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Biden win could accelerate US oil companies' participation in energy transition


Essential Energy Insights - February 2021


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Six trends shaping the industries and sectors we cover in 2021

Six trends shaping the industries and sectors we cover in 2021

Biden win could accelerate US oil companies' participation in energy transition

Major U.S. oil and gas companies may reevaluate their role in the energy transition and increase their carbon-reduction efforts if Democrats score key wins in the November election, according to some industry observers.

A blue wave would not be immediately transformative, but it could send a strong market signal that there may be limited growth in hydrocarbons beyond replacing current production, according to David Livingston, senior analyst with the Eurasia Group.

Democratic victories would not likely threaten existing production volumes, Livingston said. But he indicated he would expect to see more of a convergence between U.S. and EU oil majors in terms of climate-focused priorities and investments. These companies' survival depends on "how well they're able to convince capital providers and capital markets that they have a compelling narrative around their role in the energy transition and their future in a decarbonizing world," he said. European oil majors have announced more aggressive decarbonization and clean energy targets than their U.S. counterparts.

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"I think if you did see a blue wave and a big blue sweep, you would see a lot of those majors putting into place probably contingency measures and contingency strategies that they've already been mulling over," Livingston said. "And it would lead to, again, a consolidation of the majors around climate and the energy transition, and you would see that convergence between the EU group and the U.S. group driven by the U.S. group catching up to the EU group, not the other way around."

Biden's proposed clean energy policies could result in reduced U.S. gasoline demand, which would have significant repercussions for the global oil market, according to Kevin Book, managing director of the independent research firm ClearView Energy Partners LLC.

Given the nation's significant role in global energy consumption, any change to U.S. energy demand could have substantial effects on the world's markets, he said, highlighting a scenario where Biden's policies translate to coal plant closures or a major build-out of electric vehicle charging infrastructure.

"It's a big deal. It's a huge deal. It's a binary set of implications," Book said. "In 2020 if Biden wins, then in 2030 the world is going to look different from an energy perspective. ... The duration of the change is essentially permanent."

Regulatory and investor pressures

Presently, Europe remains distinct from the U.S. in ways that heavily shape companies' responses to climate change. For instance, the European Commission has already proposed a law aiming for net-zero emissions across the region by 2050, and shareholders of many European companies have approved legally binding resolutions demanding decarbonization.

Should Democrats retake the White House and U.S. Senate while maintaining the U.S. House of Representatives, the government may adopt legislation with provisions to help mitigate climate change, and Democratic presidential nominee Joe Biden has said he supports a transition away from the oil industry. Such policies could drive U.S. oil and gas companies to invest more heavily into cleaner energy sectors or take other steps to reduce their greenhouse gas emissions, observers said.

Biden has pledged to rejoin the Paris Agreement on climate change if elected and would likely commit to being a global leader on combating climate change, something most majors would surely note, according to Kelly Johnson, a partner with Holland and Hart who represents the oil and gas industry.

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"I do think most global companies will look at it even more seriously because there's going to be just increased pressure on them, both domestically and globally, worldwide," Johnson said.

Climate change poses an "existential risk to the industry," and some major oil companies are beginning to reposition themselves to ensure they remain sustainable and profitable once oil is no longer their main product, according to John Thieroff, senior analyst with Moody's Investors Service.

While a Biden administration may play some role in driving oil and gas companies to decarbonize, those entities are more likely to respond to pressure from the investment community, Thieroff said. In recent years, investors have supported broader disclosure and divestment from carbon-heavy assets. A Biden victory might enhance that investment pressure, he said, but there is already momentum in the investment community.

"We do think [a Biden administration] has the potential to accelerate the transition, certainly from a very slow pace currently," Thieroff said. "But it's not something, again from the climate perspective, that we'd expect to see a dramatic, quick change for oil companies."

Sector effects

Industry representatives largely said they do not expect the election to materially disrupt the sector.

"Regardless of the outcome of this election, oil and natural gas will remain our primary source of energy, and our industry will remain focused on advancing innovative solutions to reduce emissions while ensuring we continue to provide people with affordable and reliable energy," said the American Petroleum Institute's Frank Macchiarola, the group's senior vice president of policy, economics and regulatory affairs.

Democrat wins could potentially curb green investment, according to Fred Schneiderman, president and CEO of New York-based FBS Properties, an investment platform for the oil and gas industry, among other sectors. If a Biden presidency were to result in increased regulations on the industry, major oil and gas companies would have less money to invest in cleaner energy research and development, Schneiderman said.

"The larger companies have the resources and the capability to take into account what may happen, anticipate and take other directions," Schneiderman said. "When you get down to the smaller companies that don't have the necessary free cash flow … it's more of a challenge of survival."