Trends In Energy Infrastructure: Mid-Year Update

In This Issue:
  • What the recent Exxon shareholder vote means for ESG activism
  • Are environmentalists turning against the energy transition?
  • Regulatory uncertainty is giving way to post-construction regulatory reversal
  • Will the post-Colonial cybersecurity debate lead to legislative action?

DESPITE RECENT EXXON WIN FOR ESG ACTIVISM, KEEPING FINANCIAL AND POLITICAL INTERESTS ALIGNED MAY PROVE DIFFICULT

Financial And Political Shareholder Activism Merges For Exxon Vote. Company management and boards have long had to contend with two different types of shareholder activism: Activists focused on the fundamentals of the business and on maximizing profits, and activists primarily driven by social and environmental concerns, not financial objectives. In May, investor activists at Exxon showed these two types of financial activists have merged, with hedge funds now making fundamentally profit driven arguments directly driven by the belief that environmental and sustainability issues, and a firm’s social responsibilities, directly impact that firm’s bottom line and long term value. However, while this shift is being hailed by many as a major climate victory by financial activists challenging the “existential risk” caused by fossil fuels, the reality is that the merger of financial and political activists is much more nuanced.

While the financially motivated investors take credit for Exxon’s “sudden enthusiasm” for investing in clean technology like carbon capture and expect the firm to invest wisely in continuing to meet the world’s oil and gas demand, their politically motivated allies expect nothing less than Exxon’s complete departure from fossil fuels and already oppose Exxon’s proposed $100 billion carbon capture project. While this tie-up between financial and political interests among shareholders will have major impacts for managements and boards, the marriage of the two may prove difficult to maintain as some shareholders’ focus on effective firm governance will not always align with the moving targets of environmentalist expectations.

Despite Recent ESG Successes, Green Groups Remain Unsatisfied. As activist investors advance ESG, so too are major banks, financial regulators, and congressional Democrats. In April, JPMorgan Chase, Citi, and Bank of America each made trillion dollar ESG announcements. The announcements come as the Federal Reserve  and SEC seem set to address disclosures and other measures related to ESG. Congressional Democrats are also looking to “allow fiduciaries to consider ESG factors in selecting investment strategies for employer-sponsored plans,” a reversal of Trump Labor Department efforts to prevent such considerations. Despite these ESG successes, environmentalists with the “Stop the Money Pipeline” movement remain unimpressed, and on April 17, 2021, (only two days after JPMorgan’s ESG announcement) marched to JPMorgan’s New York City headquarters in an attempt to “shut JP Morgan Chase down for the day.” For groups like Stop The Money Pipeline, the goal posts will continue to shift until banks “immediately end financing for fossil fuel expansion, and put in place a stringent, rapid plan to phase out its overall support for the fossil fuel sector.”

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THE ENERGY TRANSITION IS HERE AND ENVIRONMENTALISTS ARE ALREADY AGAINST IT

Industry Is Embracing The Energy Transition, But Practical Solutions Are Not Meeting Environmentalist Demands. More and more, the energy industry is taking steps to advance a cleaner grid and fight climate change. The oil industry is working with White House Climate Adviser Gina McCarthy, energy trade groups are supporting methane regulations, and oil majors are making climate and net-zero pledges. As noted elsewhere in this report, those firms not seen as moving fast enough are facing pressure from investors, not just activists. However, as these companies take steps to invest in the necessary technology and infrastructure to meet their climate goals, environmentalists are shifting the expectations. Much like natural gas was once considered a cleaner technology and is now reviled by environmentalists, activists are already raising objections to the next generation of technologies that could help us reach a low or net zero carbon future.

Environmental Activists Are Organizing Against Carbon Capture, Utilization, And Storage (CCUS). While The White House has acknowledge the role carbon capture can play in meeting key climate emissions goals, a May 13 report issued by The White House Environmental Justice Advisory Council (WHEJAC) objected to CCUS, arguing such projects “will not benefit a community.” Citing the high cost of the technology and the “uncertainties” regarding “waste streams, CO2 sequestration and emissions of criteria pollutants that can’t be captured by CCS systems,” WHEJAC’s Co-Chair Peggy Shepard, who leads a New York-based environmental activist group, pledged “to ensure that these projects are not happening in communities of color.” WHEJAC’s opposition comes after more than  650 environmental groups, including the Center for Biological Diversity, Food & Water Watch, and Friends of the Earth, sent a letter opposing “filthy and false solutions such as…carbon capture and storage.”

Environmentalists Are Beyond Hydrogen Before It Arrives. Like CCUS, hydrogen power is another nascent technology seen by industry and investors as offering great promise but meeting skepticism and claims of “greenwashing” by environmentalists. Recent environmentalist op-eds published in The Guardian and Morning Consult have urged readers not to “fall for the hydrogen hype.” Opponents of hydrogen cite concerns that a hydrogen future “risks locking in a dependency on fossil fuels,” as activists in Newburgh, New York argue in their opposition to a permit for a proposed natural gas peaker plant that would one day run on hydrogen, calling the company’s plan to convert the plant to hydrogen in the future a “bait-and switch” and “greenwashing.” Similarly, in Minnesota, opponents of a proposed natural gas plant that could someday run on hydrogen have questioned the feasibility of the technology in PUC filings. In Ohio, local opponents dismissed an announcement that the proposed Mountaineer NGL Storage Facility was exploring green hydrogen demand as “well-crafted PR messaging.” Even “Green Hydrogen,” which is hydrogen created by using renewable sources “to power the electrolysis of water,” is facing opposition from activists who call it a “false solution.”

Increased Scrutiny On Battery Technology Means Activist Pressures Are Likely To Follow. On May 6, 2021, The New York Times reported on “The Lithium Gold Rush” to help offset the “near total reliance by the United States on foreign sources of lithium,” which is needed for electric vehicles and power storage systems for renewable energy sources. Despite this drastic need for the energy transition, the Times notes greens are attempting to block proposed domestic mining projects. Similarly, a May 11, 2021 Wall Street Journal  op-ed titled “Biden’s Not-So-Clean Energy Transition” expressed concern about mining the “energy transition minerals” needed for renewable energy. The op-ed cited a recent IEA report titled “The Role of Critical Minerals in Clean Energy Transitions,” calling it “devastating to those [clean energy] ambitions.”

Now, as it becomes increasingly clear what investments and technologies are needed to advance the energy transition, the Biden Administration seems to have flipped on a campaign promise to support domestic production of such minerals in an attempt to “placate environmentalists.” The more battery and storage technologies move to the forefront, the skepticism and concern about their environmental footprint is likely to grow with it. As we noted in a clean energy analysis last year, “It’s Not Easy Being Green.”

AS ACTIVISTS AND THE ADMINISTRATION TRY TO ACCELERATE THE ENERGY TRANSITION, REGULATORY UNCERTAINTY IS GIVING WAY TO REGULATORY REVERSALS

Getting Infrastructure Constructed And Into Operation Is No Longer A Guarantee Projects Can Continue Forward. The announcement by TC Energy that the firm would cancel Keystone XL after more than a decade of controversy is an important reminder that once activism and controversy surrounds a project, it is difficult to see it through to completion. However, other recent notable headlines on pipeline infrastructure shows that is no longer the end of the activism story. Even if a project is able to secure the political will and regulatory approvals to undertake construction, and even if a project begin operations, the past several months have provided several examples of projects continuing to face an onslaught of legal, regulatory, and activist pressures to shut down even after construction is complete.

Such fights include battles against the Dakota Access Pipeline, and Enbridge’s Line 5. This phenomenon becomes particularly relevant as infrastructure ages and requires updates or replacements. According to PHMSA, as of 2020 approximately 50 percent of gas transmission miles and 41 percent of hazardous liquid transmission miles were installed pre-1970. Such is the case with Enbridge Line 3, which was originally built in the 1960s, and now faces coordinated financiallegal, and on the ground activism as Enbridge looks to replace the aging pipe. With challenges to infrastructure persisting throughout the life of a project, companies need to plan to maintain communities’ permission to operate long past construction, even as activists and their allies in government increasingly use every means available to them to reduce and restrict fossil fuel infrastructure to hasten their desired energy transition.

Local Coalitions Are Targeting Regulatory Reversals And Officials Are Listening – And Taking Unprecedented Actions. While DAPL, Line 5 and Line 3 have all received significant national attention, in Brooklyn NY, a local coalition is working to stop construction of National Grid’s Metropolitan Reliability Infrastructure Project. These groups have been able to generate significant opposition from local politicians, including Mayor Bill de Blasio, in calling on National Grid to cancel construction or the Cuomo Administration to pull National Grid’s permits. In Louisiana, local activists have generated significant attention, as well as the support of national groups like the Sierra Club and Earthjustice, in their opposition to permits issued to Formosa Plastics. With technical and legal support from large national environmental groups, these Gulf Coast organizations are actively challenging an existing federal permit in hopes of killing the proposed plant.

In Weymouth, Massachusetts, years of local activism led FERC to open an unprecedented “paper briefing” review of the Weymouth Compressor Station’s service authorization order. Following the announcement of the examination, an activist with the Sustainable FERC Project noted she couldn’t “think of a time when commissioners have signaled as strongly that they’re willing — if not outright interested — in reexamining a project that was already in service.” As FERC Commissioner Danly noted in his dissent to the order, “Intended or not, the message from this order is clear: even if a pipeline has its certificate, a court upholds that certificate, and that pipeline is in compliance, the Commission can now find a way to modify, or even possibly revoke, the certificate.”

COLONIAL PIPELINE HACK BRINGS SIMMERING CYBERSECURITY DEBATE TO A BOIL, BUT WILL IT LAST?

Recent Ransomware Attacks Prompted Renewed Legislative Interest, But Action Is More Likely From Federal Regulators. The recent  ransomware attacks, including on the Colonial Pipeline, has brought back to the forefront the long running debate over cybersecurity measures for our nation’s critical infrastructure. The renewed interest on Capitol Hill includes proposed legislation, to require more reporting and disclosures, and proposed legislation from senior members of the Energy and Commerce Committee “would put the Energy Department (DOE) in charge of pipeline security, rather than the Transportation Security Administration.” As industry engages with Congress on what legislation might look like, the question is, will Congress’s efforts be sustained, or will interest wane before progress is made? While bipartisan legislation is possible, regulatory action seems more likely. With pipeline cybersecurity oversight from the historically underfunded and understaffed TSA, rather than DOE, it is incumbent on industry to proactively work with regulators to ensure questions regarding disclosure and standard setting are answered productively, through an effective public-private partnership, rather than becoming a source of reputational risk and regulatory burden.

The Colonial Attack Showed How Critical Pipelines Are To Americans’ Daily Lives – Providing Evidence For Both Industry And Environmentalists To Make Their Case. The Colonial Pipeline hacking brought pipeline security and safety to the forefront of public discussion and provides a reminder that that companies must be thinking about how they are shaping brand awareness before a crisis hits. While Colonial is a “vital artery” for fuel throughout the eastern U.S., prior to the hack it had “little name recognition among the general public.” Now, Colonial is a household name, and for most outside the energy industry, the hacking is all they may know about the company. Meanwhile, industry opponents, including the Environmental Defense Fund, have seized on the hack to argue “traditional strategies for producing and delivering energy are under threat by climate and by cyberterrorists,” and therefore lack the necessary resilience for our future energy security. However, the hack and the panic buying that followed also provides industry an opportunity to remind the public why pipelines are so crucial.

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