Integrated oil companies are part of the solution to reducing carbon emissions and not part of the problem, according to Schroders’ Mark Lacey.
Speaking to delegates at the Schroders Investment Conference in Edinburgh last week, while COP26 was taking place down the road in Glasgow, Lacey (pictured) said the industry needed to address the fact that more than half (54%) of global carbon emissions came from the transport and power generation sectors.
Lacey manages the £418m Schroder ISF Global Energy Transition fund, launched in December last year, which invests in companies associated with the global transition towards lower carbon sources of energy. He also co-manages the Schroder ISF Global Energy fund which holds traditional integrated oil companies, including BP, Royal Dutch Shell and Repsol that are making the transition to clean energy.
Large oil companies have publicly committed to addressing the issues. BP, Royal Dutch Shell and Total are among those that have vowed to be net zero by 2050 or sooner. But according to the Carbon Disclosure Project, oil and gas companies account for more than half of global greenhouse gas emissions associated with energy consumption.
Lacey said to meet carbon emissions targets, renewables need to go from 20% of the global power generation mix to 85% by 2050, as per the International Renewable Energy Agency’s ‘Roadmap to 2050’. He added capital expenditure for the energy transition theme is set to accelerate to as much as $120trn across sectors that reduce carbon emissions, creating investment opportunities across the value chain.
“Capital expenditure must happen because what we need to do over the next nine years, in theory, is reduce emissions by 33%,” he said.
Lacey questioned whether that goal was likely to be achieved. “Probably not,” he said, adding it would have to be the industry itself rather than any initiatives coming out of COP26 that drives these capital expenditure flows.
But he said, contrary to popular opinion, integrated oil companies were part of the energy transition solution, not part of the problem. He pointed to their use of gas as a transition fuel, noting how floods in China’s key mining region in June resulted in a shortage of coal with the subsequent energy demand being met by spare capacity in the combined gas turbine market.
“As we transition, coal has to come out of the system, so what we need to do is use gas as a transition fuel,” Lacey said. “This is why the companies are part of the solution, not part the problem.”
According to the International Energy Agency (IEA), between 2010 and 2019, coal-to-gas switching saved around 500 million tonnes of carbon dioxide – an effect equivalent to putting an extra 200 million electric vehicles running on zero-carbon electricity on the road over the same period.
Lacey said the key is to distinguish between companies that are changing and providing the services to market for that change, versus those that produce oil fields, flaring and high methane emissions. “We would never invest in that sort of company,” he added.
Lacey’s comments echoed those of Blackrock chief executive Larry Fink who told COP26 the previous week that “if we are not working with the hydrocarbon companies together, we will never get to net-zero”.
Lacey also noted that integrated oil companies have big targets to hit on renewables. For example, Europe’s seven largest providers together produce around 7 gigawatts in renewable power generation and the aim is for this to be around 158 gigawatts by 2030.
“So, as much as they already dominate about 15-20% of the oil and gas markets, the same will happen in the renewables market,” he said. “We are engaging with the integrated companies and they are providing solutions to mitigate disruption through the change.”
Shard Capital head of research Ernst Knacke agrees that big oil has to be a part of the climate change solution.
“You can’t just say, ‘I’m not going to give BP capital because they are a part of the problem’,” he says. “But if they are part of the problem, then you need to get them to fix it.”
Knacke flags the Trium ESG Emissions Impact fund as a way to play the transition to net zero. The fund is an equity market neutral strategy, which brings about positive impact by engaging with companies in high-emitting sectors to implement lower CO2 emissions – and shorting those that are not moving in the right direction.
“It effectively arbitrages the ‘environmental gap’ between the companies that are doing bad but will do better – those the market misunderstands – and those that are doing bad and are not going to improve their business or are not on the right trajectory.”
It’s not an activist proposition, but it is almost that, says Knacke.
“[Portfolio manager Joe Mares] works really closely with company management and tells them if they are heading in the wrong direction, “ he adds. “Sometimes they ignore him, and that would be a short candidate.”
Elsewhere, Lacey highlighted oil companies’ important role in the move to hydrogen, saying they already have the size and scale to help facilitate the decarbonisation of industry practices like cement production.
“Integrated oil companies are perfectly positioned for hydrogen markets because what do you need? You need processing capability, storage and transportation – and they already have that.
“You need to be very careful saying, ‘I’m never going to invest in these companies ever again’.”
