The State of the Energy Industry: Risk and Resistance

Major Investors Call for Climate Policy; Industry Worries About Regulation

Jan 14, 2010

As the U.S. energy industry faces down what promises to be a critical decade in determining the shape of its future, the opinions of industry representatives seem as diverse as the energy sources they represent.

"What we do this decade will shape the electricity future of 2050," Michael Howard, senior vice president at the Electric Power Research Institute, told the U.S. Energy Association's Sixth Annual State of the Energy Industry forum in Washington.

But what action should be taken this decade is far from decided.

Sandwiched between discussions of renewable energy and securing a "low-carbon future," American Petroleum Institute President and CEO Jack Gerard took the stage Wednesday to emphasize the centrality of the oil and natural gas industries to the U.S. economy and to call for expanded domestic production in these areas.

"Oil and natural gas are the foundation of our energy-dependent economy," he told the room. They supply 63 percent of the nation's energy, support 9 million U.S. jobs and represent more than $1 trillion of U.S. economic activity, accounting for some 7.5 percent of U.S. GDP, he said.

But even the president of the API recognized that supplying energy in the future will take more than fossil fuels.

"While oil and natural gas companies continue to invest substantially in new oil and natural gas projects, they are also investing in virtually every alternative technology from solar power to lithium batteries to geothermal to fuels made from algae," Gerard said. "Between 2000 and 2008, the oil and natural gas industry invested more than $58 billion in these and other carbon mitigation technologies, more than either the federal government or the rest of private industry combined."

He believes that the day when those alternative technologies take center stage in the U.S. energy mix is still decades away, though, and so his main concern is ensuring a steady supply of oil and natural gas for the near future. It is up to policymakers to ensure the path to that supply is open, he said.

It is no surprise, then, that Gerard is not satisfied with the climate change legislation before Congress as it currently stands: "Some of the policies advanced recently seem aimed at chilling the job creation potential of domestic oil and natural gas development Some climate proposals would put U.S. refiners at a competitive disadvantage, driving jobs out of the country, along with their emissions. Other proposals would increase costs on the oil and natural gas industry, depressing new investment in domestic oil and gas prospects. Still other initiatives would adversely affect leasing and development on federal lands and U.S. waters," he said.

The Flip Side: Growing Risk to the Bottom Line

As Congress heads back into session over the next week and the Senate recommences debate on climate change legislation, policymakers are hearing these arguments from some in the industry, many of them deep-pocketed campaign contributors.

On the flip side, equally powerful investors are warning Congress that the United States' heavy focus on high-carbon fossil fuels like coal and oil is becoming an increasingly risky business.

On Thursday, 190 of the world's largest investors, together representing $13 trillion in assets, wrote to Congress and world leaders calling for quick adoption of national climate policies that: set short and long-term carbon emission reduction targets; set a price on carbon; support financing mechanism that mobilize private investment in developing countries; and accelerate the deployment of energy efficiency, renewable energy and clean vehicles and fuels.

With those in place, private and institutional investors will have the TLC — transparency, policy longevity and regulatory certainty — they need to let their investment dollars flow into the creation of a competitive, jobs-creating low-carbon economy, said Mindy Lubber, president of Ceres and director of the Investor Network on Climate Risk.

Lubber is clear in her concerns about some in the energy industry who are putting more into fighting legislation than into developing energy sources compatible with a low-carbon future:

"There's going to be policy, and ignoring it is going to create a risk to them." That, she said, is a bad investment for everyone.

The nation's largest institutional investors are beginning to take that into consideration, creating another pressure point for the energy industry.

Anne Stausboll, CEO of the California Public Employees' Retirement System, a system with a $181 billion investment portfolio, said her group talks with utilities about whether they are considering future climate risks and whether they have the structure in place to truly be accountable to investors down the road. For long-term investments, knowing that business leaders have the foresight to address future challenges before they become problems is critical.

The challenge is that, without a price on carbon, the risks aren't always obvious.

Some Agreement On Energy Efficiency

Increased regulation was less popular at the energy forum — "To date, we don't find it workable legislation and certainly it's very expensive," said Joe Nipper, senior vice president for government affairs at the American Public Power Association.

One area of overlap between the forums, however, surfaced in discussions of the value of energy efficiency. Investors and advisers such as McKinsey & Co. see it as the low-hanging fruit, the fastest, most efficient near-term solution to cutting carbon emissions. Nipper and some others in the energy industry agreed.

The reality is, energy efficiency improvement are among the easiest and cleanest ways to increase energy supply today, said John Mahoney, COO of Chevron Energy Solutions, a Chevron subsidiary.

Mahoney emphasized the "business value" of knowing that government is promoting efficiency as a long-term energy source, and pointed to California as a specific example of where these policies have not only not hurt his company but actually created an environment that has enabled the company to grow.

Nipper also spoke of the value of renewable generation from wind and solar — and, more controversially, nuclear.

His hope of getting the "next wave" of reactors under way was echoed by others throughout the forum, though their hopes were generally not high that a greatly expanded fleet of nuclear power plants would be possible anytime soon.

At the investors forum, Kevin Parker, global head of Deutsche Asset Management, offered this advice to utilities: "Switch to natural gas. They have the capacity to do it right now. It's certainly looking like natural gas is going to be pretty abundant for a long time." That, combined with greater energy efficiency, he said, is going to give scientists, government officials and businesses time to decarbonizes the economy and reduce the risk of catastrophic climate change.

However, decarbonizing the economy — an important theme for the institutional investors looking to lower their risks — hits right at the heart of the American Petroleum Institute's business, and the group has no intention of backing down.

API has been behind several of the "astroturfing" and ad campaigns pushing its opposition on climate legislation, and it reportedly spent over $3 million on lobbying as the House debated the American Clean Energy and Security (ACES) bill.

 

See also:

Insurance CEOs Call on Industry to Get Proactive About Climate Change

EPA Review Reverberates Through U.S. Energy Industry

Rocky Year for Coal Industry: 26 Power Plant Plans Shelved in 2009

Are Environmentalists and the Fossil Fuel Industry Calling a Truce?

Nuclear Power's Cost Competitiveness Remains a Critical Question

 

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