No, not the market. Not oil. I’m good with that. I’m thinking more of the great global fossil fuel divestment movement. In fact, I am so moved by the effortless logic of their position that I have decided to liquidate all of my oil and gas holdings, yes, even as the market appears to be finally turning forever in my favour.

 

I know what you’re thinking, clearly he has recently been brainwashed or tripped and fallen down some stairs and hit his head.

 

Seriously though, there has been a fair amount of press lately about the whole fossil fuel divestment movement hasn’t there? Enough to inspire a few articles and what I feel is a singularly unfocused blog.

 

The gist of the movement is that fossil fuels are morally bad because they contribute to increased emissions that cause climate change and that since we are virtually hours away from peak oil demand anyway, these companies are inherently more risky investments than, say, bitcoin, because their asset base is in essence stranded because things like the Paris Accord mean that companies and countries will never be able to produce all their reserves. Thus the value of all these reserves and companies is pretty much going to be zero and all the countries that own the reserves are screwed. So clearly divesting is the right thing to do. Sell and take all that capital and build a solar farm the size of New Mexico. Save the world.

 

Makes sense right? In a fuzzy and childish kind of way? I mean, if it’s going to zero anyway, why own it?

 

Except it’s not going to zero. And divesting really accomplishes little.

 

The divestment movement is the type of activism and fringy zealotry that’s all show and no pony. It gets picked up and overblown by the mainstream media and used for political point-making by all too eager politicians seeking to prove their environmental bonafides. After all, why take any concrete policy action when you can simply sell a few stocks? I’m hard-pressed to believe that even the people advocating for divestment are really all-in on it. But every once in a while, someone decides to make a point and we are back to talking about it again.

 

Case in point, consider for example the situation in New York where newly re-elected Mayor Bill De Blasio recently announced that he is going to order the City’s five main pension plans to divest of their fossil fuel investments, to an estimated tune of $5 billion.

 

Setting aside the wisdom (or not) of selling such a large block of assets just when the sector appears to be out of the woods, can he even do that? Is this how a fiduciary should act? Does the Mayor of a city really have the ability to set investment policy for a public pension plan? Has anybody asked the beneficiaries if this is something they want? The purpose of a pension plan is to manage the retirement assets of its beneficiaries, not to be an ideological tool.

 

It’s happening with pension plans, college endowments and foundations. What all these fund managers, politicians and divestment activists miss in this whole shlamozzle is pretty simple – it’s NOT THEIR MONEY! Leave it alone. Never mind that, it isn’t going to make a difference. For every dollar sold there’s 1,000 lined up to take its place. The only people who suffer are the people who need the money the most.

 

Look, I’m absolutely onside with an individual exercizing their personal beliefs and wanting to target their investments to green funds, renewables, socially responsible entities and the like. It’s a free world and it’s your money. There are literally thousands of options along those lines. Or you can just make a choice and not buy energy stocks.

 

But a politician telling a pension plan manager/fiduciary to sell energy stocks because a loud crowd says they must do it is just plain wrong.

 

And don’t even get me started on the hypocrisy of the mayor of a massive energy consuming city lecturing the rest of us on the need to sell stocks in the very energy companies they are enriching by buying their product. Sheesh.

 

Here in Canada the divestment movement is targeting the major provincial pension plans and the Canada Pension Plan Investment Board. If you think New York had a large exposure to the energy sector, you ain’t seen nothing yet.

 

From indirect public market investments to private equity investments to direct investments in producing properties, the Canadian exposure is huge and appropriately reflective of the importance of the energy sector to the overall economy. Any unwinding of it would be impractical, ill-advised and detrimental to both the retirement plans of millions of Canadians and the overall economy.

 

But hey, at least it’s a pyrrhic victory.

 

And where do you draw the line anyway? Is it just the fossil fuel companies themselves or do you need to target the entire value chain? The service companies, the engineering companies, the construction companies, the transportation and distribution companies. Pipelines companies? We saw one bank say they weren’t going to lend to pipeline companies anymore (since reversed), Where does it end? How do you decide what an appropriate level of exposure is? We saw a French bank that had pretty much zero exposure to the oilsands boldly proclaim that they weren’t going to lend to oilsands companies anymore. Great press right? But they lend to Total, the French energy giant that is developing fossil fuel projects in some of the most corrupt and unregulated places on the planet. Spare me your self-congratulatory BS.

 

Here’s a question for the divestment divas. What about energy consumers? Aren’t they as much a part of the problem as anyone else? Surely car companies and airplane manufacturers are responsible for their share of emissions too. And banks – don’t forget about them. Don’t they lend money to fossil fuel companies? Gotta dust those guys too.

 

At the end of the day all you are left with, if you are really true to your ideals, is government bonds, a handful of cannabis stocks and some stolen bitcoins. But even that is problematic. Government bonds are supported in part by the taxes and royalties paid by fossil fuel companies, the cannabis growers require energy and bitcoin is a widely acknowledged energy sink.

 

Look, I’m clearly exaggerating for effect, but if you follow this divestment movement to its logical conclusion you see how ultimately limiting and ill-advised it is.

 

And as a social policy tool or behavioral modifier, it’s blunt and ineffective.

 

One well-intentioned pension plan taking direct orders from a politician to screw over its beneficiaries for a quick feel-good photo-op isn’t going to stop the flow of capital into the energy sector one bit. It’s just going to come from some other source and more than likely end up in a morally questionable locations.

 

Capital finds a way and given that demand for oil is projected to grow by at least another 10 million barrels per day over the next 20 some-odd years, there is ample room for return and value to investors. Market cap for the energy sector exceeds $5 trillion and upstream capex this year is projected to be about $400 billion. That’s a lot of zeros that people want to be a a part of.

 

But what about Norway you may ask, and their announcement that they were going to sell down the energy and fossil fuel holdings in their massive sovereign wealth fund?

 

Ironically, Norway I get and agree with. Their entire economy is highly leveraged into the oil and gas sector, so it kind of makes sense that its massive sovereign wealth fund should be invested outside of oil and gas if only because its actual sovereign wealth comes from oil and gas. In fact, I would argue that is prudent portfolio management for that particular situation. They already have a way of funelling money back into the energy sector through Statoil. Are they milking it for a few environmental brownie points? Sure, who wouldn’t. But at the same time, Norway just this week announced they had awarded a record 75 licenses for North Sea oil and gas development. And you thought only North Americans could be hypocrites!

 

As a final point, the divestment movement ignores a basic point which is that the transition is already well under way and that many of the companies best positioned to drive and execute on that transition are the very firms whose livelihood are tied to fossil fuels.

 

What do I mean by that? Simple. Rather than hectoring investment funds and managers, maybe it’s time to let the “energy” companies run the divestment process themselves. Because if indeed the oil and gas sector is going the way of the dodo bird, don’t you think these massive companies populated by hyper-intelligent business managers with access to limitless amounts of capital can figure out what is happening and maybe as well how to reinvent themselves?

 

Consider Shell for example, which recently increased its capital program for renewable energy to $2 billion and has purchased a stake in a solar company in the United States and just this Thursday announced a stake in a solar Power Purchase Agreement in the United Kingdom. Clearly, one of the largest energy companies in the world is actually putting its money to work in the renewables space and rearranging its own portfolio to reflect the realities of a transition. Does this get rewarded by the divestment crowd or are they still fodder for the sale?

 

Shell may be leading the charge right now, but this is just the tip of the iceberg for many companies in the energy sector who will become much larger, more integrated full-suite energy providers where oil and gas will represent a gradually shrinking piece of their growing energy pie.  This should generate returns to investors, make the zealots feel good and won’t disrupt the economy either. Seems like a win all around, no?

 

Or we could just sell it all, lock in some losses and leave the profits to someone else. Great plan, right?

 

Prices as at January 19, 2018 (January 12, 2018)

• The price of oil continues to hold its own on inventory draws, dollar weakness, demand and political upheaval.
  • Storage posted big decrease
  • Production was adjusted upward by a significant amount
  • The rig count in the US was down by a rounding error
• On the back of a deep freeze and the biggest withdrawal in recorded history, natural gas keeps trying to rally – sort of…

 

• WTI Crude: $63.56 ($64.30)
• Nymex Gas: $3.186 ($3.20)
• US/Canadian Dollar: $0.8001 ($ 0.8024)

 

Highlights

• As at January 12, 2018, US crude oil supplies were at 4112.7 million barrels, a decrease of 6.9 million barrels from the previous week and 72.8 million barrels below last year.
  • The number of days oil supply in storage was 23.9 behind last year’s 29.1.
  • Production was up for the week by 258,000 barrels a day at 9.750 million barrels per day. Production last year at the same time was 8.944 million barrels per day. The change in production this week came from an decrease in Alaska deliveries and a big increase in Lower 48 production. The wild swing the last two weeks is promarily weather related as extreme cold in North Dakota took significant production off line.
  • Imports rose from 7.658 million barrels a day to 7.950 compared to 9.052 million barrels per day last year.
  • Exports from the US rose to 1.249 million barrels a day from 1.015 and 0.704 a year ago
  • Canadian exports to the US were 3.625 million barrels a day, up from 3.377
  • Refinery inputs were down during the week at 16.875 million barrels a day
• As at January 12, 2018, US natural gas in storage was 2.584 billion cubic feet (Bcf), which is 12% lower than the 5-year average and about 12% less than last year’s level, following an implied net withdrawal of 183 Bcf during the report week.
  • After the big withdrawal of the past week, overall U.S. natural gas consumption was flat during the week ending January 17, influenced by warmer weather
  • Production for the week was flat. Imports from Canada were up 5% compared to the week before. Exports to Mexico were up 4%.
  • LNG exports totalled 17.2 Bcf.
• As of January 15 the Canadian rig count was 301 – 204 Alberta, 29 BC, 65 Saskatchewan, 3 Manitoba. Rig count for the same period last year was about 270.
• US Onshore Oil rig count at January 19 was at 747, down 5 from the week prior.
  • Peak rig count was October 10, 2014 at 1,609
• Natural gas rigs drilling in the United States was up 2 at 189.
  • Peak rig count before the downturn was November 11, 2014 at 356 (note the actual peak gas rig count was 1,606 on August 29, 2008)
• Offshore rig count was unchanged at 19
  • Offshore rig count at January 1, 2015 was 55

• US split of Oil vs Gas rigs is 80%/20%, in Canada the split is 56%/44%

 

Drillbits

• The National Energy Referee, I mean Board, has created a set of rules to mediate any permitting issues that arise during the course of TransMountain construction
• Kuwait’s oil minister Bakhit al-Rashidi said on Wednesday there is no plan or intention so far to exit from a production-cutting agreement among OPEC and non-OPEC oil producers.
• Meanwhile in Russia – many producers would like to ditch the agreement sooner rather than later
• Ethiopia is getting set to join OPEC.
• Venezuelan production continues to fall off a cliff, hitting a 28 year low. The government meanwhile says that production is actually much higher than reported. Someone is lying…
• TransCanada Corp. confirmed enough commercial support for its controversial Keystone XL pipeline thanks in part to a commitment from the Alberta government. The company said it has secured 500,000 barrels a day of 20-year commitments for the project after concluding an open season, locking up about 60 per cent of the 830,000 barrels of planned capacity. The Province of Alberta committed 50,000 barrels of oil a day that it receives as royalties in kind. Subsidy or not, it was important for the province to support this project. This is much more proactive than empty press-conferences. Construction preparation has begun with actual work expected to commence in 2019.
• Trump Watch: “Stormy” weather seemed to be the theme of the week for his orangeness as racy revelations about a cheatin’ tryst with a porn star was overshadowed by a health assessment no one believed, Steve Bannon testimony he tried to control and a government shutdown of his own making. All things being equal, I figure Canada is about to get kicked between the legs with a NAFTA pull-out, mainly because he’s gotta score against someone. In the greatest of all ironies, Colin Kaepernik is 6’3″ and 239 lbs.