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ESG in Alaska's DNA -- ESG & the Green Mirage
Science behind net zero by 2050 roadmap assumption doesn't hold up. That's not a judgment, it's physics
As I sit and watch the leaves fall, I am reminded that Alaska's oil and gas industry is again in the run-up to another winter construction and exploration season on the North Slope. This year promises to be an exciting one with ConocoPhillips advancing Willow construction, and Bill Armstrong's Lagniappe Alaska planning multiple exploration wells on state of Alaska leases in a previously unexplored area south of the Badami unit.
On the broader global stage, oil demand is higher than ever -- with the International Energy Agency, or IEA, reporting in August that demand was up to its highest level ever at 102.2 million barrels a day.
(See charts in the online issue PDF)
And exploration and production investments are beginning to show a small glimmer of growth after several years of negative investment that were driven largely by capital constraints imposed by misguided ESG investment initiatives intended to push capital away from fossil fuels and into renewable energy generation.
We have spent considerable time in these columns looking at how those misguided ESG investment initiatives grew out of the weaponization of a very well-intentioned United Nations program and have become the battle cry of the "Net Zero by 2050" movement.
Not just climate change Recall that ESG stands for environmental, social and governance and it refers to the main "pillars of ethical financing" as put forward in 2004, under the UN Global Compact Initiative, to reduce financial risk and promote "sustainable" investing. It should be noted that at the time, the UN also included elevating global reading instruction and clean water initiatives as a part of its overall sustainability goals, not just climate change.
These "pillars" represent the three main topic areas that companies are expected to report on in their annual ESG or sustainability reports. Environmental criteria consider how a company safeguards the environment and the report can include metrics like its environmental compliance track record, greenhouse gas emissions from operations, resilience to natural disasters, and nowadays, climate change.
Social criteria examine factors like how a company manages relationships with its employees and suppliers, health and safety statistics, and relationships with the communities where it operates.
Governance deals with matters such as a company's leadership, cybersecurity, audits, internal controls, and shareholder rights.
All of these were originally intended to help reduce risks to investors and improve company performance -- and therefore its sustainability -- by establishing a reporting system that could demonstrate if companies were behaving as good, socially conscious, corporate citizens. But in just the last few years, this originally noble endeavor has been hijacked and morphed into what has become the weapon of choice for climate activists and the "Net Zero by 2050" climate movement.
Many in the climate movement and the public at large would believe that the "Net Zero by 2050" movement was initiated, or at least endorsed, by the IEA when it published its report Net Zero by 2050: A Roadmap for the Global Energy Sector in May 2021.
The usually conservative and heretofore well-respected IEA was established in 1974 under the framework of the Organization for Economic Cooperation and Development, or OECD, with the initial mandate for oil supply security and policy cooperation to help its member countries respond effectively to potential disruptions in oil supply as well as develop energy conservation policies.
In 2015, the IEA's mandate was modernized to strengthen and broaden its commitment to energy security beyond oil, to engage with major emerging economies, and to provide a greater focus on clean energy technology including energy efficiency. IEA's own website states that "We provide reliable and comprehensive data, analysis, and policy recommendations with the goal of shaping a secure, sustainable, and affordable energy future for all while meeting the climate change objectives of the (UN's) 2016 Paris Agreement."
IEA runs afoul Yet, with its net zero by 2050 roadmap, the IEA appears to have run afoul of its own mandate and stated agency objectives. In that report, the fundamental assumption underlying the IEA's net zero roadmap is the superiority of alternatives to hydrocarbons will cause demand for coal, oil and natural gas to fade away. (The alternatives were principally wind and solar, nuclear was barely considered.)
I am reminded of my eighth grade science teacher who taught us to be leery of assumptions and in science, to never assume. You understand why when you spell assume" -- ass-u-me.
The science behind IEA's net zero by 2050 roadmap assumption doesn't hold up. That's not a judgment, it's physics. Wind and solar have less energy density and less energy efficiency than hydrocarbons, pure and simple. That doesn't mean they don't have a place in the global energy mix -- they do -- but they can never fully replace hydrocarbons in the global energy system.
Trying to force such a scenario on the world would be catastrophic to the global economy and significantly worsen the human condition, disproportionately impacting those already in social and energy poverty.
IEA assumptions unrealistic In June 2023, the Energy Policy Research Foundation, or EPRINC, published the findings of a forensic analysis* it undertook, looking at the IEA's major reports on net zero and assessing the likely economic impact of stopping investment in new oil and gas fields, just as the radical ESG investment scenarios and pressure campaigns have been trying to do.
EPRINC's analysis conclusively demonstrates that the IEA's assumptions are unrealistic, internally inconsistent with the agency's own mission and mandate, and quite often support the case for increasing hydrocarbon fuel production, not reducing it.
The EPRINC findings refer to the IEA's net zero roadmap as "- a green mirage that will dramatically increase energy costs, devastate Western economies, and increase human suffering."
Key takeaways A few key takeaways from the EPRINC findings are that failure to invest in increased supply of hydrocarbons is far more likely to lead to upwardly spiraling prices -- as much as three times higher -- as demand increasingly exceeds supply.
The Biden administration certainly understood this concept in 2021 and 2022 when it used oil from the U.S. Strategic Petroleum Reserve for the very non-strategic, political purpose of driving down domestic gasoline prices.
To IEA's credit, it did herald the negative consequences of across-the-board actions designed to suppress oil and natural gas supply. In its World Energy Outlook 2022, the IEA warned that reducing fossil fuel investment in advance of or instead of both policy action and clean energy demand (meaning clean energy and fossil fuels have reached par in terms of cost and abundance), it would not lead to the same outcomes as those put forth in the net zero by 2050 roadmap scenario. IEA stated that, "If supply were to transition faster than demand, with a drop in fossil fuel investment preceding a surge in clean energy technologies, this would lead to much higher prices, possibly for a prolonged period." That is exactly the economic situation the United States finds itself in presently.
The EPRINC findings also note the vastly different cost profile of wind and solar compared to oil and natural gas. In its roadmap, IEA asserts that "Ever-cheaper renewable energy technologies give electricity the edge in the race to net zero." Yet the agency's own data demonstrates the fallacy of this envisioned post-fossil fuel world because such a scenario would require huge increases in capital, labor and land use to produce less energy.
EPRINC found that by 2030 -- not 2050 -- the IEA's net zero pathway would use an additional $16.5 trillion in excess capital. Renewables like wind and solar require nearly 38.5% more labor and under the IEA's scenario, global energy employment would rise by nearly 25 million jobs. But this new global energy system would produce 7% less energy than the current one, implying an outrageous and destructive 33% fall in energy output per employee.
Solar and wind also require considerably more land use than natural gas or oil for energy output. On average, wind generation requires one square mile of land to produce 1.2 Watts (1.2W) of power, while one natural gas well, typically situated on a pad ranging in size from 1 acre to 5 acres, can produce 1MW (1,000 Watts) of power from roughly 7,600 standard cubic feet of natural gas.
According to the U.S. Department of Energy, in 2021, the average natural gas well in the United States produced about 181,647scf/day of natural gas. Just by quick math, that's 24MW per day, every day, from an average of 3 acres. The difference in land use efficiency speaks for itself.
There is simply no way that more inputs of land, labor and capital for less output is a formula for sustained economic growth or the sustainment of our current modern society. In fact, quite the opposite is true. The IEA's net zero pathway would reverse a process that has been developing since the beginning of the Industrial Revolution where society obtains more outputs for fewer inputs. And IEA's pathway would make the world poorer, having the worst impact on billions of people in the world's poorest nations.
So, all of this leaves carbon emission reduction and overall decarbonization as the only potential benefit from deploying wind and solar. According to EPRINC, if there is an economic case to be made for Net Zero by 2050, neither the UN's IPCC nor the governments that have adopted the Paris Agreement's net zero targets and policies have produced a cost-benefit analysis that proves these policies are in the interest of their citizens or the world to do so.
And on the topic of carbon emissions, it is still a fact that today, China, India and Russia alone are three times more responsible for greenhouse gas emissions globally than the entire European Union and the North American continent, combined. And none of those three nations are signatories to the Paris Climate Agreement or accountable under its terms. That means they are not focused on ESG financing ethics or the weaponized diversion of capital that has impacted the U.S. energy industry, except to the extent that those activities have weakened the US and our allies from both a national security and energy security standpoint.
Amoral ESG investment managers All of this brings us back to today's sadly amoral approach to ESG-focused financing and investing. In its World Energy Outlook 2022, the IEA admitted that ESG investment managers exerting pressure on oil and gas companies to align their investment programs with the Net Zero by 2050 pathway are contributing to the current over-arching economic conditions of high inflation and weak growth.
As we have noted before in these columns, investment managers have a fiduciary responsibility to maximize returns for their shareholders and clients, many of whom are current and future retirees, and those simply placing money into savings. ESG investment managers do not have a mandate -- or a right -- to use other people's money in an effort to drive a political outcome by destroying corporate value and free market growth in the process.
Looming catastrophe? Nonsense. Now, many will say that there is justification to take extreme measures because the models say we are faced with a looming planetary catastrophe. Nonsense. The geologic record demonstrates that the planet has been considerably warmer and considerably colder, for much longer periods of time than at present, throughout its history. Not once did the planet "die."
And as George A. Box, a noted British statistician once said, "All models are wrong, but some are useful."
The critical part is figuring out who they are useful to and for what purpose.
If we were truly confronted with a planetary crisis of catastrophic proportion that relied simply upon removing CO2 from the atmosphere and not putting any more in, humanity would be building nuclear power generation at lightning speed because it is the only efficient, energy-dense source that can meet the power demand of the world and produce no CO2 in the process.
Strange, but there is no nuclear power on the IEA's espoused path to Net Zero by 2050.
ESG-focused financing initiatives -- or investment "themes" as they are now called -- represent a net effective transfer of U.S. wealth, geopolitical power, and the nation's national and energy security.
Is that really the trajectory the U.S. and our allies wish to be on in the current mix of global politics and aggression? The IEA's roadmap to net zero shows OPEC's share of the global oil market would rise from ~37% today to 52% in 2050, a level higher than at any point in the history of oil markets.
Worse yet, if non-OPEC producers -- under pressure from ESG investors -- follow the net zero profile of steeply declining oil production while OPEC producers maintain investment, OPEC's share would actually rise to an astonishing 82% by 2050.
McKinsey & Co. has estimated that the cost to achieve net zero by 2050 will require a staggering investment of $9.2 trillion per year, every year, between now and 2050! That is just shy of a total of $250 trillion that could be much better spent developing technologies aimed at adapting to changes in weather and climate and continuing to pull the world's poorest people out of poverty.
As the U.S. and our Western allies relearn the geopolitical importance of energy security, it is time that we put the U.S. energy industry back to work, generating the energy that our world needs. Within this, we should include the continued push to develop renewable technologies that can contribute in a meaningful way to meeting global energy demand efficiently and at cost.
Incorporating the real ethics of ESG into global energy development -- just as we have done in Alaska for decades and will continue to do for decades to come -- creates a cascade of benefits from bringing the world's roughly 1.5 billion people who don't have access to electricity out of energy poverty to improving public health and working conditions. The real ethics of ESG also ensure a cleaner and more protected environment and protects our national defense and energy security. This is the roadmap the world should be on, not one that creates economic hardship and wastes money in the pursuit of a political model that is long on emotion and short on facts.
*(A Critical Assessment of the IEA's Net Zero Scenario, ESG, and the Cessation of Investment in New Oil and Gas Fields)
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