The Capital Note

A Loss for Shell (and You)

An oil tank truck fills the pumps at a Shell petrol station in Sao Paulo, Brazil, May 31, 2019. (Nacho Doce/Reuters)

Welcome to the Capital Note, a newsletter about business, finance, and economics. On the menu today: Shell’s legal defeat, Biden and Arctic oil, Putin and Arctic oil, Putin and coal, and the ransomware negotiator. To sign up for the Capital Note, follow this link.

Hollowing out Shell
I spent a lot of the most recent Capital Letter looking at the attack on three oil companies — Exxon, Chevron and Royal Dutch Shell. Exxon and Chevron had to deal with shareholder activism, but Shell had to face the wrath of a Dutch judge.

To borrow (again!) from the Financial Times report on the case:

A court has ordered Royal Dutch Shell to accelerate its strategy for the energy transition by making steeper and quicker cuts to greenhouse gas emissions than it had planned. The landmark ruling could spur legal cases against other oil and gas companies, as well as other big corporate polluters . . .

The judge in the district court in The Hague ruled on Wednesday that Shell must cut its net carbon emissions by 45 per cent by 2030 against 2019 levels on an absolute basis, in line with a global push to prevent temperatures rising more than 1.5C above preindustrial levels. The judge said the company had violated a duty of care obligation regarding the human rights of those affected by climate change.

This, I wrote, was “junk law . . . a reminder of how, in the hands of a politicized judiciary, human rights can mean whatever some judge can want it to mean.” I cannot say that I have changed my view since then.

Back to the FT (my emphasis added):

Previous climate cases have largely been focused on liability suits, forcing oil companies to pay damages for past behaviour. But Wednesday’s first-of-a-kind ruling demands a change in Shell’s strategy for the future, setting a precedent not just for energy companies but all big greenhouse gas emitters. It could herald a wave of this new style of litigation . . .

The Anglo-Dutch oil major plans to appeal the ruling in the next three months, with the process potentially taking several years.

Despite this, and the court’s view that Shell’s current carbon dioxide emissions are not “unlawful”, the company is obliged to act now on the judge’s decision. “The order will be declared provisionally enforceable,” the court said, adding that it was up to the company to “design” how it implements the emissions cuts.

One of the characteristics of the climate warriors now helping steer what is rapidly becoming a corporatist regime in the West is a willingness to bypass the democratic process, whether it is by regulation, international “cooperation”, “lawmaking” via activist shareholders, or with the help of judges making things up as they go along.

Writing in The Daily Telegraph, Ambrose Evans-Pritchard:

Environmentalists should think twice before celebrating the week that shook Big Oil to the core. Green activist victories against Shell, ExxonMobil, and Chevron are pregnant with unintended consequences.

One of them is to interfere with future crude supply just as the market tightens ineluctably as a result of declining oil wells and chronic lack of past investment, increasing the risk of a violent price spike in the early 2020s and a disruptive shock before the world has reduced its economic dependency on oil.

The assault on well-regulated oil and gas companies in the West – the best already committed to net-zero – is a gift to Opec, Russia, and the authoritarian rentier petro-states. Vladimir Putin can expect more revenues to rebuild his military machine. Mohammad bin Salman gets a breather for the Wahhabi model. Iran’s Ayatollahs will sleep easier.

It is also a gift to state-owned energy groups such as Brazil’s Petrobras, denounced by ecologists as a patronage machine for a corrupt political elite, and certainly not entertaining drastic cuts in output. Few of these companies are so constrained by activist pressures or so reliant on global capital markets (green enforcers, these days). They are less likely to channel their profits into renewables and green hydrogen.

To the extent that the latest court rulings and shareholder coups become the pattern for Big Oil in the West, the effect will be to drive down their global share of crude production over the course of this decade.

The Shell saga is the most unsettling of the three episodes last week. (For sake of disclosure I own shares.) It was ordered by a district court in the Hague last Wednesday to slash emissions 45pc by 2030 in line with United Nations guidance, including the “Scope 3” [For a discussion on Scope 3, go here] emissions of hypothetical drivers who burn their petrol. Others will surely follow because copycat suits are proliferating.

“All the majors will now have to let their oil production decline. People are pencilling in a 3pc decline per annum for Shell, from 1pc to 2pc previously, which was already a striking number,” said Jean-Louis Le Mee from the hedge fund Westbeck Capital.

On the other side of the ledger, oil demand is inelastic and will rapidly rebound to 100m barrels a day (b/d) as economies reopen and jets fly again. Fuel dependency in transport is sticky. Sales of electric vehicles may well go parabolic by 2024 as they hit purchase cost parity but right now the total fleet of fossil cars, vans, and trucks is still growing by about 50m a year.

Oil and gas use in plastics will continue much as before unless we ban the activities that depend on them, and that would be a blunt method. Note that carbon-fibre composites make aircraft lighter, and therefore cut emissions, ceteris paribus.

Russia and the Opec cartel will gain market share and political leverage over core energy supplies. Over time they may regain a stranglehold over the pricing mechanism, with echoes of the 1970s. “If you make it impossible for Western oil and gas companies to operate, that hands a huge bonanza to some much worse climate laggards,” said Michael Liebreich, the founder of Bloomberg New Energy Finance.

The likelihood that Biden’s plans are going to end up in a reenactment of the 1970s seems to be growing, not least when it comes to energy. It was unfair (if tempting to some) to draw comparisons between the gas crunch seen in the wake of the Colonial pipeline affair and the gas shortages of the disco era, but such comparisons will not be uncalled for if the president’s reckless climate policies (which are, adding futility to stupidity, not likely to have much of an impact on the climate anyway) hand an immense energy advantage to some of the most sinister regimes on the planet. To cripple the U.S. both at home and abroad for next to no return seems . . . unwise, but that appears to be the course on which the White House now seems set.

While these fears are not specifically expressed in a recent Reuters report that followed the Exxon and Chevron votes, and Shell ruling, the underlying message is not so different:

Climate activists who scored big against Western majors last week had some unlikely cheerleaders in the oil capitals of Saudi Arabia, Abu Dhabi and Russia.

Defeats in the courtroom and boardroom mean Royal Dutch Shell, ExxonMobil and Chevron are all under pressure to cut carbon emissions faster. That’s good news for the likes of Saudi Arabia’s national oil company Saudi Aramco, Abu Dhabi National Oil Company and Russia’s Gazprom and Rosneft.

It means more business for them and the Saudi-led Organization of the Petroleum Exporting Countries (OPEC).

“Oil and gas demand is far from peaking and supplies will be needed, but international oil companies will not be allowed to invest in this environment, meaning national oil companies have to step in,” said Amrita Sen from Energy Aspects consultancy…

“It looks like the West will have to rely more on what it calls “hostile regimes” for its supply,” joked a high-level executive from Russia’s Gazprom oil and gas group, referring to energy companies around the world owned completely or mostly by the state.


Back to Evans-Pritchard, who describes himself, incidentally, as “a strong advocate of net-zero,” believing, remarkably, that “it makes society richer, quickens economic growth, and with scale will cut energy costs for the poor.” He is on stronger ground when he hits out at the Dutch judge’s tortured reasoning and “cowboy legalism.”

More importantly, he understands that:

Prescriptive policy of this kind by judges has become a bad Western habit – indeed, it is endemic – and clashes with the constitutional basis of liberal democracy. It trespasses on what used to be deemed the proper role of legislatures and elected governments.

So far as corporatists and climate warriors are concerned, this is a feature, not a bug.

And there is just one other thing, the increasing political pressure on major oil companies to lower their production could, Evans-Pritchard reports, easily lead to a squeeze on the oil price:

“It is really shocking that no one seems to be doing any maths on the supply front. Record oil prices in the next three to four years look not only possible but probable,” said Mr Le Mee.

Predicting the oil price is a perilous business, but if I had to guess, the extent of the pain that may well be inflicted by the climate warriors’ run of victories not just on Western oil companies, but on Western economies and on the consumers who live in them is difficult to overestimate. So, no, it wasn’t just Shell that lost that court case.

There will in, all likelihood, be an appeal, but there will also be other cases, many of them, and even their possibility will have a significant chilling effect on investment in new production by companies that are, generally, responsibly run. It’s far better, apparently, to leave the job to the Russians, the Saudis, and the rest . . .

Around the Web
Shot . . .

The Financial Times:

The Biden administration has announced it will suspend the Arctic oil drilling rights sold in the last days of Donald Trump’s presidency, reversing a signature policy of the previous White House and handing a victory to environmentalists.

In his first day as president, Joe Biden directed the interior department to review oil and gas activity in the Arctic National Wildlife Refuge, one of the largest areas of untouched wilderness in the US. On Tuesday, the department said the licences would be halted pending an environmental and legal review . . .

Chaser . . .

The Barents Observer:

There is still a thick layer of sea-ice in the Yenisey Bay. But ships have still made their way to the coast of the Taymyr Peninsula and set ashore about 20,000 tons of construction materials.

The shipments to the remote location mark the start of construction of what ultimately will become Russia’s biggest oil terminal in the Arctic. Included in the materials are heavy machinery, housing modules, communication equipment and other goods needed for the building of a project working village . . .

According to [Russian oil company] Rosneft, Sever Bay terminal has been fully approved by the authorities, and engineers will soon start hydrotechnical works in the nearby waters and construction of port installations on the shore.

The terminal is a key component in Vostok Oil, the huge project that already by year 2024 is to deliver 25 million tons of oil. By 2030, the volumes will increase to 100 million tons per year. It is to be exported both westwards to European markets and eastwards to the Asia-Pacific region.

Second chaser . . .

The oil company argues that the Vostok Oil is “environmentally friendly,” and that it has “a very small hydrocarbon footprint”. Furthermore, the oil installations will reportedly be powered by wind turbines and associated gas.

Say what you will, someone in Moscow has a sense of humor.

Oh yes . . .


The proposed project is dauntingly huge. Rosneft said that it anticipates exporting 25 million tons of oil a year by 2024, 50 million tons by 2027, and 115 million tons by 2030. (The company plans to make 15 entirely new towns for the estimated 400,000 workers needed.)

And while we are on the topic of Russia and climate change . . .

Bloomberg Green (my emphasis added):

European governments are drawing up plans to phase out coal, U.S. coal-fired power plants are being shuttered as prices of clean energy plummet, and new Asian projects are being scrapped as lenders back away from the dirtiest fossil fuel.

And Russia? President Vladimir Putin’s government is spending more than $10 billion on railroad upgrades that will help boost exports of the commodity. Authorities will use prisoners to help speed the work, reviving a reviled Soviet-era tradition.

The project to modernize and expand railroads that run to Russia’s Far Eastern ports is part of a broader push to make the nation among the last standing in fossil fuel exports as other countries switch to greener alternatives. The government is betting that coal consumption will continue to rise in big Asian markets like China even as it dries up elsewhere . . .

Putin will doubtless be grateful to the western climate campaigners for the contribution they will be making to ensure this project’s profitability.

Random Walk
Ransomware negotiator:

Rachel Monroe writing in the New Yorker:

The F.B.I. advises victims to avoid negotiating with hackers, arguing that paying ransoms incentivizes criminal behavior. This puts victims in a tricky position. “To just tell a hospital that they can’t pay—I’m just incredulous at the notion,” Philip Reiner, the C.E.O. of the nonprofit Institute for Security and Technology, told me. “What do you expect them to do, just shut down and let people die?” Organizations that don’t pay ransoms can spend months rebuilding their systems; if customer data are stolen and leaked as part of an attack, they may be fined by regulators. In 2018, the city of Atlanta declined to pay a ransom of approximately fifty thousand dollars. Instead, in an effort to recover from the attack, it spent more than two million dollars on crisis P.R., digital forensics, and consulting. For every ransomware case that makes the news, there are many more small and medium-sized companies that prefer to keep breaches under wraps, and more than half of them pay their hackers, according to data from the cybersecurity firm Kaspersky.

For the past year, Minder, who is forty-four years old, has been managing the fraught discussions between companies and hackers as a ransomware negotiator, a role that didn’t exist only a few years ago. The half-dozen ransomware-negotiation specialists, and the insurance companies they regularly partner with, help people navigate the world of cyber extortion. But they’ve also been accused of abetting crime by facilitating payments to hackers. Still, with ransomware on the rise, they have no lack of clients . . .

— A.S.

To sign up for the Capital Note, follow this link.


The Latest

Colin Powell, R.I.P.

Colin Powell, R.I.P.

We had substantial disagreements but recognize that he will be remembered for a long, consequential career of service to a country that he loved.