April 29, 2015
Top energy watchdog says two thirds of all assets booked by coal, oil and gas companies may be worthless under the ‘two degree” climate deal
Didcot power station, Oxfordshire Photo: Alamy
The G20 powers have launched a joint probe into global financial risks posed by fossil fuel companies investing in costly ventures that clash with international climate goals and may never be viable.
World leaders are increasingly concerned that a $6 trillion wave of investment into the nexus of oil, gas, and coal since 2007 is based on false assumptions, leaving companies with an overhang of debt and “stranded assets” that cannot easily be burned under CO2 emission limits.
The G20 has asked the Financial Stability Board in Basel to convene a public-private inquiry into the fall-out faced by the financial sector as climate rules become much stricter. All member countries have agreed to co-operate or carry out internal probes, including the United States, China, India, Russia, Australia, and Saudi Arabia.
Diplomatic sources have told The Telegraph that the investigation is being pushed by France and is modelled on a review launched by the Bank of England last year.
Governor Mark Carney told Parliament that officials are probing whether “the majority of proven coal, oil, and gas reserves may be considered ‘unburnable’ if global temperature increases are to be limited to 2 degree celsius”. The 2 degree target is the level above pre-industrial levels at the end of this century.
The Bank will issue its verdict in July. The fact that this is spreading to the rest of the G20 suggests that early findings may have proved sufficiently serious to warrant broader study.
The International Energy Agency warns that two thirds of all declared energy reserves become fictional if there is a binding deal limit to C02 levels to 450 particles per million by the year 2100. This amounts to a nominal $28 trillion of stranded assets over the next two decades, according to a study by Kepler Cheuvreux.
A report by University College London concluded that there would never be any development of the Arctic and that 75pc of Canadian oil – mostly tar sands – would never be burned in a 2 degree policy world. Over 95pc of coal reserves in the US, Russia, and the Middle East would be stranded.
Rachel Kyte, the World Bank’s vice-president for climate change, said the G20 inquiry aims to find out how much damage a “burst carbon bubble” could do to institutional investors. The World Bank is carrying out its own review of energy assets in its portfolio, and is studying “sovereign risk” for the most vulnerable carbon-based economies.
Mrs Kyte said some companies have been slow to face up to the implicit risks of stranded assets, though all are acutely alert to the possible fall-out from a sweeping climate change deal in Paris this December. “Businesses are taking it very seriously,” she said.
The chances of a break-through at the COP 21 talks are rising. Todd Stern, the US chief negotiator, said a far-reaching agreement last year between the US and China has cleared away the biggest obstacle.
The North-South conflict that poisoned the Copenhagen summit in 2009 has fallen away as China embraces a green agenda, with plans for 1000 gigawatts of solar, wind, and nuclear power by 2030.
“This is a very different state of affairs versus 2009. The two 800-pound gorillas are working together, and sending an international signal,” he said.
Mr Stern said countries responsible for 60pc of global CO2 emissions are “already on board”, including most recently Mexico. The hold-outs are a diminishing alliance.
Carbon Tracker says companies have committed $1.1 trillion over the next decade to projects that require prices above $95 to break even, far above Brent crude’s current price of $65.
The group calculates that 92pc of Canada’s oil sands need prices of $80 to cover costs. Many of the Arctic and ultra-deepwater projects need $120, or even $150. Petrobras, Statoil, Total, BP, BG, Exxon, Shell, Chevron, and Repsol are together investing $340bn in these inhospitable zones.
The IEA says global investment in fossil fuels has been running at around $950bn a year. It reached $200bn in the US before crude prices crashed last year, or 20pc of total US private fixed investment, the highest in US history.
This $6 trillion spree on exploration and development since 2007 has generated US shale gas and oil in large volumes, but not much else of great scale. Production from conventional oil fields peaked in 2005. No big project has come on stream at a break-even cost below $80 for four years.
A new report by HSBC said the fossil industry is facing risks from several fronts at once, including ever-cheaper renewables, “dramatic advances” in battery storage, and much more efficient use of energy. The bank said high-cost fossil projects will be driven out of business by fast-moving technology.
HSBC has offered clients a divestment strategy for “selling down” holdings in the most exposed companies as pension funds, churches, and other investors pull out of the fossil industry altogether, much as an earlier generation pulled out of tobacco.
Major energy companies are facing a growing shareholder revolt. Some 98pc of BP’s investors voted for a climate resolution last week ordering the company to disclose more information on the risks.
Robert Dudley, BP’s chief executive, played down the issue at a recent energy gathering, suggesting that green activist groups were making much ado about nothing.
Critics say the industry can still thrive and prosper even after a draconian climate deal, but only if it faces the challenge and bites the bullet on new technology to capture carbon emissions.