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Paris Climate Pact ‘Unlikely to Catalyze Changes’ to Energy Use, Analysts Say

After two weeks of negotiations in Paris, representatives of nearly 200 nations, including the United States, India and China, entered into an agreement to reduce global carbon emissions.

But with more negotiations likely needed to meet long-term international emissions targets, and with many companies already planning for a lower-carbon world, the immediate impacts of the climate pact on the oil and gas industry appear limited.

The deal, celebrated by President Obama and environmental advocates, was hammered out during this year’s meeting of the Conference of Parties (COP21) to the United Nations Framework Convention on Climate Change. According to the White House, the Paris agreement, which would require participating nations to submit emissions reduction plans and review those plans every five years, “lays the foundation for keeping a global temperature rise below 2 degrees C [Celsius]” above pre-industrial levels.

The 2 degrees C threshold is generally thought of as the point past which the most severe effects of climate change would occur.

Obama said in a statement that the agreement “sends a powerful signal that the world is firmly committed to a low-carbon future” and that it could be “a turning point for the world.”

The GOP-led Congress has already declared its opposition to Obama’s climate change action plan, with a pair of symbolic votes aimed at undercutting the U.S. bargaining position during the Paris negotiations (see Daily GPI, Nov. 18).

Analysts with ClearView Energy Partners LLC expressed skepticism over whether the COP21 agreement would have the kind of sweeping impact on energy markets that advocates had originally envisioned.

“In the lead-up to -- and during -- the talks, key stakeholders appeared to reframe the broader goal of the meeting from limiting global warming to 2 degrees C to ‘sending a market signal’ to transition from fossil fuels to clean energy,” ClearView said, noting that the agreement “itself seems unlikely to catalyze changes the UN believes necessary to prevent warming above 2 degrees C.”

Future negotiations will have to close the gap between current emissions plans and what’s needed to prevent the worst of climate change, ClearView said. “We would also suggest that the implementation of a Paris agreement could prove at least as contentious as the negotiations themselves,” the analysts said. “Despite this weekend’s agreement, in the face of gaps remaining between developed and developing countries, we think a continuation of global energy consumption trends seems more likely than a dynamic shift away from fossil fuels.”

ClearView added that “negotiators substantially deferred action” on several major issues that will have to be resolved in more detail to achieve the targeted global emissions reductions.

On Saturday, the American Petroleum Institute released a statement highlighting the emissions reductions already achieved through industry innovation, especially the emergence of cheap natural gas from U.S. shale plays.

“America’s private sector has already taken the lead on reducing greenhouse gas emissions, even as we increase economic activity and domestic energy production to keep energy reliable and affordable for consumers,” CEO Jack Gerard said. “Our success is driven not by government mandate or legislative fiat, but through innovation, investment and entrepreneurial spirit.

“The United States has become the world leader in reducing carbon dioxide emissions. And EPA [Environmental Protection Agency] data show that methane emissions are also plummeting, with the largest reductions coming from hydraulically fractured natural gas wells.”

Cathy Landry, a spokeswoman for the Interstate Natural Gas Association of America (INGAA), said natural gas is likely to figure prominently in efforts to cut carbon emissions moving forward.

“The COP21 climate agreement will incentivize the usage of natural gas in the short- and medium-term, as more natural gas is used to comply with the emissions targets. The United States is well positioned because of its abundant natural gas supplies,” Landry said. “Those vast, affordable natural gas supplies already have helped the United States in recent years lower its greenhouse gas emissions, particularly its carbon emissions, as more power plants switch to clean-burning natural gas.”

But while proposed carbon regulations figure to incentivize further coal-to-gas switching for electric generation, the Obama administration has also proposed regulatory action aimed at gas production, transportation and storage in the name of climate change. Last week, INGAA released detailed comments raising concerns about the EPA’s proposed plan for cutting methane emissions from new and modified sources in the oil and gas industry (Daily GPI, Dec. 7).

Prior to the Paris climate talks, analysts were already talking about the potential market impact of carbon. BlackRock Investment Institute released a report last month concluding that investors must factor in greenhouse gas emissions when evaluating their portfolios (Daily GPI, Nov. 5).

Indeed, major energy companies like BP plc and Royal Dutch Shell plc, as well as Mexico’s Petroleos Mexicanos, have already declared support for the UN to adopt an “effective” climate change agreement (see Daily GPI, Oct. 16).

In the lead-up to Saturday’s announcement of the Paris agreement, Bernstein analysts released a report detailing investments made by major oil companies in renewables dating back to the 1970s energy crisis, including substantial investments in wind and biofuels.

“Most are still investing in renewables, with their dollars making up almost 50% of global [research and development] in renewables. While oil and gas is their core business, they are also increasingly including future carbon prices in all investment decisions,” Bernstein said. “One day the Majors might come out and rebrand as integrated oil, gas and renewable companies. Until then their 12 years of proven oil and gas reserves will be needed. When any shift to renewables comes, they might be more ready than they are given credit for.”

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