The Russian invasion of Ukraine has focused European political leaders on the independence of their energy generation. The issue, however, is not new and across Europe there have been a series of disputes with Russia about the supply and cost of natural gas over many years.
Interestingly some countries, notably those with formerly close ties to Russia, have been more wary. Poland was already planning energy independence from Russia and Lithuania had called for the EU to phase out imports of Russian gas and oil.
Numerous warnings have been sounded in the past two decades and before this – Ronald Regan in the 1980’s feared that Europe would become too dependent on Russia for energy, providing the Kremlin with a lever and degree of control over Europe. In 2016 disputes over gas prices and pipeline closures looked to many like Russia using its energy advantage to intimidate Europe. It was suggested that Russia was developing an ability to use unilateral sanctions via gas pricing and flow disruption against NATO member states. Despite these long-term concerns Europe has remained a significant importer of natural gas from Russia.
In 2021 Europe was the largest importer of Russia’s fossil fuels and 40% of the gas consumed in Europe was Russian, but this situation is highly likely to change. At a country level some are more vulnerable to disruptions in the gas supply than others; Germany is often the country highlighted when this issue is discussed, primarily because it is the largest economy in Europe and does have a significant dependence on Russian gas. However, it is not the biggest dependent – Latvia, Finland and Moldova and others have an almost exclusively reliance on Russian gas supplies.
Energy themes at play
Energy independence is going to become the priority for many, if not all, European countries and it would seem there are three broad themes at play here. It indicates there will be a substantial build out of renewable energy infrastructure and not just wind and solar, but biomass, hydro, wave, and hydrogen I’m sure will be in the frame.
Read also: – Hydrogen on the horizon at COP27
There will likely be a re-routing of the oil and gas supply chain – the warnings of dependency on Russian fossil fuels that have been sounded over the decades are now coming to a head. The obvious replacement supplier of oil and gas would be the Middle East and there is the potential for Iran to be let back into the global oil family to make up for the boycott of Russian oil.
A third consequence is extending the life of existing power generation plants such as nuclear and coal. Germany was planning to close its two remaining nuclear power stations by the end of 2022 and to phase out its coal generation by 2030 to bridge the energy gap their plan was to use Russian gas, this is clearly no longer a palatable option consequently their policy has changed.
To this end Germany has already responded with a number of potential measures including the extension of the life of the nuclear power plants and ramping up its new renewable plans. Germany plans to be 100% renewable energy by 2035. It seems very clear that the terrible events in the Ukraine war are going to push the development of renewable infrastructure much harder than would have been the case otherwise. In the meantime, the demand for oil and gas is not going to significantly change and with the pressure on supply and the boycott of Russian oil, the likelihood is oil and gas prices will remain at elevated levels, most likely above pre-invasion levels for an extended period of time.
An elevated oil price means companies in the sector are likely to be more profitable including those involved in maintenance of oil and gas infrastructure, and to a lesser extent the nuclear industry too, making these investments more attractive on a returns basis. Pure profitability never has been an ESG argument of course but, supporting industries that take us to a decarbonised world must be.
From an ESG investment perspective this raises a number of conundrums. Avoidance of oil and gas stocks has been a given for many ESG investors, and although no one would chose to compromise national security and protecting democracy, it has not been at the forefront of ESG thinking, and yet is essential to everything we all, not just ESG investors, want and believe in.
Just how this situation should be approached from an ESG viewpoint when managing client money is difficult because it’s personal to clients on a number of levels, but there is a case to answer that embracing oil and gas companies from the large majors through to service companies is helping to bring energy security to Europe and to redress the political balance away from what has turned out to be a far more aggressive Kremlin than was thought only a short while ago.
Energy is required to build renewable infrastructure (concrete and steel especially) and with an urgent need to build out quickly secure energy supplies are a pre-requisite to this goal. Supporting the oil and gas industry from and ESG perspective because it facilitates the building of renewable energy infrastructure is an issue that has to some extent been glossed over historically, but in a future where energy security is critical this dependency becomes clearer.
Energy security is essential for our collective freedom and for democracy to be maintained. So, although the oil and gas industry and the renewables industry are strange bed fellows it seems they’ve come together in an odd alliance. If we see an increased adoption of renewable technology, then the goal of keeping global temperatures rise to no more than 1.5 degrees is brought forward.
But short term there may also be a delay in the reduction of carbon emissions as old polluting electricity generation is maintained. ESG investing has never been black and white and never more so than now. This could be an opportunity for oil and gas producers and ESG investors to come together and engage and work on the dual goals of energy security and the transition to a decarbonised world.