Editor’s Edition: Russia, Texas, and the ‘political theatre of energy’
Have ESG investors messed with Texas? The Lone Star state thinks so. Lawmakers in the heart of U.S. oil and gas recently accused ten financial companies, including investing titan BlackRock, and 350 investment funds of taking steps to “boycott energy companies.”
Texas comptroller Glenn Hegar could force the state’s multibillion-dollar pension funds to divest from institutions named on a list released in late-August. BlackRock has called the decision “bad for the business climate.” BlackRock, UBS, and Credit Suisse have responded with evidence of ties to the energy sector. The Investment Company Institute, a U.S. industry lobby group, said the move “will only harm the ability of Texas police, firefighters, teachers, and other state civil servants to save for a secure financial future.”
Kevin Krausert is CEO and co-founder of Avatar Innovations, a Calgary-based venture capital firm and startup accelerator that pairs entrepreneurs with the biggest companies in Canada’s energy patch. He hopes the idea does not make its way into the debate ahead of Alberta’s provincial election.
“It’s just generally never a good idea never to pick fights with capital markets,” Krausert told Yahoo Finance Canada’s Editor’s Edition. “If Texas, the second largest economy in the United States, is having trouble doing this, little Alberta is going to have a much, much harder time.”
He also weighs in on Russia’s closure of the Nord Stream 1 natural gas pipeline, and discusses the key drivers for the price of oil.
Got a question for Kevin Krausert? Email Jeff.Lagerquist@yahoofinance.com and let him know what interests you in the world of clean energy and technology.
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.
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Video Transcript
JEFF LAGERQUIST: Welcome to "Editor's Edition." I'm Jeff Lagerquist with Yahoo Finance Canada. Have ESG investors messed with Texas? The Lone Star State thinks so. It may force its pension funds to divest from financial firms that it says boycott energy companies. Today, we'll talk about this reaction to an increasingly green focus on Wall Street and decide if this type of divestment could make its way to Canada.
Also, Russia has indefinitely shut off its biggest natural gas pipeline to Europe. Gazprom says this is because of an oil leak, but the Germans aren't buying it. And the price of oil is dipping below $90 per barrel as OPEC agrees to a modest production cut. We'll talk about where the price of oil could be headed next.
Joining me to break it all down is Kevin Krausert. He's the CEO and co-founder of Avatar Innovations. It's the venture capital firm and startup accelerator that pairs entrepreneurs with the biggest companies in Canada's energy sector. Welcome, Kevin.
KEVIN KRAUSERT: Good morning, Jeff. Good to see you. You,
JEFF LAGERQUIST: Too. So the state of Texas has accused 10 financial companies, including BlackRock and UBS, of taking steps to boycott energy companies. That's their words, not mine. The Texas pension funds essentially would have to divest from 350 investment funds that are on this list. The companies would also be blackballed from doing business with the states essentially.
The state comptroller says the ESG movement has produced an opaque and perverse system that pushes a political agenda shrouded in secrecy rather than prioritizing returns to shareholders. Kevin, why don't we start with that strong language about the merits of ESG? I'm sure the proponents would say that the E, especially, is about managing the financial risk of climate change and investing in the means to getting to net-zero. Do you see politics and secrecy as part of this equation?
KEVIN KRAUSERT: [CHUCKLES] Well, I think today's episode should almost be called the political theater of energy. My first note of caution is it's just generally never a good idea to pick fights with capital markets. The net effect of it is generally always that capital ends up leaving the jurisdiction, driving up costs of capital in the jurisdiction, leading to a generally less competitive economy. And I will say that is true for the oil divestment people or now, I guess, the anti-oil divestment people.
The Texas bill has been around for over a year now. And you know, it's arguably filled with loopholes. The exact legislation says it will have state financial entities divest from financial groups that, quote, "boycott" oil and gas. So now, one of the 10 firms listed in the report today is BlackRock, the largest private investor in the world. Now, it's really hard to say that BlackRock is boycotting oil and gas when it has, I think, the number they're using is $100 billion invested in Texas in oil and gas alone.
So you know, I think if you step back from this, you have to take this Texas Bill 13 in the broader-ish context of three financial conversations that have been happening over the number of years. The first is ESG. The second is oil divestment. And I guess the third is sort of this net-zero banking alliance or Glasgow Financial Alliance.
ESG, which was taken target in that conversation, has been around for years. And it's actually-- based on a whole bunch of research that says that companies with strong, ESG or environmental, social, and governance metrics, have performed substantially better than companies which do not. So if you take the last two, the S and the G, S means that the communities they operate in are generally more supportive of the company's operation and hence, a better business outcome. G, the governance means they have better business and investment practices. So this is by no way at some political agenda. It really was just how to make more money.
That conversation on E, which is the easiest to quantify because you can just say how much carbon emissions is a particular company emitting, started to become the fulcrum of it. But it was by no means opaque. All sophisticated companies have a really clear understanding of what requirements are in ESG reporting that are measured and monitored by. So this is not opaque or whatnot.
The second piece of this that I think sometimes gets confused is the oil divestment movement. The oil divestment movement has been around for about a decade. And it was really premised around the idea of a carbon budget. That we have a finite and knowable amount of carbon, we can put into the budget before we exceed 1.5 degrees Celsius. So their argument is that companies have an undue financial risk if they're investing because you can't value-- you should value the production of any hydrocarbons past that carbon budget as essentially zero.
And through these conversations, they made a lot of headlines with major institutional equities divesting from oil and gas, which had the net effect of driving prices and energy up. But frankly, it's been a total disaster. First of all, oil companies no longer value themselves based upon their proven and probable reserves. So it's irrelevant how much reserves they have and how much they can produce because they're trading on cash flow. Most of them are trading anywhere between three to four times cash flow. And nobody's suggesting we're going to hit net-zero in three to four years.
Secondarily, it doesn't take into account abated uses of oil and gas. If you can burn hydrocarbon with carbon capture, you should still be able to burn it. Also, if you're using oil for the production of things that aren't producing emissions, like asphalt or plastics, again it's proven as a little bit of a too simplistic model. And then you've had the rise of the net-zero banking alliance, which is a UN driven alliance, which has the majority of the banks around the world, saying they're only going to finance around Paris. And-- but I think it's a misunderstanding.
If you listen to Mark Carney, I have chance to meet with him about a month ago, who really led this initiative and is a proud Canadian, actually from Alberta. He's saying that what is the effect of that. If you just divest of oil and gas and you go and buy Microsoft, and then you just put those assets into an investor who cares less about ESG, you're making no effect on reducing emissions. What he's saying and what they're trying to argue for now is that an investor could invest in a higher-emitting portfolio, so long as that portfolio has a concrete and rational plan to decreasing their emissions. And that way, you're going to be making the biggest impact that you can have.
So in short, go by Suncor and Cenovus because they've got really phenomenal plans on how to reduce their emissions that are measured, that are costed, that are implementable, and making some great returns. So you know, this circles us back, I think, that this is a really complicated story. And it's the political theater of energy is just generally not helpful.
Everyone wants a villain in this story. The challenge is there isn't one. The greens and the left want the villain to be oil and gas companies, but the reality is they're producing a commodity the world wants and are actively investing in new technologies. The Texans are claiming this is some villainous bankers. But in reality, they're just trying to make a buck.
And I guess, my closing thought on this would be, you know, in my work I have the pleasure of working with a lot of, lot of investment bankers. And a surprisingly high number of them are really good human beings. The vast majority of them are exceptionally smart. But I have never met a single investment banker who's not spending most of their time figuring out how to try and make a buck. So I would push back a lot that this is some political theater, where I have yet to meet an investment banker that would put politics at the head of making $1.
The one thing that we can all do is we can invest in new technology and recognize that that's going to be where the market is going. So I'd respectfully say to my friends in Texas, their time could be spent better elsewhere.
JEFF LAGERQUIST: So we've seen other energy-focused US states like West Virginia, Louisiana, Oklahoma, also target financial firms similar to the way the Texas has. But at the same time, like the Harvard Endowment Fund, the Norwegian Sovereign Wealth Funds, and big money managers have very, very harshly cut exposure to fossil fuels. When we look at both ends of this, is the polarization spreading? Like, are we seeing people taking harder stances rather than investing and pushing for change at the board level like a normal institutional investor might?
KEVIN KRAUSERT: I'd say that's an outdated narrative. I'd say that, yeah, you had the rise of a lot of splashy headlines by some pretty major institutional investors like the ones you just mentioned, who said they were divesting from oil and gas. Now, we're in a period where we've seen this profound disconnect between our desired energy future and our current energy reality. And those that stuck in the energy industry have made tenfold returns over the past couple of years as these commodity prices have gone.
So the conversations that I'm having is actually on the investment side, it's becoming a lot more rational. I would say on the political side, it's becoming a lot more irrational.
JEFF LAGERQUIST: As we talk about that political side, it occurs to me that your home province of Alberta is heading for an election in the spring, I believe. Do you expect maybe some of the candidates would roll out this sort of idea? I imagine that it would gain some traction with a certain amount of people who are near and dear to the fossil fuel industry.
KEVIN KRAUSERT: God, I hope not. But I guess we should be prepared for it. You know, what I would say is if Texas, as the second largest economy in the United States, is having trouble doing this, little Alberta is going to have a much, much harder time doing this. And while there are certainly going to be tricks in the hat of a variety of candidates to do what they can to win the election, the conversations, that I will be having with them and that I would encourage others to, is that Alberta has a very unique chance to lead in this new world of energy that we're in, of delivering energy security and investing in the technologies that can rationally reduce emissions. And this is how we can win this not just as a province but as a country.
And so I'm cautiously optimistic that the majority of Albertans that we'll be able to see through any cheap political points that an election sometimes brings out.
JEFF LAGERQUIST: All right. Let's turn our focus to the energy crisis unfolding in Europe. Russia kept its main natural gas pipeline to the continent shut on Saturday after what was supposed to be a three-day outage for maintenance. Apparently, there is an oil leak that warrants an indefinite closure, according to Gazprom, the pipeline's operator. Kevin, the Russians say the German infrastructure company Siemens has nowhere to do the repair. Siemens says they haven't even been asked to do the job. This seems like quite a mess here. I guess the question is, if the Nord Stream 1 pipeline stays out of commission for the long term, how devastating is that going to be this winter?
KEVIN KRAUSERT: I think we all need to be preparing for a very difficult winter surrounding energy. The caveat to that obviously was the Kremlin came out and said, oh, but if you guys were to remove your sanctions, well, then we could figure out a way to get this pipeline fixed. So they're not even pretending they're not weaponizing energy any further.
And you hear a variety of sets of numbers, you see the Germans being relatively happy with how they've filled their natural gas inventories for winter. But I think the sobering realization is really going to have to be around what effect will rising energy prices have on Europe on recessionary fears and the impact of that. You know, what I think is probably more telling is the timing of this. Basically, the same day the G7 finance ministers came out and said that they would put a price cap on Russian oil was the same day miraculously they can't fix the pipeline.
And so I think that we would be absolutely naive to think that Putin is out of Tricks and he has just been very clear that he's able to weaponize energy. But I also would not put it past him to have further destabilizing effects on the global economy in his drive to create an anti-West coalition. You know, I'd be terrified if some of the more volatile oil-producing jurisdictions like Venezuela and Libya were to fall into these antics. And so I think the big question is, can the G7 price cap hold and whether China and India will buy into it?
JEFF LAGERQUIST: Yeah, yeah. But I mean, what are your expectations there? I mean, I guess, though, the world is sort of on the edge of their seat when it comes to this.
KEVIN KRAUSERT: Well, so it's interesting, you know? Before the war, India hardly imported any Russian oil. China imported a fair bit because there's a pipeline that goes from Russia to China. Now, I think in June or July, you have both China and India at record-high imports of Russian oil. Basically, these other countries aren't buying it. And so they can buy it at a discount. And so they are very happy to do so because by them having access to cheaper energy than the rest of the world, it provides their economy with competitive advantage.
And you had the Indian energy minister come out and basically said he'd watch the G7 price cap closely, but his moral obligation was to the consumer of India. These are rapidly developing economies. And to think that they're not for their own self-interest or best interest and are exceptionally talented negotiators would be naive. So you know, I'm less optimistic on the G7 price cap. But I definitely think it's worth a try.
JEFF LAGERQUIST: Kevin, we talked a lot about Europe looking for new sources of energy. Of course, we saw the German Chancellor pay us a visit pretty recently. Liz Truss, the new UK Prime Minister, newly minted, just very shortly ago, has talked about lifting a ban on fracking in that country and issuing more North Sea drilling licenses. I mean, is this more politics, as you said before? Or could there be a meaningful impact to European energy market from this?
KEVIN KRAUSERT: I'd like to figure out where she thinks the shale oil or gas play on surface in the UK is that she can-- that the removal of a fracking ban is going to have any impact. [LAUGHS] There's not a lot of land producing energy in the UK and hasn't ever been. Where it is, is in offshore. They don't frack an offshore.
So on the first piece of the equation, it's clearly obviously political theater, as much as political theater as it was when they banned fracking in the first place. Because you can ban something you're not doing, what effect does that have? On the issuing of new offshore licenses, you've seen Norway come to the table in a big way by increasing their gas supply to Europe. And you know, I think it's probably about time the UK comes to this.
We have to stop hamstringing the responsible oil-producing jurisdictions of the world, like Canada, like US, like Norway, like the UK, and just cede over market share to countries that are weaponizing energy and are, frankly, far less concerned about net-zero implications. So you know, broadly speaking, I'd have to see more details, but I think it makes some sense to expand offshore drilling in the UK.
JEFF LAGERQUIST: S&P Global recently said the commodities spike we're seeing may be the last chance for some of the Frontier in early stage gas producers and oil producers to get going before the energy transition intensifies. A lot of these places are kind of like around the Horn of Africa-- Madagascar, Sierra Leone, and places like that. Is there an opportunity for some of these regions where the regulations may not be as green to get up and running?
KEVIN KRAUSERT: You know, it's going to be interesting. If-- you know, you look at some of those more nascent war frontier plays, like Madagascar or Mozambique, you know, they've been trying and working on this for quite, quite some time. And a lot of that is going to be long lead cycle capital. And I don't know if I see a lot of the type of big institutional investors that are going to be making those-- that are capable of making those types of investments would make such a long lead investment, given the long-term uncertainty.
You know, oil, as I said, oil and gas is trading at three or four times cash flow, meaning that it's too much uncertainty for an investor to predict out much longer than that. So you know, I don't-- I don't know, I guess. You know, I'm hopeful those economies will develop. But I hope they will look at a full cycle energy analysis of where things get going in the future.
But the amount of impact some of those plays are going to have on global energy demand is probably, or supply rather, is too small to have a material impact. This is a game of OPEC-- OPEC, Russia, Canada, and the US.
JEFF LAGERQUIST: Yeah. And to your point, I'm looking at this list here, and I'm seeing some of the countries here-- Suriname, Somalia, Gambia. How many of these countries would have to actually get up and running in order to, well, ease the energy crisis?
KEVIN KRAUSERT: Well, a lot. And then also, too, there's not a whole lot of energy infrastructure that exists there from facilities and batteries to pipelines, to drilling rigs. You'd have to import a lot of that into some of those countries. And then you're still going to have a lot more geological risk than you'd have in some of the more established place. You know, I see that as a bit of a challenge.
JEFF LAGERQUIST: Right. And look, I guess some of these might be tough political operating environments, just sort of these are less stable countries than, well, Canada obviously, but some of the other regions where oil and gas is produced.
Lastly, I just want to touch on the price of oil. As we're recording, we're seeing WTI just above $87 per barrel. We saw OPEC announce a small production cut of 100,000 barrels per day. The cut is being seen as essentially symbolic. When we look at all the moving parts we can anticipate today, the G7 plan to cap Russian oil, a potential deal that would see sanctions lifted on Iran. What's the most important factor in determining the future price action of oil?
KEVIN KRAUSERT: Recession in Europe, full stop. The rest is just, you know, in a variety of stages. You know, it's interesting, again, the timing of this OPEC production cut, which is marginal to say the least, but probably, the exact opposite of what the Americans would like to see, given their rising energy prices.
The cooling of oil prices has been driven essentially by two things, the recessionary fears in Europe and demand destruction in China with their zero-COVID policy. I think the demand destruction has probably been overstated in China. The jury's still out on recessionary fears in Europe. But from an $87 oil perspective, not only is it a very healthy price of oil for Canadian producers.
The reality is oil prices aren't what's causing the energy crisis in Europe. It's natural gas. And that's because of the complete lack of other options they have around their natural gas supply. So you know, I think the key takeaways here are, you know, focused on the fundamentals of the economy and the markets. And that should guide you through some of these news stories on complicated issues. [CHUCKLES]
JEFF LAGERQUIST: Where does the Iran sanctions issue sort of rank in terms of significance? I've sort of seen estimates that say varying things. I mean, Iran was, I believe, the third largest producer in OPEC after Saudi Arabia and Iraq. So I mean, they're not a small player.
KEVIN KRAUSERT: Yeah. And if, you know, sort of being shut out of the market, but they're selling their oil and in a variety of mechanisms at a steep discount. You know, again, it's in the theme of this episode. Whatever you have prices spike, you get some politicians saying we're close to a deal with Iran to try and cool oil prices.
You know, the two questions and the two doubts I'm hearing on this are, first of all, could you get the Revolutionary Guard support in Iran? They had a nuclear deal and an oil deal that was ripped up. And so do they trust the Americans and the West as a faithful negotiating partner? And likewise, on the other side, could you get a deal pass Congress in the US? The Americans have just issued an arrest warrant for an Iranian spy to-- for his plot to assassinate a former national security advisor. That doesn't seem like a really good place to make a deal if I was trying to make one. So I would say I'm doubtful.
JEFF LAGERQUIST: And when we talk about political intrigue and sort of geopolitical tension, Iran and Saudi Arabia, famously, not great friends. Do you think that Saudi Arabia would make some move on production in response to Iran rejoining?
KEVIN KRAUSERT: I think what Saudi's primary goal right now is to ensure the world understands they are the price setter in oil. And I think that their $100,000-- or 100,000 barrel a day cut. The same day the G7 comes out with a proposed price cap is them reminding the markets they are in charge. And I think they would take that same logic to an Iranian deal. But for the reasons I just mentioned, I see its pathway as being difficult.
JEFF LAGERQUIST: And just lastly, what about President Joe Biden, what is the sort of political read-through here, the theater of it all, for him as a result of this OPEC decision?
KEVIN KRAUSERT: I think he's been surprisingly quiet on the energy file, I think, lately. [LAUGHS] I think he's happy that gas prices are down from their exorbitant eyes. And I don't know what the wind would be for him to bring this all up to the mass public, who doesn't follow the energy news as closely as we do, Jeff.
JEFF LAGERQUIST: Yeah. And I guess that that's a good question when we talk about all this stuff like divestment and oil and gas. It's political theater. How much does sort of the energy versus climate change issue resonate with voters, say, in Texas, or Alberta, or just anywhere in North America?
KEVIN KRAUSERT: That's the trillion question, I guess, Jeff. But you know, I think at the end of the day, the vast majority of people want to be able to have some confidence in the security of their energy supply and understand that that system is investing and designing in the future that they want, solving climate change. And I think that's probably as complicated as the vast majority of people want is they want secure energy. They don't want to spend a fortune for it. But they also want to transition to lower carbon and energy economy.
The good news is that's exactly what's happening behind the scenes and the markets. And so, you know, I don't know how much impact the politics has.
JEFF LAGERQUIST: Well, if nothing else, it's certainly interesting to watch, that feels like a good place to end, Kevin. Thank you so much for joining me.
KEVIN KRAUSERT: Great to see you. See you next week.
JEFF LAGERQUIST: All right. For all the latest news on clean energy and the broader world of Canadian finance, please visit the Yahoo Finance Canada website. I'm Jeff Lagerquist, we'll see you next time.
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