The global debate about climate change is accelerating, and the odds of binding carbon dioxide (CO2) caps in the United States and elsewhere are rising, but the bullish fundamentals of the oil and natural gas industry will not be impacted anytime soon -- in fact, more stringent regulations favor natural gas, said Raymond James & Associates Inc. energy analysts.
Analysts J. Marshall Adkins and Pavel Molchanov wrote in a note to clients that this politically hot topic is taking on new dimensions that eventually will impact the United States. However, the "enormous size of the conventional energy markets means that any gradual, incremental steps at carbon reform -- the only ones that are politically feasible -- are very unlikely to 'shock the system.' Our message to investors, therefore, is: it's business as usual."
Several recent events indicate the likelihood that emissions reform will move forward:
"Virtually all developed countries are subject to Kyoto's CO2 caps -- a total of 38, including 25 of the 27 European Union members, Canada, Japan and Russia," the analysts noted. And Australia is set to impose CO2 caps, "leaving the U.S. (which accounts for over 20% of global emissions) essentially alone in firmly opposing such a policy."
The U.S. government has indicated it will not join an international agreement on emissions that does not cover emerging markets, but that argument "undercuts international support," said Adkins and Molchanov. The "core" of the Kyoto Protocol is a requirement that industrialized countries reduce their emissions of six greenhouse gases, especially CO2, by an average of 5.2%. The base year is 1990; the reductions are to be achieved by 2012. If the United States had ratified the treaty, it would have been subject to cutting emissions by around 7%.
Even with the push for emission reductions, progress is slow, Adkins and Molchanov noted. With more than two years of observable Kyoto Protocol history, the analysts said that from the standpoint of the oil and gas industry, "we see negligible impact...Even if binding CO2 caps are increased and become more widespread, it is difficult to see how oil demand could materially be affected, since there are no viable, large-scale alternatives to fossil fuels for transportation," which accounts for about 70% of oil demand in the United States and other developed countries.
If anything, the analysts expect natural gas to gain if more stringent U.S. regulations are adopted. The one conventional energy source that could be affected under a CO2 limit would be traditional coal-fired power generation.
"However, the prospect of carbon sequestration from coal power plans means that this issue can be successfully overcome, so well in fact that environmental groups such as the Natural Resources Defense Council back continued coal usage," they wrote. "Furthermore, with the advent of clean coal (and, longer term, coal-to-liquids), we believe the outlook for global coal demand remains solid and economically attractive."
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