Dan Romito, Pickering Energy Partners

The laws of mathematics, supply and demand always trump popular trends and ideological zeal.  One can wish for a desired paradigm, but history teaches us that market forces will always prevail.

This distinctly applies to the evolution we are observing in the global energy markets. The data show that the U.S. consumed approximately 32 Tcf of natural gas in 2022. While the sheer magnitude of that figure initially appears immense, keep in mind that CO2 emissions in the U.S. between 2007 and 2022 decreased by roughly 18%. It is also worth noting that annual U.S. GDP, on average, increased about 2.7% per year during the same time frame.

Natural gas consumption within the European Union was significantly lower than in the U.S. in 2022. Twenty-seven countries within the EU consumed approximately 412 Bcm in 2022, but the Eurozone’s GDP is almost half of the U.S. GDP ($15 trillion versus $28 trillion). Interestingly, the U.S. produced 980 Bcm of natural gas in 2022, while Europe imported roughly 85% of its natural gas. Moreover, Russian natural gas accounted for about a quarter of European natural gas imports. Since the 2008 financial crisis, Europe’s GDP grew 1.6% yearly, while annual CO2 emissions declined by nearly 25%.

The data is clear: Western economies have cracked the decoupling code. The U.S. and Europe have successfully figured out how to significantly lower their emissions profiles without sacrificing economic output. Several technological advances have contributed to this achievement. However, it is essential to acknowledge that the increased use of natural gas (which comprises about 33% of the energy mix in the U.S. and about 20% in Europe) is one of the most influential variables driving this trend.

The EU recently voted to designate natural gas as “green” and “sustainable.” Natural gas is not only a fossil fuel but is composed of about 95% methane. It begs the question—why would the EU suddenly redesignate a methane-based fossil fuel as “green” when it is simultaneously implementing policies and regulations intended to penalize, if not eliminate, fossil fuels?

The answer is straightforward—the long-term economic health in Western economies increasingly relies on natural gas.

With these goalpost adjustments, the cynicism generated within the industry is more than understandable. Fossil fuel divestment proponents focus too much on aspirational goals rather than critical empirical and economic data. Whether those setting the divestment agenda like it or not, there is a distinct correlation between GDP expansion and energy consumption.  Furthermore, there is a 0% chance that developing countries will act against their best economic interests in the name of climate mitigation.

Investors and governments already show evidence of instituting a quiet compromise, i.e., balancing economic truths with ongoing ESG-related pressures. I foresee more pragmatic energy agendas emerging globally as stakeholders realize how geopolitics, population trends and socio-economic dynamics adversely impact local economies. Economic realities will always prove out in the long term, but the energy industry must proactively engage by quantitatively showcasing its non-fundamental performance.

At the end of the day, it is all about the data. Parties who continue to double down on the divestment of fossil fuel-based assets are at threat of losing money and face. Quantitative analysis of the current economy and non-fundamental trends will objectively showcase that Western economies, led by the U.S., are leading global decarbonization efforts.

Herein lies the foundational tenet of what we are beginning to unofficially call “The Silent Compromise.” The capital markets are opening their arms once again to hydrocarbon businesses. However, quality long-term capital rewarded to the energy space will be contingent upon showcasing positive non-fundamental trends for material ESG-related drivers of the business. Showcasing trends is a function of self-reporting material quantifiable data points that validate best-in-class characteristics.

The energy sector must improve its external quantitative messaging to provide investors with the evidence required to justify a specific investment. Empirically, the data already indicates that the U.S. displays a global best-in-class ESG profile. To win quality capital moving forward, corporate management teams must objectively demonstrate how their strategy and performance are accretive to this best-in-class resume.

Other ESG-related goalposts will likely continue to shift as market forces demand it, implying that adequate preparation is critical. Capital will be reallocated to the hydrocarbon businesses because economic law will facilitate viable and attractive long-term alpha.

However, this alteration comes with an explicit asterisk. Namely, financially performing companies worthy of valuation premium must also proactively provide quantitative evidence that they belong in the upper quartile of popular ESG rankings. Future investor diligence will require objective proof that an investment’s material ESG profile does not lag peers and appropriate benchmarks. This effort may feel painful now, however, outlooks suggest that non-fundamental reporting is due to increase in both volume and sophistication. Therefore, it is wise for companies to boost their data collection game.