A well-heeled coalition of investors is asking top fossil fuel companies to calculate the risks of plowing billions into new oil, gas and coal projects. They fear that carbon emission limits and slowing demand will turn them into bad investments that leave investors worse off.
The requests, contained in letters sent to 45 companies last month, are part of an initiative aimed at persuading oil producers and others to rein in their quest to stockpile more carbon energy. They hope to do so by tapping into growing concerns that climate policies and market factors could prevent companies from selling all of their reserves of fossil fuels, which are still growing fast.
Companies with large amounts of such "unburnable" carbon resources could see their stock prices slashed, clobbering the value of investment portfolios that hold the shares. By one estimate, as much as 30 percent of the value of some of the world’s stock exchanges is in proven fossil reserves.
In the letters, the coalition asks the companies to examine and disclose their "exposure to the risks associated with current and probable future policies for reducing greenhouse gas emissions by 80% by 2050."
The initiative is potentially groundbreaking because it comes at a time when a growing number of large shareholders of energy producers are similarly questioning whether costly projects that are underway or on the drawing board will pay off. That rare alignment of interests could convince company boards to weigh the risks of strict climate policies alongside other factors as they review projects.
"We came to this with the goal of really changing the investment behavior of these companies in the mid- to long-term horizon," said Andrew Logan, director of the oil program at Ceres, a nonprofit that organizes businesses and investors interested in climate change and other issues.
"We have real optimism because we're operating in a context
where there's actually a lot of dissatisfaction with how the
fossil fuel industry is being run—and that's really different
from four or five years ago, when the companies were seen as
sort of bulletproof."
That's what helped the initiative win the backing of 70
institutional investors, representing about $3 trillion in
assets. The list includes large pension funds from California
and New York, as well as investment firms in Scotland, Great
Britain and Australia. Ceres launched the project along with the
Carbon
Tracker Initiative, a nonprofit that links capital markets
to climate issues. The groups
announced the initiative Thursday in a press conference.
The campaign elevates the discussion of "unburnable carbon,"
a term coined by The Carbon Tracker to describe a relatively new
concept borne out of scientific research that's now being
championed by a host of other groups worried about climate
change. It highlights the possibility that national and global
agreements to limit carbon emissions would force fossil fuel
companies to leave large oil and coal deposits in the ground
because burning them would exceed the limits. That's a
development that would "strand" those assets and erase their
value.
John Felmy, chief economist at the
American Petroleum
Institute, an industry advocacy group, isn't buying it.
"This is either delusion or wishful thinking on the part of some
folks who just don’t like fossil fuels," he said. "There's just
no justification for that argument. The notion that somehow
[oil] is somehow unburnable—from the perspective of keeping
people warm, keeping economies going and so on, the reality of
this is really clear."
Still, doubts are emerging.
The initiative's central question—whether it's prudent for
fossil fuel companies to continue investing based on
business-as-usual scenarios—is now being asked by analysts at
Wall Street firms such as Goldman Sachs, Citigroup, HSBC,
Sanford C. Bernstein Ltd. and others.
A
January report from HSBC underscored the potential impact of
unburnable reserves by estimating that emissions caps and lower
oil prices could put up to 60 percent of the market value of
certain European companies at risk. "We believe that investors
have yet to price in such a risk, perhaps because it seems so
long term," the report noted. "However, we believe it does give
an indication of the potential impact on the sector."
Increasingly, industry analysts are also worrying about demand
projections for oil and other fossil fuels, not just pending
climate laws.
What if China's energy demand falls well short of the industry's
lofty expectations? What happens to oil if natural gas
displaces it in more markets? Can oil and gas companies continue
bankrolling the soaring expenses of both new projects and
current production without threatening the quarterly payouts
investors have relied on for decades? What happens to all those
hard-to-reach reserves if world oil prices sink below break-even
levels?
"It's a really different world where you have big mainstream
analysts saying that it’s not peak oil supply that we should be
concerned about—it's the reverse, peak oil demand," said Craig
Mackenzie, head of sustainability at the
Scottish
Widows Investment Partnership, which manages $234 billion in
assets. The firm owns stock in fossil fuel companies (except
coal), and is one of the companies backing the new Ceres
initiative.
For instance, in a new report called "Global
Oil Demand Growth—The End is Nigh," Citigroup disputed the
broadly held belief that the world's thirst for oil will
continue its inexorable rise through to 2030. The study was
based on assumptions about fuel efficiency improvements that are
already planned for the United States, Europe and China and the
steady shift to natural gas-powered commercial vehicles.
Under Citigroup's analysis, Mackenzie said, "You get global oil
demand potentially peaking around 2020, which is a very
different story than you get from oil industry forecasts."
Coal Is Particularly Worrisome
But the biggest question for concerned investors is how
climate policies will unfold. If governments don't implement
tough climate laws, then fossil fuel companies could burn
through their reserves as planned providing other factors don't
intervene. However, if national or global policies require steep
cuts in the use of fossil fuels, they could gut the value of
those companies that get stuck with unburnable resources they
can't cash in.
The outlook for companies laden with coal is particularly
troublesome, analysts say. Mackenzie cited a Bernstein & Co.
report that noted that coal demand is falling everywhere except
China, and that coal demand there will begin to fall by 2017.
New efforts to cut worldwide carbon emissions would accelerate
that downward shift, since coal can have three times as much
embedded carbon than other fuels.
In the United States, a mix of plummeting demand and
environmental restrictions on harmful emissions has already
stranded coal deposits that can't be burned. That shift caused
the share prices of coal companies to fall by two-thirds over
the last two years, Mackenzie said.
Predictions for natural gas are far rosier, at least in the
short term, since it is replacing the use of coal and oil in
many industries.
"These concerns about climate impacts have been around for
awhile," said Logan from Ceres. However, he said, the potential
climate costs are starting to resonate more broadly with fossil
fuel industry investors and the companies themselves. The theory
about stranded carbon assets, he added, "has risen from what was
seen as a fringe issue a very short time ago, to now firmly
being in the mainstream."
What's made the difference is the magnitude of what's at stake,
according to Mackenzie of the Scottish Widows Investment
Partnership.
"We're talking about trends that are massively significant to
share prices," he said. "We're moving to a space where these
issues are just much, much more material than they have been."
The Origins of the Debate
Today's debate over the financial impacts of burning fossil
fuels recklessly has its roots in
a landmark 2009 climate paper by scientists led by Malte
Meinshausen, a climatologist at Germany's Potsdam Institute
for Climate Impact. The researchers found that at the current
rate of fossil fuel use, dangerous warming—surpassing the two
degree Celsius limit—could hit the globe in as few as 11 years.
MORE:
The Most Influential Climate Science Paper Today Remains Unknown
to Most People
The paper included another startling conclusion: That burning
all the proven and economically retrievable fossil fuel reserves
already claimed by oil, gas and coal companies would add enough
carbon to the atmosphere to "vastly exceed the allowable CO2
emission budget for staying below 2C" of warming.
That got the attention of the international financial community,
because the values of the world's energy companies are linked to
future earnings from selling oil, gas and coal stockpiles that
scientists now suggest might have to remain underground.
Since then, the findings have given rise to often-cited reports
by the Carbon Tracker group of London. Environmental activist
Bill McKibben, founder of the activist group 350.org, also
expanded on the 2009 paper's conclusions in
a Rolling Stone article and launched
a speaking tour around the theory.
Last month, the concept of stranded and unburnable carbon
resources gained the endorsement of the United Nations
Intergovernmental Panel on Climate Change, or IPCC, the world's
largest scientific body on global warming. The latest IPCC
report embraced the view that existing reserves of fossil fuels
contain more carbon than what can be burned without exceeding 2
degrees of warming.
MORE: Top 10 Takeaways From the New IPCC Climate Report
Building on that and other publicity, the Ceres-led
initiative is now taking the issue to the board rooms of BP,
ExxonMobil and other top fossil fuel producers.
"We need to understand how the companies think about these
risks, how they prepare for them, and how they're taken into
account in their capital investment plans," said MacKenzie of
the Scottish investment company.
Logan, the director of Ceres' oil program, said the responses
have been encouraging so far.
"We've seen very few companies dismiss the issue out of hand,"
he noted. "Lots of them essentially acknowledge that there is a
real tension between their long-term business plans and any
attempt to deal with climate change. That, to me, is a
constructive place to start."
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