Incrementalism is dead. We are in the midst of a dis-continuous shift. Every institution and apparatus of state must be re-invented. The world under construction during this COVID-Portal is different from the ones we made before. But ambiguity dampens investment. Even a silhouette will do. Not even clarity is required. Just a few faint construction lines. The global energy landscape will change more in the next ten years than in the previous one hundred. By 2040, the universal demand for power will expand by 50%. This means that energy must be affordable, clean and reliable. The power mix must ensure that electricity is available when and where it is needed.
This energy transition trilemma from fossil fuels toward variable renewable energy sources to combat climate change becomes even more pressing as energy transitions are now loosely coupled to digitization agendas for a post-COVID contactless Caribbean. Digitization is key to making power-generating assets more efficient and the grid more secure and resilient. Digitization will also help manufacturers reduce waste, and make construction less destructive.
Today the palette of colours used to depict Hydrogen fuel includes: Green, Grey, Blue and Turquoise. Green hydrogen derived from offshore wind farms and floating electrolysis plants are a new frontier. The German cabinet approved a national hydrogen strategy as part of a wider push to decarbonize Europe’s largest economy. Carbon emissions are casting a spotlight on how investors approach petroleum companies and their plans to mitigate climate risks. Royal Dutch Shell PLC has been ordered by a Dutch Court to slash emissions by 45% by 2030. The ruling amps up the gravity to decarbonize.
Yields on debt issued by oil multinationals like BP PLC and Total SE have risen faster this year than comparable nonenergy bonds. Federated Hermes recently cut holding of bonds issued by heavy carbon emitters. Central Banks around the world are putting climate change as a top priority as they anticipate market pricing of assets to increasingly reflect the extent to which manufactures and businesses are working to pollute the earth less. “Next” will display a far greater difference in pricing and in the cost of capital for companies that aligned themselves to human life versus those that do not.
Central Banks remain a major source of demand in the Bond Market, especially since the COVID-19 catastrophe. Last year, the Bank of England (BOE) snapped up £9.5 billion through stimulus programs and the European Central Bank (ECB) purchased about €68 billion. The BOE plans to adjust its corporate bond-buying program to account for the climate impact of issuers and drive the U.K. economy to be net zero.
The Brent, the global benchmark for oil prices, is up 34% in 2021. During the same period, the spread or extra yield over treasuries on bonds issued by European oil behemoths has also climbed. This means that financiers see them as risky assets. This widening of the spread is unusual. In the past, energy company bond yields tended to narrow when oil prices rise and widen when they fall. Higher prices for crude result in more cash flow for bond issuers, making them more creditworthy. When bond yields fall, bond prices go up. Considering where energy spreads are trending in the context of the COVID-19 recovery and rising commodity prices, there is certainly something holding energy spreads back.
Christine Lagarde has reiterated that the ECB is calculating its latent role in reducing carbon emissions as part of a major review of its policies set to be released later in 2021. Pension funds and insurers are also shifting money into funds that consider a company’s record on the environment. The emergence of climate change as a factor for investors to consider is altering the investment world. Shareholders of Exxon Mobil have just elected board members nominated by an “activist-investor” who wants the oil company to prepare for a post-fossil-fuel world. Forces have already started to create a new dynamic on how investors view fossil-fuel companies.
In March 2019, Trinidad Petroleum Holdings (TPH) entered into advanced debt restructuring talks with banks to secure loans of up to US$1.4bn based on oil reserves to ease a looming US$850m bond maturity in August. TPH, formerly known as Petrotrin, was surveying the loan market challenged by the uphill task of convincing investors of the merits of reorganizing the company with a reduced workforce and new energy strategy. Having closed the refinery in Pointe-a-Pierre, Trinidad last November, the company was expected to pay a high interest margin on any new bonds.
The plan at that time was to outline a plan that prioritizes its more profitable oil and gas exploration and production (E&P) sector over its previously principal oil refining operations. In April 2021, it was announced that a new RFP for the sale of Petrotrin refinery was under consideration and that there is a market for a refinery of that nature. Elsewhere, in shy corners of the market, debt investors are trying to get ahead of sweeping changes unhinged by Greta’s Climate Extinction Rebellion and possible manoeuvres by the ECB, BOE and other Central Banks to favour sustainable companies in their bond-buying programs.
