How governments and the cult of net zero wrecked the energy market
Ten years ago, I flew to Texas to take a tour of the US’s most productive gas field. The Anglo-Australian mining giant, BHP Billiton, had spent $20 billion buying a slice of the Eagle Ford shale field and was trying to convince investors, via the media, that it had been a good idea.
BHP’s oil chief, Mike Yeager, a genteel, walrus-moustached Texan, hosted us on a flight over the woods and meadows of Eagle Ford in a helicopter, took us to see production wells, and introduced us to officials in a county (population 20,000) generating $71 million in gas tax revenues. BHP would spend a further $20 billion developing the field before eventually selling it to BP for just $10 billion. It had bought at the top.
This investment rollercoaster has been on my mind because it was the last time serious new money was put into oil and gas development. Since then, investment has fallen 60 per cent. With it, the stock of proven “reserves” – fossil fuels found and viable for extraction – has fallen more than 50 per cent.
Now the reckoning has come. With Russia cutting supply, prices are rocketing. Since January last year, US gas prices have risen nearly threefold. European gas is up sevenfold. Bills are following suit. Proximately, this is because of Putin. But the reason we are so exposed to the whims of a murderous dictator is under-investment.
Why has there been such dramatic under-investment and why is it that producers are hesitating, when they would normally respond to soaring prices by pushing up production and investment? Well, after the shale writedowns, governments and corporate governance busybodies didn’t just leave the losers to lick their wounds. They mounted a campaign to shut down investment permanently in the lifeblood of the global economy – energy – in the name of saving the planet. What we are now facing are the consequences of these decisions.
The mistakes span governments, continents and decades. They are going to cause untold hardship for millions. They threaten not just our economy and health, but the durability of the Western alliance. Most ludicrously, they risk making semi-permanent the role of coal as an emergency back-up when it’s the dirtiest fuel of them all.
The original error was not with the science of climate change. It was not with the notion that we should phase out coal. But sometime around 2014-16, regulators, lawyers and politicians began to run with the idea that the trashing of “big oil” (and so on) led by students in feathered war bonnets was costless, popular and green.
What followed was a co-ordinated effort to run down fossil fuel production, seemingly without a thought for the vastly different environmental impacts of gas versus coal or the need for Western economies and people to enjoy a reliable supply of energy. In 2015, the then Bank of England governor Mark Carney (yes, him again) gave a speech talking up the risk of climate “stranded assets” – energy investments that would be rendered worthless by climate change legislation.
The EU excluded gas and nuclear from its list of “green” technologies eligible for “sustainable” grants, investment and the like. The UN issued ethical investment guidelines that discouraged putting new money into fossil fuels. Theresa May rammed net zero through Parliament without scrutiny of the cost and slapped the “price cap” on utility firms, which soon after began to go bust by the dozen. Last year, Rishi Sunak added “supporting the net zero transition” to the Bank’s mandate. And the more production we shut down, the more virtuous we felt.
It wasn’t just in Europe. US officials also took up the mantle. States passed net zero laws that, like ours, had no accompanying energy production strategy. Bureaucrats from California to New York began to pressure insurers and oil firms to account for fossil fuel investments or answer in the courts for “climate fraud”. The Keystone XL oil pipeline was blocked. Investors, taken over by righteous and economically illiterate “environmental, social and governance experts”, pressured oil firms to stop investing and banks to stop funding them, and then went on a marketing binge to sell expensive “ethical” investment products.
Industry saw the writing on the wall. Utilities shut down their long-term gas contracting departments and began to buy gas at the going price on the day, fatally undermining security of supply and making new investment un-financeable. Fossil fuel producers began handing money back to investors. Even state-owned producers, like Qatar, cut investment on the basis that Europe (the UK included) had become an unreliable customer. In the first half of this year, even as Russia began to turn the screws, the West’s seven biggest oil firms spent more on dividends and share buybacks than on capital investment. They were only doing as they were told.
And now? Well, now, as “big oil” might say: “We just walked in to find you here with that sad look upon your face.” Europe needs gas. It is pleading for gas. Instead of flying media to gas fields to court capital, the oil and gas men are being flown to the capitals of Europe and begged to invest. Despite the incredible prices, they hesitate.
The meeting goes like this: “We need you!” say the politicians. The producers scratch their heads as they mull $20 billion, 20-year investments, and wonder whether, when the war is over and the green bandwagon rolls back into town, the politicians will still sound so sweet on them. “Your green targets still say we need to shut down by 2030,” they point out. To which Europe says: “Well, of course. Fossil fuels are evil!”
The upshot is that the market is broken and it is governments and do-gooders who broke it. They broke it wantonly, recklessly, touting their saintly intentions, and now we are all reaping the consequences. The only way to resurrect it is with more government intervention.
One scheme sketched out by Lambert Energy Advisory would see the EU and UK collectively co-ordinate utility companies to offer 15-year contracts for enough gas to replace Russian supply, using a dynamic pricing mechanism (that is, we obviously do not lock in 2022 prices for 15 years). The producers who fill the contracts can come from anywhere except hostile states. Do it right and just watch the investment taps – and then the gas taps – turn on at full flow again. And given the lower emissions of gas versus coal, the planet doesn’t even have to suffer.
The alternative is that we continue with a policy of self-sabotage on a truly industrial scale. Politicians can blather about windfall taxes and price freezes all they want. If they don’t repair the market, it is irrelevant. In the meantime, the demolition ball of a self-created gas crisis is swinging through Europe. Will any of our leaders act to stop it?