Wednesday, September 24, 2014

Tackling the Oil Industry on Climate Change

Bill McKibben Interview

‘Protect our climate’ was the rallying cry heard across New York City Sunday, but the underlying message really was ‘stop using fossil fuels.’

Here is the plain truth – and you’ve heard it before:  We won’t solve climate change unless we wean ourselves off oil and coal and use cleaner energy sources.

But there is a novel solution, and it’s not the one hundreds of thousands of people were talking about on the streets of Manhattan.  Take the people making the most money off the extraction of vast oil and coal reserves – the investors who own oil and coal companies – and show them how they stand to lose billions if these companies get it wrong in navigating the transition to a low-carbon economy.

Oil and coal reserves that fossil fuel companies already have are enough to cook the planet.  They spend more than half a trillion dollars a year to develop new reserves.  The International Energy Agency says that two-thirds of proven coal and oil resources should remain underground if we want to limit global temperature increases to 2 degrees Celsius (3.6 degrees Fahrenheit), the goal set by world leaders attending a United Nations Climate Summit here tomorrow.

Investors are starting to connect the dots.  Many of the world’s largest investors are voicing concern that fossil fuel companies are grossly underestimating the financial risks they face as the global economy shifts from high-polluting energy to cleaner alternatives.  They’re especially focused on curbing investments in expensive, high-carbon oil projects that simply won’t make economic sense as global oil demand is constrained by carbon emission limits, more competitive clean energy technologies and other factors.

Last fall, these investors, which collectively manage $3.5 trillion in assets, wrote to the world’s 45 largest fossil fuel companies, asking them to disclose how climate change will affect their businesses, including the potential of current and future reserves becoming unusable – or “stranded.”  They also filed shareholder resolutions with a dozen companies and held face-to-face meetings with oil giants such as Exxon and Shell.

In their responses to investors, Exxon and Shell argue that a low-carbon economy – and declining global oil demand – are unlikely until the distant future, which is why they’re continuing to invest billions in increasingly expensive, carbon-intensive oil plays.  In short, they said, ‘We don’t think world governments will limit carbon pollution anytime soon and until they do, we’ll keep drilling.’

Royal Dutch Shell: Annual Capital Expenditure per Barrel of Production Versus Production  (Credit: Click to enlarge. We think this ‘business as usual’ thinking is fraught with risks.  Even without a global carbon price, the industry’s financial standing is significantly weaker than it was just a decade ago, when high oil prices guaranteed high profits.  Companies are seeing weaker profits, even with oil prices hovering around $100 a barrel.  In the case of Shell, which is especially dependent on oil that is expensive to develop, its profits are lower today than they were in 2009, despite a $40 jump in the price per barrel of oil.  Exxon’s annual returns in the past five years, like Shell’s, are also lagging behind the S&P 500 index.

A big reason for the weaker returns is that ‘expensive’ oil is the new norm.  More than ever before, oil majors are spending significantly more capital on harder-to-get oil.  Capital expenditures by the largest oil companies are now five times the levels they were in 2000.

Tackling the Oil Industry on Climate Change

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