government is serious about holding fossil fuel companies accountable for damage caused by pollution and CO2 emissions, with consequent effects on climate change. It has been supported by Greenpeace International and a number of other NGOs in this effort.

A Commission on Human Rights of the Philippines has released a report on their findings and 47 oil, coal, cement and mining companies have been contacted with a detailed letter seeking response to a complaint that the rights of Filipino citizens have been violated. Public hearings will be held in October and the companies are ordered to attend, although only those with offices in the Philippines can be forced to attend. Companies who will be forced to attend include Chevron, Exxon Mobil, Royal Dutch Shell, Total (NYSE:TOT), BHP Billiton (NYSE:BHP) and Anglo American (OTCPK:AAUKF).

The core question asked of the fossil fuel companies revolves around their addressing climate change issues in terms of "eliminating, remedying and preventing human rights violations resulting from climate change." This is the beginning of serious attempts to indicate to major corporations that they have an obligation not to pollute and to address past emissions.

To date the expectations for addressing climate change have rested on Government actions and this is what the COP21 program is about. However, opening up another angle by targeting corporations that have been responsible for CO2 emissions since the beginning of the industrial revolution, the game gets more concrete for the companies, as they are being forced to have a public stance.

Action by 17 U.S. State Attorney Generals: "Exxon Knew"

In the US there are no less ambitious actions by 17 U.S. states to seek redress for climate change consequences from the large fossil fuel companies who, it is claimed, deliberately set out to deceive the public about climate consequences of burning fossil fuels.

This was started as the "Exxon Knew" campaign late last year by NY State Attorney General Eric Schneiderman, but it has been expanded to include Attorney Generals from 17 U.S. states. Exxon Mobil isn't taking this lying down and has tried using congressional allies to intimidate the Attorney Generals. In a sign that the power structure may be changing, Massachusetts Senator Elizabeth Warren has warned Exxon and its Congressional allies that it has "picked a fight with the wrong state." The efforts to obtain documents and information by the House Science Committee have been ignored by State Attorney Generals and non-profit organizations, who claim overreach and intimidation.

As often happens with litigation, the possibility of success can be unclear, but there is clearly interest in bringing to light actions of oil and gas companies that sought to mislead the public about the dangers of climate change.

Given the challenges that the oil and gas industry is facing currently, having a battle on another front is no doubt very distracting, especially when the power structures are shifting.

India

India is emerging as a serious and active participant in decarbonizing not only its own economy, but in also assisting other developing countries to do likewise.

It isn't clear to me that U.S. investors realize what is happening in India currently. There is a real sense of public service in the work that PM Modi and Energy Minister Goyal are overseeing, especially for 200 million citizens without access to electricity in rural India.

Key highlights from a recent extended briefing at the launch of the "Large Scale Integration of Renewable Energy" report by Energy Minister Piyush Goyal include:

1) India will provide 24/7 electricity across India not by 2022, but by 2019. One nation, one grid, one price for electricity is the mantra.

2) India's goal of going from 2.2GW in 2014 to 100GW solar PV by 2022 (40x growth in 8 years) is now seen by Minister Goyal as perhaps lacking ambition and he foreshadows that this goal may be exceeded. He notes 21GW of solar PV contracted in 12 months, all projects having PPAs. The three enablers are technical ability, sense of purpose and honesty.

3) India's solar plan does not involve subsidies. Solar power cost is at grid parity. Minister Goyal suspects no one in the world has the capacity to do what India is doing as a public (not private) sector endeavor. He isn't worried about the SunEdison bankruptcy.

4) There is a focus on sustainable development and protecting the environment, while at the same time keeping the affordability of power in mind.

5) India is willing to learn and willing to teach. Goyal is visiting the best examples of renewable energy implementation around the world.

6) India offers its technological know-how without cost to any country (in Africa, Asia, etc.) that is engaged in the transition to renewable energy. India will help to build sustainable and strong grids to improve the quality of life of all.

7) Minister Goyal says that there should be a global mission to have affordable energy access by every person in the world by 2025. Minister Goyal contrasts India's approach to that of the developed world, which he sees as anti-development and anti-climate change action. The west uses the private sector who charge "top dollar" and he thinks this is wrong. India is willing to help in this process as the champion of clean technology in the underdeveloped world.

8) India is a strong supporter of the Paris climate agreement and also the International Solar Alliance which PM Modi proposed. The International Solar Alliance now involves 121 countries and plans to mobilize $1 trillion for clean energy investment by 2030.

The above summary indicates that dramatic changes are happening in India currently that are likely to propagate throughout the developing world. This is a major challenge to the status quo and needs to be taken seriously by investors. Minister Goyal does not see a role for fossil fuels in the future.

Conclusion

My reason for reviewing major developments of relevance to the future of fossil fuel exploitation is that most of the debate is about cyclic phenomena, when it needs to be about structural changes that are now well in train.

The emerging legal challenges and resolute action by India are further examples of a major structural shift away from fossil fuel exploitation and resulting negative impacts on the world's climate.

I suggest that this information is important to digest when reviewing one's fossil fuel portfolio.

Disclosure: I am/we are long SUNEQ.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.