Oct 1, 2018

Axios Generate

By Ben Geman
Ben GemanAmy Harder

Good morning from London, where I'm speaking at a Hawthorn Club event, and later this week I'll be checking out some carbon capture projects in Norway. 

My latest Harder Line column provides a behind-the-scenes look at an invite-only event of CEOs from global oil companies talking about climate change last week.

I'll share that, and then Ben Geman will get you up on the rest of the news.

1 big thing: Inside Big Oil’s climate strategy

Illustration: Sarah Grillo/Axios

A nascent organization funded by global oil companies to address climate change may seem ironic but it's a credible effort that could actually have a real impact.

Why it matters: Under pressure from investors and lawsuits, oil companies are starting to acknowledge climate change and slowly shift their business models in response.

The intrigue: Last week at the first-ever U.S. meeting of the group, called the Oil and Gas Climate Initiative, a rare and surprisingly candid discussion took place between CEOs of the world’s biggest oil producers and leaders in climate change action.

  • At the invite-only event at the Intercontinental Barclay hotel in Manhattan, roughly 150 people asked questions of 11 oil-company CEOs, including from Saudi Aramco, European producers BP and Shell and Houston-based Occidental Petroleum.
  • The guest list was strict and security officers were everywhere. Leaders of several environmental groups were invited, and as the two-hour discussion wore on, the dialogue got increasingly pointed.

Nigel Topping, CEO of a nonprofit coalition called We Mean Business, noted (accurately) that the companies were still overwhelmingly investing in finding new oil and gas over cleaner energy resources — “lest you suggest you’re really betting the farm on the future.”

The other side:

  • Josu Jon Imaz, CEO of Spanish producer Repsol, responded by saying he and other CEOs must balance transitioning to cleaner sources of energy over decades with returning short-term profits for shareholders. “The real dilemma and difficulty of all these jobs is to combine both things,” Imaz said.
  • Patrick Pouyanné, CEO of French producer Total, said cutting oil production too drastically would hurt the economy. “I don’t want to be accused in 10 years — because I would have diminished my amount of oil — for hiking the price of oil because the world will continue to need more.”

The big picture: The burning of the fossil fuels that oil and gas companies produce is a big reason Earth’s temperature is rising, yet their products are also foundations of the global economy.

  • Whether you love or hate them, the role these companies play is inherent to addressing climate change, particularly in the absence of U.S. presidential leadership on the issue.

The background: The Oil and Gas Climate Initiative was officially founded 4 years ago, but it’s just starting to do things worthy of attention.

  • The first U.S. member companies — ExxonMobil, Chevron and Occidental Petroleum — joined last week. That brings the total to 13 companies, accounting for roughly a third of the world’s oil and gas production.
  • The companies also pledged last week to cut by one-fifth their emissions of methane.
  • Each member contributes $100 million to Climate Investments, a $1.3 billion investment fund the group launched in November 2016. That effort has also had a slow start.

Of note: The initiative has limitations, driven by its makeup and mission.

Go deeper: Read the full column in the Axios stream.

2. Breaking: GE replaces CEO and may take $23B earnings charge

General Electric has named Lawrence Culp as its new chairman and CEO, replacing John Flannery, who took the reins just last year. Simultaneously, the company announced that GE Power would take an approximately $23 billion "non-cash goodwill impairment charge," though that remains subject to review.

Our thought bubble, from Axios' Dan Primack: Flannery's relatively short tenure was best-known for getting rid of things. Now he's gone too, after revealing a stunning $23 billion non-cash charge for its power business.

3. The latest: post-NAFTA, EPA, LNG

Trade: As seen in the tweet above and its followup here, President Trump says the new post-NAFTA trade deal with Canada and Mexico is a "great deal." Reuters describes the energy provisions of the new USMCA announced overnight:

  • "[T]he deal states that Mexico has the direct, inalienable and imprescriptible ownership of all hydrocarbons in its subsoil."
  • "Despite the strongly worded language, the energy chapter does not prevent foreign oil companies from producing oil in Mexico under a liberalization of the industry passed by the outgoing government."

EPA and mercury: Via the New York Times, "The Trump administration has completed a detailed legal proposal to dramatically weaken a major environmental regulation covering mercury, a toxic chemical emitted from coal-burning power plants."

A huge LNG deal: Per Bloomberg, "Royal Dutch Shell Plc and its four partners have agreed to invest in a multibillion-dollar liquefied natural gas project in western Canada — the largest new one of its kind in years that would carve out the fastest route to Asia for North American gas."

  • The $31 billion project, which would be Canada's largest-ever infrastructure development, will be announced as soon as today, according to the story.
4. Saudi Arabia puts giant solar project on hold

Saudi Arabia has put its $200 billion plan to build the world's largest solar project on hold, according to the Wall Street Journal, which cites Saudi government officials as sources.

  • "Saudi officials are instead "working up a broader, more practical strategy to boost renewable energy," the paper reports.
  • Its Japanese partner, SoftBank Group, declined to comment to WSJ and to Axios' request shortly before deadline.

Why it matters: The news signals the struggles and challenges the Saudis face in implementing ambitious plans to diversify their crude-reliant economy.

  • Recall that the kingdom also appears to have shelved plans for the IPO of state oil giant Aramco, which was designed to raise tens of billions of dollars to help seed the kingdom's modernization vision.
5. Tesla stock rises after a wild weekend

Tesla's stock is up about 16% in pre-market trading Monday following CEO Elon Musk's $20 million weekend settlement with the Securities and Exchange Commission, which had sued him on Thursday for making misleading statements, causing stock price to drop sharply.

Musk also said over the weekend that the company is on the cusp of profitability.

  • ICYMI Saturday, Musk will get to remain as Tesla's CEO under the deal, but must step down as chairman.
  • Tesla, as part of a separate but related settlement, also will be required to pay a $20 million fine, must add two new independent directors, and is required to vet Musk's tweets before they go out.

Why it matters: A drawn-out case would have clouded the future of Musk and Tesla for months to come at a critical time for the thus-far unprofitable Silicon Valley electric automaker.

  • Tesla has been struggling to show it can sustainably continue expanding production of the Model 3 sedan that’s critical to the company’s future, and a prolonged case could have also hindered its future access to capital (more on that below).

What's next: All eyes now turn to Tesla's vehicle third-quarter production and delivery numbers, which are expected in days, and then Q3 financial results in a few weeks.

  • Musk has claimed the company will profitable and cash-flow positive in the third and fourth quarters this year.
  • A Saturday email from Musk to employees encouraged them to go all-out in the frenzied push to complete deliveries on the final day of the quarter.
  • “We are very close to achieving profitability and proving the naysayers wrong, but, to be certain, we must execute really well tomorrow (Sunday),” he wrote, per Business Insider.

Our thought bubble: The SEC settlement amounts to some "tough love" for the company. New independent voices on the board should be helpful. And in theory the controls over Musk's communications may help prevent this type of self-inflicted wound in the future.

6. Tesla's financial future
Expand chart
Data: FactSet; Chart: Andrew Witherspoon/Axios

More on Tesla: Axios' Felix Salmon explains why the settlement matters for the company's ability to raise money...

The big picture: Tesla is still burning through $1 billion a quarter. Investors don't love to lend money to a cashflow-negative company that has never made a profit, is at war with its regulator and already has more than $11 billion in debt.

When companies die, it's nearly always because they can't raise money. That, ultimately, is why Musk swallowed his pride and settled with the SEC. He can't afford to be in a fight with the SEC when he inevitably returns to the debt markets to ask for more money.

  • The chart above shows that the Tesla debt window probably hadn't shut completely. Even with Tesla stock at its post-lawsuit low, there was still a huge equity cushion, and in a worst-case scenario, there are any number of companies that would be willing to buy Tesla for much more than the value of its debt.
  • If you lend Tesla money, you're lending against an asset, which is the company itself. And there's always going to be a buyer for Tesla at a price above $11 billion.
  • But stock-price chaos is always reflected in higher borrowing costs, and Musk will surely need to borrow more money in the next year or two, which is the amount of time that the SEC lawsuit would have been hanging over him had he not settled.
7. A Trump agency's dire warming forecast

Extreme weather events, such as the recent N.C. flooding from Hurricane Florence, will be more frequent and intense under higher levels of global warming. Photo: Joe Raedle/Getty Images

ICYMI via Axios' Andrew Freedman ... In calculating the potential environmental impacts of freezing federal fuel economy standards in 2020, the Trump administration made the assumption that the world will warm by about 4°C, or 7.2°F, by 2100, when compared to preindustrial levels, first reported by the Washington Post on Friday and since confirmed by Axios.

Why it matters: Such a high amount of warming would also far exceed the amount that scientists say would result in potentially catastrophic impacts, including the partial to complete collapse of the Greenland and Antarctic ice sheets.

The details: The National Highway Traffic Safety Administration document states that the impacts of nearly 7°F of global warming would be severe, including "increases in mortality and morbidity due to excessive heat and other extreme weather events" and the swamping of cities due to sea level rise.

  • However, it argues that weakening the strict fuel economy standards enacted under the Obama administration would result in a tiny additional amount of warming, contributing relatively little to this overall temperature increase.
  • The document also assumes that global emissions of greenhouse gases will proceed along their current path.
"The amazing thing they’re saying is human activities are going to lead to this rise of carbon dioxide that is disastrous for the environment and society. And then they’re saying they’re not going to do anything about it."
— Michael MacCracken, climate scientist, tells WashPost

Read more of Andrew's story here.

Ben GemanAmy Harder