On Friday, the US state department submitted a notification to the UN that the administration intended to withdraw from the Paris climate agreement reached in 2015.
The statement, confirming the decision that President Donald Trump announced in June, is at one level momentous. The world’s largest economy and second-largest emitter of greenhouse gases is quitting a deal that the governments of leading European countries have described as “a vital instrument for our planet”.
In terms of the consequences for the global energy industry, however, its impact has so far been negligible.
Of course, the full implications have yet to play out. But in the nine weeks since Mr Trump announced that leaving the agreement would be “a reassertion of America’s sovereignty”, energy companies around the world have been making plans that suggest their views on the outlook have not changed in any significant way.
The most important reason for that is that moves towards reducing greenhouse gas emissions are going with the grain of energy markets, regardless of political decisions. The plunging costs of renewable power and electricity storage, the rise of electric cars, the availability of cheap gas for power generation, and the prospect of abundant supplies of oil, for a while at least, all point towards investment decisions that would curb emissions.
The comments from oil companies reporting earnings over recent weeks have provided a stark illustration of that point. For years, environmental groups have been raising concerns about stranded assets: projects that cannot be viable in a world where greenhouse gas emissions are constrained. When they first started making that argument, with oil at about $100 per barrel, it was often a tough sell, says Andrew Grant of the Carbon Tracker Initiative, which has pioneered analysis in this area. Now, he adds, they are “pushing at an open door”.
The central idea is that in a world where fossil fuel consumption is curtailed to cut greenhouse gas emissions, investment in high-cost assets is likely to be wasted. The International Energy Agency’s “450 scenario”, showing a possible path to limiting the rise in global temperatures to 2C, has oil demand dropping from 92.5m barrels per day in 2015 to 89.9m b/d in 2025 and 73.2m b/d in 2040. That is still a lot of oil needing to be produced, and even in that scenario the industry is expected to need $4.9tn of investment to offset natural decline and meet demand.
The oil and gas industry would have a future for many decades to come. Businesses with assets at the top end of the cost curve, however, would be in trouble. Carbon Tracker published an analysis in June, using costs estimated from Rystad Energy, the consultancy, to look at which companies might be most at risk of investing in uneconomic assets in a carbon-constrained world.
The results include some predictable conclusions: low-cost operators in the Permian Basin of Texas and New Mexico such as Pioneer Natural Resources seem likely to prosper even if oil demand is falling, and so does Saudi Aramco. But there are also some surprising results: there can be wide variations between two different operators in the same region. For several of the companies reporting second-quarter earnings recently, plans for ensuring they were at the lower end of the cost curve were a key message to investors.
Brian Gilvary, BP’s chief financial officer, talked about reaching the point where the company could cover its capital spending and dividends from cash flows “at oil prices well below where they are today”: about $35-$40 per barrel. Jessica Uhl, his counterpart at Royal Dutch Shell, said the company was giving the go-ahead for projects that need oil prices of “more or less” $40 per barrel to break even.
Expectations on climate policy and the outlook for oil demand are not the only factors shaping those plans: there is also the prospect of additional supply from US shale to depress prices if they start rising too far. But in the face of the eternal uncertainty of the oil market, they are a no-regret strategy. If oil prices do rise much higher, which is entirely possible, companies that have been cutting costs and curbing capital spending may miss out on some opportunities for growth, but they will generate abundant cash flows and can reward shareholders accordingly.
Whatever happens to international climate policy in the aftermath of Mr Trump’s decision, unless some other shock comes along to shake the industry out of its current mindset, downward pressure on costs and caution on investment decisions are likely to remain the prevailing rules.