Sticks & Stones was wrong, words matter

Energy and climate discourse needs to be overhauled

Sticks and stones may break my bones but names shall never hurt me.

- American parents and teachers to elementary school children, circa 1970s-1980s

This was presumably an anti-bullying defense mechanism taught to American elementary school children in the 1970s and early 1980s. I don't think my now college-aged kids used the phrasing when they were young presumably since at some point society shifted from effectively telling bullying victims to toughen up to instead deciding to stop bullying in the first place. It is a good thing that the world moved away from the notion that only physical violence can hurt and to start taking mental health more seriously.

In my view, the importance of language and the need to stop bullying should apply to energy and climate discussions. Unfortunately, many have not gotten the memo. So in this week's Super-Spiked I will examine the language used around the energy and climate discussion and the urgent need for improved discourse. In some cases the words or phrases need to simply go away as they are inaccurate. In other instances it is more about redefining a better understanding of what the idea ought to entail. Inclusivity, compassion, and the truth are all traits generally lacking in mainstream energy and climate discussions.

In reviewing the draft of this write-up pre-publication, I acknowledge that I am taking greater issue with words/phrases that typically come from the so-called left side of the aisle in the context of US politics. It is what it is. I hate partisan politics. And while I am definitely not a left-of-center progressive, I am also not fan of some right-wing views and find some appeal to certain left-of-center causes.

I don't like the term "moderate" as it implies a sort of middle-of-the-road wishy-washiness that is not reflective of my very strong views about what would constitute sensible energy policy and corporate strategy. The focus and motivation of Super-Spiked remains to have the world move to a healthier and less messy energy transition glide path than it is currently on. An important starting point is to refocus the conversation to ensuring we achieve, first and foremost, the over-arching objective of having available, affordable, reliable, and secure energy for all, ideally with as small of an environmental and climate footprint as possible.

Clean versus dirty (green versus brown) energy

The idea that energy sources can be sorted between "clean" and "dirty (or the similar "green" versus "brown" nomenclature) may be the original sin when it comes to energy and climate discourse. No energy source is inherently clean or dirty; it is all a mix. Today the phrase is most often used as a marketing (or perhaps ideological) spin on high versus low carbon content. Lets use those words—high and low carbon energy—instead as it is actually more accurate and removes the false morality implied.

Moreover, wind and solar are intermittent resources. There is nothing clean about not having 24/7/365 power generation. We can see it in the brown-outs occurring in California and other renewables-heavy regions. It would be far more accurate to simply say that a megawatt of power created from coal versus solar or wind will produce higher CO2, a negative externality of fossil fuel energy sources.

Everyone that is not living in poverty thanks to coal is living in cleaner, environmentally healthier conditions. Those that do not have access to modern energy, including fossil fuels, are most at risk of living shorter lives in less environmentally friendly locales. And there is certainly nothing clean about using forced labor to manufacture solar panel in China. Or to use child labor-mined minerals from various African nations that are sourced for supposedly clean electric vehicles.

Undoubtedly life-cycle CO2 emissions for a working offshore wind farm is lower than a coal plant. But to call offshore wind "clean" and coal "dirty" is not accurate. The most environmentally friendly regions that exist today were all built on coal; coal is perhaps most responsible for lifting the most people out of crushing poverty. There is nothing dirty about that. Why do some feel the need to slander coal? Why not instead take a positive approach that focuses on decarbonization efforts that ensure we have available, affordable, reliable, and secure energy for all?

Zero emission vehicle

An electric vehicle has zero tailpipe emissions, which is a great thing. If you suffer from breathing the smog-filled air of New Delhi, a move to zero tailpipe emissions I am sure would be quite welcomed. However, today the term is often used by some politicians and “climate only” advocates to imply EVs are zero CO2 vehicles. Unfortunately, immaculate conception is merely a Biblical concept, not an EV manufacturing methodology. In fact there are significant CO2 emissions required up until the point of sale (I'll generously ignore power-source CO2 emissions when operating an EV since I can retain hope zero emission nuclear power will some day be ubiquitious).

Are the life cycle CO2 emission for an EV lower than an ICE vehicle? Most likely. But it is no where near "zero", gross or net. Why should we pretend otherwise?

CO2 is a pollutant

Carbon dioxide is an important greenhouse gas that helps to trap heat in our atmosphere. Without it, our planet would be inhospitably cold. However, an increase in CO2 concentrations in our atmosphere is causing average global temperatures to rise, disrupting other aspects of Earth's climate.

- University Corporation for Atmospheric Research

Too much man-made CO2 is a negative externality the world needs to deal with. I 100% agree. But mis-labeling CO2 as a pollutant is bad ideology that is leading to bad public policy. There is a long history of favorably dealing with the negative externalities from combusting fossil fuels. Leaded gasoline, acid rain, and the brown cloud over Los Angeles and Denver have all been relegated to the dustbin of history.

The day may yet come when we can successfully move beyond petroleum. That day is not here yet. The "C02 is a pollutant" ideology I don't think is putting us on a healthy track to actually do what the proponents want. The pollutant cudgel is used by climate activists to impede fossil fuel developments in the United States and Canada, which I will argue is unquestionably bad for human prosperity in the United States, Canada, and the rest of the world. We reduce the odds of meeting the goals of providing reliable and secure energy with as small of an environmental and climate footprint as possible when we seek to limit fossil fuel projects in the United States, Canada, and Europe.

Urgent climate crisis and climate denialism

The related concepts of the "urgent climate crisis" and climate denialism go hand-in-hand. The intended effect seems to be to stifle debate and dissent to the preferred narrative. It's not good. I have no doubt there are many who use the "climate crisis" language sincerely, driven by a passion to address the negative externality of man-made CO2.

However,

• When nuclear power is not part of the decarbonization solutions mix, and, incredibly, we are prematurely retiring existing nuclear plants that can otherwise be safely run for many, many more years;

• And when we ban all ICE vehicles while not enforcing existing mpg improvement goals;

• And when we don't make every effort at efficiency gains that do not require meaningful sacrifice or cause environmental harm;

• And when many of the most affluent still fly private planes, which are also not banned;

• And when we want to "electrify everything" but somehow only with intermittent sources of power generation;

Then I am not sure we are taking the "urgent climate crisis" seriously in the first place. Why do some use the “urgent climate crisis” language, but then narrowly define what is deemed to be acceptable solutions?

As for the related topic of climate denialism, lumping in everyone that doesn't fully buy into the "urgent climate crisis means we should electrify everything but only with intermittent resources" ideology as "deniers" is hateful, ridiculous, and inaccurate. Is the “urgent climate crisis” really your main concern or are there other objectives?

Social and environmental justice

This is a topic area I agree with. We need to ensure the least fortunate are lifted out of all forms of poverty, including energy poverty. There are in fact still far too many people in India as an example that suffer daily from the environmental harms of burning dung and other forms of bad biomass in their "homes" (tents?) as they lack oil, LPG, diesel, coal, nuclear, solar, wind, or natural gas, At this time, every single one of those people would be far better off with fossil fuel based energy. The environment they live in and the health of their families would all be immeasurably improved.

Why would anyone want to deny these people the opportunity for a better life? Why are we are harming the underprivileged by denying access to modern energy due to the "urgent climate crisis"? Policies that restrict energy resource development, in particular in Canada, the United States, and Europe in the name of the "urgent climate crisis" do the most harm to the least fortunate among us. There is neither social nor environmental justice in the anti-fossil fuel movement.

XYZ technology is "the cheapest form of energy"

The levelized cost of electricity (LCOE) seems to be as bad in assessing power generation alternatives as the dis-credited "well IRR" methodology has been for shale oil. The related tag line that solar and wind are now the least expensive forms of power is, at best, badly mis-leading, and, at worst, a blatant mis-direct. For sure, there are locations where wind and solar are by far the least expensive forms of power. But the implication this is true everywhere and in all instances is about as big of a falsehood as exists in the energy world.

All energy sources have cost curves that relegate regions/sub-regions as low, medium, and high cost. For example, no E&P company can declare the Permian Basin is the lowest cost shale oil resource. There are parts of the Permian that compete favorable on the oil cost curve and other areas that are higher cost in nature.

Technically, LCOE is not so much the issue as is the mis-application of the LCOE methodology, much as was the case with well IRRs in shale. The issue with well IRRs was that it ignored many additional costs not included in the calculation. As popularly communicated, it ignored region/sub-region variability in resource economics (i.e., not all wells are created equal) along with pipeline and many other required infrastructure expenses. In a nutshell, LCOE appears to have the equivalent issue, as intermittency, storage, transmission line infrastructure, and a host of real world costs are ignored when wind and solar are declared to be the low cost power generation technology.

Windfall profits

The term windfall profits was undoubtedly created by those that favor socialism over capitalism. As you know, here at Super-Spiked we are pro-capitalism, anti-socialism. To be sure, oil and gas profitability is deeply cyclical—both in the short- and long-term. Stuff happens and profits swing wildly. If 2022 is a "windfall" profits kind of year, 2020 showed affliction losses. For whatever reason, even many who claim to be pro-capitalism decry volatility, often going as far as to claim "excessive" volatility exists. Rubbish!

A combination of fossil fuel-sourced energy used since the Industrial Revolution combined with the advent of global capitalism has created the greatest wealth the world has ever known. Humankind has enjoyed robust population growth, the largest reduction in global poverty ever, longer life expectancy, and far less suffering due to the vagaries of climate/weather events than was the case 100+ years ago.

Profits over people

This phrase is somewhat related to the notion of windfall profits: the idea that "corporations" put "profits" over "people". We are all collectively better off thanks to the profit motive, even as necessary laws and regulations ensure that the people that run corporations respect the values societies wish to impose on them. Embrace capitalism. Reject socialism. We aren't choosing between profits and people. The profit motivate is how we live the lives we live.

Anti-woke, anti-ESG

I have previously differentiated between substantive ESG that I think is needed and the virtue-signaling, anti-fossil fuel, "climate only" version that we could definitely do without. In response to the latter, we are seeing a growing movement of what is broadly characterized as "anti-woke" anti-ESG efforts including in the investment community. Anti-woke ESG does not appear to differentiate between substantive and virtue-signaling ESG, lumping it all in the latter bucket. I disagree.

I am sure there is no disagreement that governance is important. I believe it is in the interests of most companies to hear from a range of voices and perspectives. And there is plenty the corporate world should be doing in terms of health, safety, and the environment. I support substantive ESG. Lets narrow our focus to ending the virtue signaling variety.

Energy transition?

This is a tough one. I actually don't mind and even kind of like the phrase. No one and no company should be stagnant. It's always about evolving and adapting to the world that awaits. So perhaps, as some have suggested, the term "energy evolution" would be better. While evolution is undoubtedly a more accurate descriptor, I actually like the sense of urgency and purpose that comes with "transition". The world is looking to provide energy for all that is affordable, reliable, and secure, something that does not exist today. We should transition to that world as soon as possible, ideally with as small of an environmental and climate footprint as possible.

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⚡️ On a personal note…

Oxford is a special place and my second favorite UK university

For 15 of the past 17 years (the event was cancelled due to COVID in 2020 and 2021) I have had the great pleasure to present "A View from Wall Street" at the Oxford Energy Seminar (OES) held annually at St Catherine's College at Oxford University. The gathering brings together rising executives from various national and international oil companies from around the world including the Middle East, North and South America, Europe, Africa, and Asia. As a US-based equities research analyst, the opportunity to dialogue and debate with especially executives from some of the largest state-owned oil companies has always been something I have treasured and benefited greatly from.

I originally met the host of OES at a National Bank of Kuwait conference I was invited to speak at in Kuwait City in Spring 2006. My wife was 8 months or so pregnant with our third child, our baby who joined us that June. Our baby is now learning to drive. And I am now able to combine the Oxford visit with what is on-track to become a 2X-3X per year pilgrimage to the Home of Golf where our middle child now attends the same school where the Prince and Princess of Wales studied.

I was invited to the NBK talk and the 2006 OES owing to our 2005 Super-Spike call. I am now presenting my Super-Spiked views. The 2006 audience had I believe one woman, a US-based investor I knew. Today, the audience was about 25% female based on my unofficial accounting. We discussed and debated the degree to which traditional oil and gas companies should be pursuing new energy technologies, the role of ESG, and the desirability (or not) for investors to return to the sector. The themes in 2006 included questions over the ability for the global economy to withstand a $50+/bbl oil world versus the previous $15-$20/bbl expectation, whether the oil price rally was based on fundamentals or "excess speculation", and the merits of various oil and gas capital spending opportunities (i.e., Middle East vs deepwater West Africa vs deepwater Gulf of Mexico vs Arctic, etc.).

What hasn't changed over 15 appearances? Oxford is an amazing place, the rooms at the MacDonald Randolph are still very odd, and the importance of a healthy and thriving energy sector hasn't diminished one bit. It's about energy for all—available, affordable, reliable, and secure. That is what should always be the priority, while treating the negative externalities as just that: issues that need to be addressed but kept within the perspective that energy is what is fundamental to human prospering.

Road Hole tee shot: found the fairway and, eventually, the road

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⚖️ Disclaimer

I certify that these are my personal, strongly held views at the time of this post. My views are my own and not attributable to any affiliation, past or present. This is not an investment newsletter and there is no financial advice explicitly or implicitly provided here. My views can and will change in the future as warranted by updated analyses and developments. Some of my comments are made in jest for entertainment purposes; I sincerely mean no offense to anyone that takes issue.

Regards,

Arjun

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📘 Appendix: Super-Spiked Energy Transition Playlist

This week’s focus on mental health and the need for compassion and inclusivity at the start of this post is an opportunity to showcase my favorite song from what is easily a Top 10 most under-appreciated album in the history of music. From Suicidal Tendencies awesome 1990 album, Lights, Camera, Revolution is the classic You Can’t Bring Me Down—late 1980s/early 1990s-era mental health therapy. Give the full album a listen: It’s an all-time great. And a very small number of you may well recognize the bass guitarist. You can find the full Super-Spiked Energy Transition Playlist here.