DAC Energy Investor Monthly – February │ March 2024

COP28: The End of Fossil Fuels or Just Hot Air?

The 2023 United Nations Climate Change Conference or Conference of the Parties of the United Nations Framework Convention on Climate Change (UNFCCC), more commonly known as COP28, was held last year From November 30th to December 13th in Dubai, UAE. According to the UNFCCC, the conference had over 85,000 participants, including 154 Heads of State and Government. As many news headlines have stated, the Convention ended with an agreement that claims the “beginning of the end” of the fossil fuel era by laying the groundwork for a transition away from CO2-emitting hydrocarbons, underpinned by deep emissions cuts and scaled- up financing for new energy projects.

However, the most important outcome of COP28 was an agreement for the world’s first “global stocktake” to ratchet up climate action before the end of the current decade and achieve the ultimate goal of limiting the rise in global temperatures to 1.5°C. This climate milestone, known as the Paris Agreement, was defined in an international treaty reached during the UN Climate Change Conference (COP21) in Paris, France, in December 2015. To achieve this goal, the “stocktake” agreement calls on all governments to take the necessary actions toward tripling their renewable energy capacity and doubling their energy efficiency improvements by 2030. The list also includes accelerating efforts to phase out coal power, eliminating inefficient fossil fuel subsidies, and using other measures to speed the transition from fossil fuels to zero emissions and renewable energy. By all accounts of the COP28 conference, this “global stocktake” will lead to the phase-out of fossil fuels much faster than any previous agreement. However, this is only partially true, especially if one separates this agreement from the economic realities.

The United Nations Climate Change Conference was established in 1992 during the United Nations Conference on Environment and Development, and it had its first major meeting, the Conference of the Parties (COP 1), in 1995. Of the 27 COP conferences since, two major climate agreements have been reached: the Kyoto Protocol in 1997 and the Paris Agreement in 2015. Both have attempted to reduce greenhouse gas emissions, and each COP meeting has centered around negotiating how to achieve these reductions. Again, the end goal of all these agreements is to limit the rise in global temperatures to less than 1.5 degrees Celsius, or about 2.7 degrees Fahrenheit, which is an amount that the scientific community has determined is a reliable “pre-industrial” reference temperature and is representative of temperature levels that predate the global use of fossil fuels.

While there has been much fanfare in the media and among environmental groups about the significant achievements of COP28, it did not result in a major multi-national treaty, merely a promise to work toward reducing CO2 and other greenhouse gas emissions. Importantly, this “global stocktake” lists how each nation has been deficient in meeting the Paris Agreement’s aims and highlights developed countries’ failure to provide more funding to developing nations, particularly those deemed to be most impacted by climate change. This funding was to be in the form of a transfer of $100bn annually from the developed nations to those deemed developing. Additionally, COP28 included a pledge for all parties to create a framework for the remediation or payment of their deficiencies that will be addressed in the next global climate conference COP29 and a plan of action for this remediation to be prepared for COP30. In short, COP28 resulted in a decision to point out how every party involved with the 2015 Paris Agreement failed to meet their pledges and for every party to devise a plan for how they will meet their commitments from now on.

What most of the media stories about COP fail to mention, to no one’s surprise, is that each of these agreements lacks any means of enforcement, relying only on each party to meet their commitments or risk suffering a firm scolding at the next COP confab. In theory, the UN could use its power to enforce these agreements; however, if a Security Council member state, such as the United States or China, decided not to meet its obligations, it could use its veto power to stop any enforcement action. The stark reality is that many of the UN member states that have signed onto the COP agreements would need to forgo significant economic growth or, at the very minimum, saddle their economies with highly uncompetitive energy costs to reduce their greenhouse gas emissions meaningfully. Alternatively, some developed nations could meet their COP climate emissions pledges by purchasing emissions credits from less developed countries that have fewer resources to meet their climate obligations. Unfortunately, under this shell game scenario, the net effect is that the developed world becomes poorer while nothing is actually accomplished to reduce carbon and GHG emissions. It all becomes kabuki theater. This is to say nothing of the many countries and special interest groups who see the COP agreements as a means to grab as many resources – and dollars – as possible for greenhouse gas mitigation techniques that are either unproven or ineffective in all but name. For now, we remain pessimistic that any real progress will be made in reducing the world’s reliance on fossil fuels, at least in the foreseeable future.

Sources:

  1. https://en.wikipedia.org/wiki/2023_United_Nations_Climate_Change_Conference
  2. https://unfccc.int/news/cop28-agreement-signals-beginning-of-the-end-of-the-fossil-fuel-era
  3. https://unfccc.int/cop28
  4. https://news.mit.edu/2023/explained-climate-benchmark-rising-temperatures-0827

ENERGY MARKETS BY THE NUMBERS

U.S. Total Crude Oil Production and U.S. Crude Rotary Rig Count (as of March 8, 2024):

  1. West Texas Intermediary (WTI) oil price was $78.01 per barrel (+1.6% m/m)
  2. U.S. oil production was 13.1mm bbl/d (-1.5% m/m)
  3. U.S. oil rig count was 504 (+1.0% m/m)
Source: Bloomberg, Dividend Assets Capital

The U.S. Commercial Crude Oil Inventories (excluding those in the Strategic Petroleum Reserve) and Inventory Changes (As of March 8, 2024):

  1. Inventory increased by 7.6 million barrels month over month to 447.0 million barrels (1.4% below the 5-yearaverage).
  2. Total crude stockpiles, including the Strategic Petroleum Reserve (“SPR”), increased by 10.3 million barrels month over month to 808.6 million barrels.

U.S. Imports and Exports (as of March 8, 2024):

  1. U.S. crude oil 4-week average imports were 6.4 mm bbl/d, up 8.8% month over month.
  2. U.S. crude oil 4-week average exports were 4.4 mm bbl/d, up 7.4% month over month.
Source: Bloomberg, Dividend Assets Capital

U.S. Refinery Inputs and Utilization Rates (as of March 8, 2024):

  1. U.S. crude oil refinery inputs averaged 15.7 mm bbl/d for the week March 8, 2024. Four-week inputs
    averaged 15.0 million bbl/d, 0.3% lower than the same time a year ago.
  2. Refinery Utilization Rate was 86.8%, up from 80.6% for the previous month. This is lower than the same period last year, which was an 88.2% utilization rate.

Source: Bloomberg, Dividend Assets Capital


This information is for illustrative purposes. Material presented has been derived from sources considered to be reliable, but the accuracy and completeness cannot be guaranteed. Nothing contained in this document may be relied upon as a guarantee, promise, assurance, or representation as to the future.

Dividend Assets Capital, LLC (“DAC”) is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about DAC investment advisory services can be found in its Form ADV Part 2, which is available upon request.

You should carefully consider the investment objectives, potential risks, management fees, and charges and expenses before investing. The Firm’s Investment Adviser Brochure, Form ADV Part 2, contains this and other information about the Firm, and should be read carefully before investing. You may obtain a current copy of DAC’s Form ADV Part 2 by visiting our website at dacapitalsc.com, emailing info@dacapitalsc.com, or by calling us at (866) 348-4769. Additional information about Dividend Assets Capital, LLC is also available on the United States Securities and Exchange Commission’s website at www.adviserinfo.sec.gov. You may search this site using a unique identifying number known as a CRD. DAC’s CRD is 129973.

You should carefully consider the investment objectives, potential risks, management fees, and charges and expenses before investing. The Firm’s Investment Adviser Brochure, Form ADV Part 2, contains this and other information about the Firm, and should be read carefully before investing. You may obtain a current copy of DAC’s Form ADV Part 2 by visiting our website at dacapitalsc.com, emailing info@dacapitalsc.com, or by calling us at (866) 348-4769. Additional information about Dividend Assets Capital, LLC is also available on the United States Securities and Exchange Commission’s website at www.adviserinfo.sec.gov. You may search this site using a unique identifying number known as a CRD. DAC’s CRD is 129973.

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