With Climate Change, Where Will Be the Next Energy Capital?

No matter how civic leaders try to spin it, the Houston economy is still very much tied to oil and gas. Below are three reports that recently came out on the state of the economy of Greater Houston area. You will see that each report highlight the fossil fuel industry as being the economic engine for Greater Houston area. There is little mention of any other economic factors, other than services, which are largely here to support the fossil fuel industry. When we look at the global activity to decarbonize the economy to mitigate climate change, this continued reliance on a single economic driver may be a problem.

Economic Outlook for Greater Houston

Texas A&M Outlook for the Texas Economy –

  • Houston posted the largest monthly increase with 8,000 jobs, half of which occurred in professional
    and business services (often linked with the region’s energy sector).
  • The Greater Houston region added 30,000 jobs in the first quarter alone amid strength in the energy and manufacturing industries. (the manufacturing is largely oil and gas related.)
  • Increased drilling activity and weaClimate Change and Texas Economykness in the U.S. dollar supported 5,800 manufacturing jobs over
    the past two months. At the metro level, manufacturing employment surpassed 4 percent growth seasonally adjusted annual rate (SAAR) in both Austin and Houston, translating to 900 and 1,800 industry jobs this year, respectively.
  • The wave of professional and business service jobs grew higher, adding more than 50,000 jobs across the state in just six months. Many of these jobs supplement the energy industry and are located in the financial sectors of Dallas and Houston.

Greater Houston Partnership – Economy at a Glance

  • The region’s leading exports in ’17 were petroleum products ($18.2 billion), basic chemicals ($12.9 billion), oil and gas extraction ($11.5 billion), agricultural, construction and mining machinery ($3.5 billion) and plastics and resins ($3.4 billion).

Greater Houston Partnership Employment Forecast 2018

Approximately one-third of Houston’s GDP is tied directly to oil and gas. This figure doesn’t include energy’s impact on wholesale trade, transportation, and professional services. Nor does it account for how much of their paychecks energy workers spend at the grocers, in local restaurants or at the drug store. Factor in those expenditures and energy’s impact on local GDP is significantly higher.

Risk of Decarbonization

Although it may be less apparent in the US, there is a global push to decarbonize our energy and transportation systems. My concern is that the Greater Houston region is underestimating the pace of this global energy transition. This is problematic for the Gulf Coast in the mid to long-term. For the short-term things are looking pretty good with oil prices lingering around $70 a barrel. However, when we look at global factors relating to the decarbonization of our world economy, it is hard to be as optimistic. Much of the world is taking climate change seriously and is taking steps to mitigate greenhouse gas emissions.

Some indications of the risk include:

Climate Change Policies
Carbon Brief Map of Climate Change Policies

Oil and Gas Majors Are Taking Note of Climate Change

The large major oil and gas companies are taking note of the global climate indicators and appear to be conceding to some degree that business-as-usual may need to change. Shell and BP are both publishing reports in 2018 that will provide greater insight into operational risks due to climate policy. The realize the near term political climate is pushing for policies that are intent on keeping the planet below two degrees Celcius temperature increase. Chevron has provided some insight as to what the near to mid-term would look like with lower oil demand due to climate-related policies. Chevron does not see peak demand in the near term but concedes that there is a future where there will be less oil demand. This will increase competition among oil and gas companies and result in lower cash flows. Exxon Mobil and BP both see peak demand coming in the next couple of decades. The peak is driven by a shift to renewables and to electric vehicles, as well as improved efficiency of internal combustion engines.

Greatest Risk is Shift to Electric Vehicles

As seen in the LNNL graph below 72% of petroleum goes to transportation. The longevity of the oil and gas market is driven by the continued consumption of oil by the transportation sector. However, forecasts point to a growing number of EVs and improved efficiency of autos which will lessen oil demand.

Climate Change Changes Energy Mix

Lawrence Livermore National Lab US Energy Consumption 2017

BP predicts 300 million electric vehicles by 2040. This will account for 15% of all vehicles. The most recent Bloomberg New Energy Financing research estimates that by 2040 there will be 530 million EVs on the road. This potentially could displace 8 million barrels of oil per day, 336 million gallons. By 2040, over 50% of car sales will be EVs. Recently, Aurora Energy Research reported in Oilprice.com that similar to the BNEF report, it sees 540 million EVs on the road. EVs will make up a little over one-quarter of total vehicles on the road. More concerning is that the firm estimates that with EVs and improved efficiencies of internal combustion engines (IEC) total revenue loss by oil and gas companies may be around $21 trillion.

China Leads the Way

Who is leading the pack? China. Being a leader in EV technology and high-tech manufacturing is one of the key focus areas of China.  As part of its Made in China 2025 strategy, the government is pouring billions of dollars into EVs to make it happen. When the worlds second largest economy is looking to electrify the transportation sector, primarily driven by strategic concerns related to importing much of its oil and gas supply and the choking smog largely attributed to the internal combustion engine, it may be time to think beyond the short-term gains being reaped from the most recent resurgence of the regions oil and gas sector.

Natural Gas May Not Pick Up the Slack

As more EVs are on the road more power generation will be needed.

It is possible that combined cycle natural gas plants will be built to provide the additional power required to power the fleet. However, with unsubsidized renewables having a similar levelized cost of energy as natural gas plants,

building more natural gas plants to offset the decrease in fossil fuels used to fuel the transportation sector is not certain.  A recent Greentech Media analysis finds lithium-ion storage looks to compete head to head with gas peakers by 2022 and beat out peakers by 2027. See below.

Climate change and energy storage

Greentech Media Image – Storage and Nat Gas Peakers 

Where are Public Leaders?

In the Greater Houston area there needs to be more leadership to diversify beyond the oil and gas sector. There has been much excitement around how the Greater Houston survived much of the last oil bust cycle due to its growing export market. However, when you look at what was being exported, a good bit of it was and continues to be petroleum products.

The Greater Houston area must take concrete steps to seriously diversify the region’s economy. The Amazon HQ snub should be a wake-up call. Dallas is more attractive than Houston to Amazon.

Exporting more oil and gas products vs. importing is not really diversification. Further, it does nothing to limit the reliance of the economy on the fossil fuel industry. Houston is not seen as anything more than an oil and gas town. Otherwise, we would not have been the only large city not making it to the top 20 of the Amazon search.

There was a step forward with the announcement of the new Innovation District in Midtown. This is a $100 million project led by Rice University, in partnership with the city and business leaders, to kick-start the high tech start-up community. Hopefully, there is more being planned than this one initiative.

Advertisements

UPDATE : Climate Change has Put the Tiger in a Corner

UPDATE:

As I mentioned in my earlier post below, ExxonMobil is being much more aggressive than would be expected in its legal activity to clear its name related to climate fraud allegations. The company is fighting back with a much-increased level of intensity. In what some are saying is unprecedented, ExxonMobil is going directly after the attorney’s that are suing them.

This week it appears ExxonMobil’s attempt to play defense against multiple climate fraud lawsuits hit a significant roadblock. The case Exxon Mobil Corp et al v Schneiderman et al was filed with the US District Court and heard by Judge Valerie Camproni. This case argues that the suits filed by the New York AG Schneiderman and Massachusetts AG Healey, which claims ExxonMobil has committed fraud by not disclosing known climate risk, are politically motivated and in bad faith. Judge Camproni disagreed and dismissed the lawsuit with prejudice. This means that ExxonMobil cannot file a similar suit in the future. ExxonMobil is currently considering its next legal options

We will see what ExxonMobil’s next move is, but the findings of this case do allow the AG’s to move forward with their investigation, as well as provides optimism to others who filed similar suits.

ORIGINAL POST:

Back in May of 2017, I wrote a post on the double climate risk for the Gulf Coast region. To quickly summarize, the first risk is the physical risk that is being realized due to a rapidly changing climate. The second risk is that the region’s economy is fossil-fuel driven at a time when much of the world is trying to decarbonize. There is still significant debate as to how quickly this will happen and to what degree, but trends in technology, i.e. electric vehicles; an increasing push for more renewable energy, i.e. China and India;  would make one think a shift is happening more quickly than initially anticipated. This shift to decarbonizing is receiving growing support from the financial and insurance sector. On the financing side, we see a quickly growing green bond sector that is pouring considerable dollars into renewable energy, energy efficiency, and other green infrastructure projects. We also see growing demand from institutional investors for “green” investment opportunities. The insurance industry is also pushing for more decarbonization, as well as climate adaptation, due to the significant and growing risks of insured assets.

Kids Want Climate Justice

The lawyers are also getting involved. A variety of lawsuits have been filed in the last few years across the United States claiming harm to communities due to the burning and consumption of fossil fuels by industry. The oil and gas sector is getting a significant amount of attention from the legal sector, with ExxonMobil being one of the key targets. ExxonMobil is a focus of many due to the research the company conducted in the 1970’s that indicated the burning of fossil fuels contributed significantly to global warming and could result in significant climate change; they found an “emerging consensus that fossil fuel emissions could pose risks for society.” While they were finding these results and continuing to study how climate change would impact business operations, they were leading lobbying efforts to fight the adoption of greenhouse gas regulations. The claim that is being made is that Exxon Mobil knew about the climate risk but did not properly disclose this risk to shareholders. The legal action that appears to be getting the greatest traction is the State of New York Attorney General’s investigation into whether Exxon Mobil the statement the company made to its shareholders was consistent with its research findings on climate change. The California AG is also investigating whether ExxonMobil was implementing business strategies in line with their research findings but not disclosing this risk to shareholders. In all, there are 17 AGs investigating ExxonMobil on this issue.

 

Much of this AG activity has received expected legal pushback from ExxonMobil. The company also tried to limit any reputational damage with media campaigns on the company being a good steward and continued denial of any wrongdoing. Until this week, when it appears the company is fighting back with a much-increased level of intensity.  In what some are saying is unprecedented, ExxonMobil is going directly after the attorney’s that are suing them. ExxonMobil is looking at filing suit and getting depositions from lawyers involved in the climate suits. The company is claiming that the state AG’s and citizen groups are conspiring against ExxonMobil in a public relations and legal campaign. This campaign is believed by ExxonMobil to have started in La Jolla, CA several years ago.

So why is the 10th largest company on the planet, fighting back with such intensity? With the current occupant in the White House and the Republican domination of the legislative branch, there is no short-term regulatory risk to the company, at least in the United States. It is not likely that it is the legal suits they are most concerned about, either.

They are good prognosticators. Based on their research, they knew that climate change could be a business risk and was making business decisions based on this risk. (At least this is what the lawsuits claim.)  ExxonMobil is likely less concerned that the AG suits will prevail in courts; they have the resources to tie these up for years. What they are more likely concerned about is losing in the court of public opinion. Public opinion is driving demand for decarbonization and the market and investors are reacting accordingly. And why not, the costs of decarbonizing are at or soon to be at the same price point as business as usual. So it’s much easier for the public to get on board. Most people don’t care what their car is fueled with. They just want to have easy, inexpensive access to transportation.

The double risk is real for ExxonMobil. They have known for years that the climate change will impact their business operations and have made decisions accordingly. Now it is becoming obvious that there is more than the physical risk. There is the real risk of losing the support of the markets and public opinion. The Gulf Coast region should take heed of this growing double climate risk. ExxonMobil may be the canary in the coal mine.

 

Book Review: Drawdown – The Most Comprehensive Climate Plan Ever Proposed to Reverse Global Warming

Title: Drawdown: The Most Comprehensive Plan Ever Proposed to Reverse Global Warming

Editor: Paul Hawken

Publisher: Penguin Books

Year Published: 2017

Price: $17.31

When this book arrived in the mail I was shocked. I was not expecting a book with coffee table dimensions. It is a wonderfully designed book. The solutions are well organized, the writing is accessible to all readers and the pictures are eye-catching.

The genesis of this book came from Hawken’s realization that there is not a comprehensive checklist of technologies and solutions for climate mitigation and climate adaptation. After several years of looking for this list and not finding one, he decided he would need to bring together and work with the top climate experts in the world to come up with a list of solutions that have the greatest potential of reducing emissions and sequestering carbon from the atmosphere. The outcome is the Drawdown organization and this book. The book is just the beginning. It is anticipated that this will be a living plan with regular analysis and updates from Drawdown and found at www.drawdown.org 

The Foreword is provided by Tom Steyer, Founder of NextGen Climate. Here he discusses the importance of identifying innovative solutions to climate change, and particularly not just technological solutions but solutions that work in tandem with natural systems. Steyer sees Drawdown as a roadmap with a moral compass that finally provides a vision that allows all of us to work together to build a cleaner and better world.

In the book over 80 solutions are identified and ranked based on the greenhouse gas reduction potential out to the year 2050. Of the top 20, reductions in the food, energy and the land-use sector are the most commonly seen. The number one solution identified is refrigeration. The problem is the proliferation of refrigeration using hydrofluorocarbons (HFC). HFCs were adopted to replace the ozone depleting chlorofluorocarbons (CFC), hydrochlorofluorocarbons (HCFC). In October 2016, in Kigali, Rwanda, the Montreal Protocol was amended to start the phase-out of HFC. However, with an anticipated 700 million air conditions being in circulation by 2030, many using HFC, this will be quite a monumental task to reign in the use of HFC.

The book provides a concise review of each of the 80 options taking into account reductions in GHG potential, net costs and the net savings of taking action. The authors do a nice job of bringing in real world examples of struggles, as well as success stories of communities and governments implementing these solutions. The solutions are broken into categories of energy, food, women and girls, buildings and cities, land-use transportation and materials. There is also a wish list presented at the end of the book of high value, but not yet fully scaled solutions such as smart highways, the hyperloop, marine permaculture and the artificial leaf.

Solutions are plentiful, both those that are already being implemented, as well as those that have some near-term potential of scaling. The book does a nice job by bringing together high impact solutions to one place for easy access and evaluation. That being said, I would not call the book a comprehensive plan. At the most a comprehensive list, but not a comprehensive plan. It is definitely a call to action. It is inspirational and provides hope and optimism that there is a way to salvage our planet through cost effective emission reducing solutions. But at the end of the book, I was still asking myself what is the plan? Maybe that is asking too much. This book takes a global approach to identify a list of solutions. We probably should not expect it to provide an actual plan to implement these measures at a national or sub-national level.

I believe the book does provide local planners and officials a better idea as to what solutions may be viable, but there still needs to be considerable work at the federal, state and local level to turn the list of solutions into a workable plan. Stakeholders must be engaged and priorities must be identified and set. Communities need to conduct cost benefit analysis to see what is economically practical. Regulations and policies must be changed that would allow for proper valuation and inclusion of these solutions and remove the barriers to their adoption. Finally, for any solution to work or plan to implemented, there needs to be funding. I was hoping this book would begin to present these funding solutions but none are identified. Fortunately, there is growing interest by institutional investors and the market in general to push more funds to climate solutions. 

To sum, it is a great list of solutions. It is well researched and well laid-out. It should be a must-read for any planner, government official or policy maker. For anything to happen in reducing greenhouse gases, it is vital that these solutions are known, quantified and ranked and the book does just that. Learn more at the image below.

Book Review: Drawdown – The Most Comprehensive Plan Ever Proposed to Reverse Global Warming

Title: Drawdown: The Most Comprehensive Plan Ever Proposed to Reverse Global Warming

Editor: Paul Hawken

Publisher: Penguin Books

Year Published: 2017

Price: $17.31

When this book arrived in the mail I was shocked. I was not expecting a book with coffee table dimensions. It is a wonderfully designed book. The solutions are well organized, the writing is accessible to all readers and the pictures are eye-catching.

The genesis of this book came from Hawken’s realization that there is not a comprehensive checklist of technologies and solutions for climate mitigation and climate adaptation. After several years of looking for this list and not finding one, he decided he would need to bring together and work with the top climate experts in the world to come up with a list of solutions that have the greatest potential of reducing emissions and sequestering carbon from the atmosphere. The outcome is the Drawdown organization and this book. The book is just the beginning. It is anticipated that this will be a living plan with regular analysis and updates from Drawdown and found at www.drawdown.org 

The Foreword is provided by Tom Steyer, Founder of NextGen Climate. Here he discusses the importance of identifying innovative solutions to climate change, and particularly not just technological solutions but solutions that work in tandem with natural systems. Steyer sees Drawdown as a roadmap with a moral compass that finally provides a vision that allows all of us to work together to build a cleaner and better world.

In the book over 80 solutions are identified and ranked based on the greenhouse gas reduction potential out to the year 2050. Of the top 20, reductions in the food, energy and the land-use sector are the most commonly seen. The number one solution identified is refrigeration. The problem is the proliferation of refrigeration using hydrofluorocarbons (HFC). HFCs were adopted to replace the ozone depleting chlorofluorocarbons (CFC), hydrochlorofluorocarbons (HCFC). In October 2016, in Kigali, Rwanda, the Montreal Protocol was amended to start the phase-out of HFC. However, with an anticipated 700 million air conditions being in circulation by 2030, many using HFC, this will be quite a monumental task to reign in the use of HFC.

The book provides a concise review of each of the 80 options taking into account reductions in GHG potential, net costs and the net savings of taking action. The authors do a nice job of bringing in real world examples of struggles, as well as success stories of communities and governments implementing these solutions. The solutions are broken into categories of energy, food, women and girls, buildings and cities, land-use transportation and materials. There is also a wish list presented at the end of the book of high value, but not yet fully scaled solutions such as smart highways, the hyperloop, marine permaculture and the artificial leaf.

Solutions are plentiful, both those that are already being implemented, as well as those that have some near-term potential of scaling. The book does a nice job by bringing together high impact solutions to one place for easy access and evaluation. That being said, I would not call the book a comprehensive plan. At the most a comprehensive list, but not a comprehensive plan. It is definitely a call to action. It is inspirational and provides hope and optimism that there is a way to salvage our planet through cost effective emission reducing solutions. But at the end of the book, I was still asking myself what is the plan? Maybe that is asking too much. This book takes a global approach to identify a list of solutions. We probably should not expect it to provide an actual plan to implement these measures at a national or sub-national level.

I believe the book does provide local planners and officials a better idea as to what solutions may be viable, but there still needs to be considerable work at the federal, state and local level to turn the list of solutions into a workable plan. Stakeholders must be engaged and priorities must be identified and set. Communities need to conduct cost benefit analysis to see what is economically practical. Regulations and policies must be changed that would allow for proper valuation and inclusion of these solutions and remove the barriers to their adoption. Finally, for any solution to work or plan to implemented, there needs to be funding. I was hoping this book would begin to present these funding solutions but none are identified. Fortunately, there is growing interest by institutional investors and the market in general to push more funds to climate solutions. 

To sum, it is a great list of solutions. It is well researched and well laid-out. It should be a must-read for any planner, government official or policy maker. For anything to happen in reducing greenhouse gases, it is vital that these solutions are known, quantified and ranked and the book does just that. Learn more at the image below.

Uncertainty in Climate Regulations Detrimental to the Environment and the Economy

A variety of climate risks are starting to have a noticeable impact on how we do business. These risks can be physical climate risk, both chronic and acute, which directly Inhofe_holding_snowballimpact operations; financial risks, such as divestment; regulatory/policy risks, such as carbon pricing or risk disclosure requirements; and reputational risks. In the next series of blog posts we are going to take a deeper look at each of these risks. The first will be with regulatory risk.

According to the Global Adaptation and Resilience Investment (GARI) Working Group 2016 survey, 78% of respondents see physical climate risk as being a very important concern and 53% ranked climate regulation risk as a very important issue that must be considered. Within the same survey, 68% of respondents are currently working on strategies to deal with anticipated changes in climate-related regulations.

Organizations must we willing to address the transitional risks associated with new policies and regulations that are likely to be adopted to mitigate climate change. New climate related regulations at the local, state and federal level have been and will continue to be considered. Some of the potential regulatory risks are related to pricing or taxing carbon emissions; change in land use zoning and subsequent loss of property value; new building and construction standards; new business continuity or insurance requirements; more requirements attached to state and federal funding for infrastructure development; and more stringent disclosure requirements. To add complexity to these regulatory changes, there is a distinct possibility that a lot of this action will be happening at the state and local level which will result in a patchwork of regulations and policy across the United States. For example, many state and local governments have vowed to move forward in battling climate change. California is one of the more vocal and active states in regard to climate policy; see the “Preserve California” legislative package.

A key area of interest for me is to what extent these companies are actually acting on these potential regulatory risks. The private sector gets very uncomfortable when there is uncertainty in the regulatory environment. In fact, although regulations are typically not highly desired, many corporations prefer regulatory certainty over a regulatory environment that is in flux. Organizations can at least plan when there is greater certainty. This is why we see some large corporations that have not traditionally been overly excited about climate regulation pushing for a carbon tax. A carbon tax is not too complex and it can be planned for and actively managed by corporations.

Unfortunately, the current Administration is creating a significant amount of uncertainty in the regulatory space. There is a definite desire by the current administration to roll back as many climate related regulations as possible. It appears the Clean Power Plan has largely been put on the back burner and there are a variety of efforts to roll back methane emissions and other Obama-era regulations. However, today July 29th, the US Court of Appeals for the DC Circuit just ruled that the EPA cannot suspend these rules.  This follows an earlier loss by the Administration when the Senate voted to reject the suspension of these rules.

This frenetic policy making process of the current administration to roll back regulations just because the word climate is associated with it is not good policy making. This is particularly a problem when the Administration does not understand the policies they are rolling back and how policy making works, particularly in regards to the dynamic we have in place with the checks and balances from the Courts and the representatives we have on the Hill. Further, for an Administration that is focused on economic growth, this yo-yoing back and forth between rules and regulations is not good for business. It leads to very uncertain business environment that reduces investment R&D, and economic growth.  To track policy uncertainty, Moody’s has published their Policy Uncertainty Index and currently it is at its highest point to date this year.

I am a fan of many of these climate regulations. I would like to see many of them stay in place. That being said, none of them are perfect and there is room for improvement. However, a wholesale rollback without any thought as to the impact on the environment, and particularly here, the impact it has on the ability to conduct business is highly problematic. There are common areas of concern and interest that both sides of the aisle can work on together. We have great examples of bipartisan work from Shaheen and Portman and Murkowski and Cantwell. So if we really want to make “America Great Again” it is important that the current Administration take a deep breath on their regulatory agenda, learn how the federal policy making process works and conduct policy making in a way that actually helps business and our communities.