Dear reader,
Camouflage — as illustrated by performance artist Liu Bolin in the image above — is a complex art. One miscalculation and your true position is revealed. This poses a unique challenge for hydrocarbon companies, who must continue to extract oil and gas to generate profits for shareholders while also appeasing environmental activists by adopting eco-friendly practices.
This week, Lex commends Exxon of the US and BP of the UK for their skillful maneuvering in this regard. Exxon, the most unabashed among the major oil companies, managed to present its $4.9 billion takeover of Denbury as an environmental victory. Denbury specializes in injecting carbon underground to enhance oil production, and Exxon argues that this approach allows for a sustainable cycle of extraction and sequestration.
While a complete transition to renewable energy would be ideal, BP made a notable commitment to wind power this week. The company secured the rights to develop 4 gigawatts of offshore wind projects in Germany, though it should be noted that BP only paid a fraction of the upfront cost. Analysts estimate that BP would need to secure power sales at current market prices to make the project economically viable.
This raises questions about BP’s true commitment to renewable energy and whether it is simply seeking to bolster its green credentials at a minimal cost. The lack of a concrete roadmap for transitioning away from hydrocarbons, combined with vague carbon accounting standards, is deterring private capital from investing in the necessary energy transition.
Capital will naturally retreat from investments exposed to the risks of climate change. This is evident in the insurance industry, where French insurer Axa plans to sell the reinsurance arm of its subsidiary XL to avoid future claims arising from catastrophic events. The insurance market may be willing to cover all risks, but extreme weather events could make insurance unaffordable for those living in high-risk areas.
However, there is still significant investment potential in low-carbon technologies, such as modular nuclear power plants. Sam Altman, the CEO of OpenAI, is supporting the New York listing of startup Oklo via a Spac. While Lex believes Oklo’s plans are lacking in detail, the modular nuclear technology developed by Rolls-Royce, which benefits from years of experience in powering submarines, may offer a more viable solution.
Another avenue for net zero investment is Kingspan, a Dublin-based manufacturer of building insulation. Though one of its products was involved in the tragic Grenfell Tower fire in London in 2017, when used safely, Kingspan’s insulation materials can significantly reduce energy consumption. The company recently upgraded its profit estimates for the first half of the year.
The demand for holidays on cruise ships, known for their high levels of pollution, highlights the lack of concern among ordinary consumers for climate change. However, this apathy may change as droughts worsen, temperatures rise, and populations in hot countries are forced to seek refuge in cooler regions.
Moving on to a different topic, I want to share a personal anecdote about a trade fair I attended in Birmingham around the turn of the millennium. While most of the event was dominated by UK gift shop owners ordering cheap items like fridge magnets, the unoccupied corner of the exhibition hall featured small Chinese businesses selling luxury cashmere scarves and military band trombones. These entrepreneurs seemed out of place and disillusioned, as they had been essentially forced to trade with the west without any demand for their products. However, this initial struggle eventually led to a thriving east-west trade relationship.
Today, China remains crucial to Apple as both a manufacturing base and a market. Despite the current political climate, it is unlikely that Apple will sever its ties with China completely. Similarly, Geely Auto, a Chinese car manufacturer, has followed in the footsteps of those early Chinese traders by establishing partnerships with European companies like Renault. It is expected that Chinese electric vehicle companies will penetrate the European market, especially in lower-priced segments. However, political obstacles could hinder Geely’s progress, both from protectionist European legislators and from unpredictable interventions by the Chinese Communist party.
In other news, investors are hopeful that the payment of a $984 million fine by Chinese payments group Ant represents the end of hostilities between tech companies and the state planning body. However, consumer confidence is declining in China, as evidenced by the increased demand for cheap clothing like that sold by Japan’s Uniqlo. It is too soon to say whether China’s government will refrain from further interfering in business affairs, as the habits of power often encourage a desire for control.
Before we conclude, I thought I would mention a few things I enjoyed this week. I highly recommend the Peak Social Media podcast, hosted by my colleague Elaine Moore. She offers a humorous and nuanced perspective on the complex world of California’s tech industry. I also found the film Asteroid City to be quite entertaining, as it eschews violence and superheroes in favor of a whimsical portrayal of 1950s America by director Wes Anderson.
Hopefully, you have a wonderful weekend, regardless of your preferred form of leisure activities.
Jonathan Guthrie
Head of Lex
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