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WHAT TO WATCH: ISSUE #6

June 27, 2019

Colorado just joined Nevada and New Mexico in legislating a response to climate change that sets economy-wide carbon reduction targets with little to no path for attainment. Such aspirational legislative and regulatory actions create a sense of fait accompli for the energy consuming public. That imagined destiny is now a hard and fast expectation for your company’s oil and gas operations. Are you ready to meet this new world?

Both of these things are true:

  1. A significant and growing public in North America believes that a carbon-free energy future is inevitable, if only governments will pass laws and regulations incentivizing the markets.   
  2. Governments do not have the experience or know-how to drive an innovation-led energy revolution, but they are doing it anyway.

The problem:

From California Governor Brown’s executive order to decarbonize the entire state economy to a number of U.S. presidential candidate’s all-or-nothing energy (aka, climate) proposals, regulatory ambitions are expanding the public’s understanding of what can be done by government and industry on energy, advancing an expectation for a carbon-free energy future… soon.

Last fall, I made the mistake of rolling my eyes at California’s frankly ridiculous, unmapped executive order to decarbonize all energy in the world’s fifth largest economy by 2045. Since then, New Mexico, Nevada, Colorado, and Washington state have made similar commitments. Four other states are working on such proposals. I did not anticipate such meaningful momentum, and I won’t make that mistake again.

As if to put an exclamation point on this personal revelation, last week New York progressed toward passing the most ambitious state plan yet, targeting emission-free electricity by 2040 and 85 percent reduction in economy-wide emissions by 2050. Notably, the act specifies that state agencies take climate goals into consideration in all permitting decisions.

Similarly, AOC’s Green New Deal has vaulted all of us in the United States into an unprecedented climate conversation, which is now deeply embedded in the presidential elections. Although the positions of Democratic candidates range from the pragmatic to the silly, they nonetheless all have a position — and we are going to keep hearing about energy and climate in the context of U.S. leadership. Period.

It matters because:

The world didn’t wait around to watch California’s proposal fail. Academics, investors, think tanks, and utilities are mobilizing their resources to make these aspirations a reality.

The voting public reads the headline about Colorado’s recent climate announcement and thinks, “okay — we are going to reduce 90 percent of carbon by 2050.” They then ask you: Why should I support your oil project when we aren’t going to need that resource in a few years?

Whether a pragmatic, affordable net-zero energy future is our destiny remains to be seen. In most things, I will not bet against American ingenuity.

The critical mistake companies are making:

Sitting in the peanut gallery critiquing the scope, overreach, and unattainability of these proposals. I just stepped down from the balcony seats myself.

Seize the day. Successful companies will:

  • Follow these developments with interest. We must adopt the mindset of the eager student — and shake off the cynicism of the grizzled warrior. By exploring both the mobilizing forces behind such regulatory ambitions and the progress underway on their implementation, we will better understand the social landscape in which we are operating.
  • Your skepticism has a place. Oil and gas companies throughout the value chain are tasked with meeting the energy expectations of their customers and communities without interruption. You will have to engage in a healthy debate about some of the kooky regulatory ambitions coming at you. No doubt about it. You will make your case more effectively when you can embody the perspective with which you are debating. (See previous bullet.)
  • Have I mentioned? You need to be able to articulate your place in the quickly evolving expectations of energy companies. What to Watch Issue #4 talks about a proactive ESG strategy that thinks comprehensively about company risk, business objectives, and investment.

I find Axios’ energy newsletter the easiest one-stop shop to keep tabs on these kinds of developments.  Let me know your resources and what you’re watching. I would also like to cover developments in Canada and welcome your insights.

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