Oil and Gas Stocks Get to Hang Out With Coal Now. Yay?

(Bloomberg Opinion) -- Name-calling can hurt people’s feelings, even if the name is an apt one. A somewhat esoteric spat about what to call energy companies in FTSE Russell’s stock indexes says a lot about the siege mentality taking hold in certain quarters of the industry.

It was announced in July that FTSE Russell would designate U.K. oil and gas producers as “non-renewable energy” companies. Meanwhile, companies engaging mainly in such things as operating solar or wind farms would switch classification from “alternative energy” to “renewable energy.” At the time, this was hailed by some as a recognition of the fundamental changes taking place in the sector under the shadow of climate change, and criticized by others as political correctness piling onto an important industry.

Now FTSE Russell has largely reversed itself, as reported in the Financial Times on Monday. Now there will be a group classified as “oil, gas and coal,” while “alternative energy” will remain as is.

There is speculation that the London Stock Exchange — which, like FTSE Russell, is part of London Stock Exchange Group Plc — kicked up a stink about the “renewable/non-renewable” re-branding messing with its plans to attract the planned listing of Saudi Arabian Oil Co., or Saudi Aramco. July’s praise for far-sightedness from fans of the earlier move has turned to dismay at a seemingly retrograde step. For its part, FTSE Russell rejects this, citing “a robust, independent and objective governance process” and that the latest changes resulted after “feedback from market participants.”

In any case, the episode highlights a particularly sore spot for the oil and gas business. Oil and gas stocks are suffering from what appears to be a mixture of apathy and fear; apathy at a record of weak returns and fear about peak demand linked to climate change (see this, this and this). The growing ranks of major fund managers setting targets for divesting from investments linked to fossil fuels is where this all starts to get existential. Hence, FTSE Russell’s earlier reclassification plan, which sent a signal to money managers worldwide, may seem like housekeeping to some but was quite a bit more significant to the treasury departments of oil and gas producers.

Keeping renewable energy sources classified as “alternative” does help oil and gas on the margin by confining such things as wind and solar to an old designation that emphasizes their currently small role and obscures their outsize role in marginal growth — which is, as it happens, what financial markets tend to care about more. On that score, FTSE Russell’s move represents a disservice to the market. Just because it dispensed with the “non-renewable” category doesn’t mean it had to ditch “renewable,” too.

Yet in other respects, this looks like a Pyrrhic victory for the oil and gas sector. While dodging the “non-renewable” designation may help on the surface, the underlying reality of which energy sources are renewable versus those that aren’t still rests with science, not index compilers. This episode, regardless of outcome, has highlighted the fundamental shift going on in the energy market, regardless of nomenclature.

Moreover, the industry has spent years (and millions) emphasizing the increasing role of natural gas as a bridge fuel to a lower carbon future at the expense of coal. Now oil and gas producers will be explicitly lumped in with coal in the new group’s name. Coal is the easiest target for climate-change regulation. More importantly, it has suffered a decade of bankruptcies and declining financial strength that offers something like a foretaste of what could ultimately befall the oil industry. As names go, being called “non-renewable” looks better than suffering that sort of association.

To contact the editor responsible for this story: Mark Gongloff at mgongloff1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.

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