Oil and gas destined to become the new coal as big investors retreat

A brewing storm of major financial institutions divesting from Arctic and oil sand drilling signals a dark future for oil and gas, finds a new investigation from the Institute for Energy Economics and Financial Analysis (IEEFA).

The investigation, published today, quantifies the scale of shifts among large investors. The World Bank, BPN Paribas, Goldman Sachs, Wells Fargo and Morgan Stanley have been named as announcing formal exits from oil sands and/or arctic drilling practices. This change has been driven mostly by European financial institutions, but also by six major institutions in the United States, and has been accelerating this year, with another 23 institutions adopting such policies, taking the total to more than 50.

The sginficance is that – like the coal industry before it – big investors are quitting oil and gas investments where the environmental risks are great, and the costs are higher. It’s the likely first step in an inevitable wave of disinvestment that will sweep the industry.

“Many financial institutions started with divesting coal and then moved to Arctic and oil sands exclusions but with pressure mounting on plastic pollution, and fossil gas no longer being viewed as a bridge fuel, financial restrictions are likely to expand to ethane crackers and new gas investments soon,” says IEEFA’s Tim Buckley.

“Tighter regulations on carbon-intensive projects is narrowing margins which means that risks are going up while the promised returns are looking increasingly elusive. These latest oil and gas exits are representative of the increasingly challenging economics of the fossil fuel sector”.

IEEFA makes their full tracker available on their website, here. “To date, over 100 and counting globally significant financial institutions have announced their divestment from coal”, they write, highlighting their message that the large-scale and significant divestments that have befallen the coal industry globally over the past several decades are very likely to be repeated for oil and gas investments.

Despite arguments from oil and gas companies that their products will be unavoidably required over coming years, gas in particular is no longer viewed as a ‘transition fuel’ for electricity grids, and developments in the electrification of transport, buildings and industry are accelerating; suggesting much of the forecasted demand will not be realised.

This was recently highlighted in Bloomberg, who  suggest that “the right combination of federal policies could easily push gas out of the power mix by 2035 or earlier”, and that a Biden win in the 2020 Presidential Election would accelerate this. “This transition is going to happen more quickly than people thought, just as the coal transition has happened faster than people thought it would”, environmental group Sierra Club told Bloomberg.

Explicitly harking back to the days of bullish forecasts for coal growth in the late 2000s, IEEFA declare that “Oil and gas is the new coal”. “Although financial institutions may be driven by climate-related goals in their exodus from the extraction and burning of coal, LNG/gas and oil, most are driven by the numbers and the need to stay relevant as the technology driven energy transition accelerates and permanently undermines the economics of fossil fuels”, IEEFA writes.

The organisation warns, though, that these investment decisions vary in quality and strength. Some groups build in loopholes or exceptions, resulting in insufficient or even little change in the flow of cash to fossil fuel projects. For example, “Citigroup, with assets worth US$1.95 trillion, has put in place restrictions only for Arctic drilling projects at project financing level and does not include restrictions on other financial offerings.

It also does not exclude oil sands projects from financing and simply mentions that it has an enhanced risk review process against such projects”. Similarly, the Norwegian government’s sovereign wealth fund has divested from companies that solely explore for oil and gas, but will retain investments in oil refineries such as Shell and ExxonMobil.

“BP, Shell, Total, ENI and Equinor should not ‘rest easy’,” says Buckley. “Their recent strong rhetoric needs to be followed up by continued, accelerated action. We expect global financial institutions exiting oil and gas to continue to tighten loopholes in subsequent policy measures to show a greater commitment towards the global Paris accord”.

IEEFA’s analysis highlights a clear trajectory for oil and gas – an accelerating analogue of the already-serious divestment movement from coal. It is tough to recognise within confident forecasts of relatively high demand for oil and gas within the industry’s forecasts, but the proof will be in the pudding, in coming years.