Tuesday, September 15, 2015

Fossil Fuel Divestment and Stranded Assets

The movement away from fossil fuels has led many investors to worry about the prospects of stranded assets. There is well warranted widespread concern about the long-term financial risks to investments in coal, oil and gas. The fear stems from the realization that as we act to combat climate change companies that are involved with fossil fuel extraction will be worth much less than their book value today.

The math used to support this concern is rather simple. Fossil fuels are the primary source of climate change causing greenhouse gas emissions. To stay within our carbon budget and stave off runaway climate change we must keep global average temperatures from rising more than 2 degrees Celsius. This means we will have to keep much of the known fossil fuel reserves underground (the so called "unburnable carbon").

The Guardian reports that a third of oil reserves, half of gas reserves and over 80 percent of current coal reserves would have to remain unused from 2010 to 2050 in order to have a chance of meeting the 2°C target.

The article quotes Dave Roberts who said that investments in coal will fall by some $11.5 trillion over the next quarter century. Gas investment will also be reduced by an estimated $3.4 trillion.

We have already seen massive declines in the value of fossil fuel stock (Exxon Mobil, Shell etc). To illustrate the point, an August 2015 report from Trillium Asset Management, California’s public pension funds (CalPERS and the California State Teachers’ Retirement System) lost $5 billion last year through declines in their fossil fuel investments, according to a new report

As reported in another Guardian article, vast quantities of hydrocarbons are at risk of being stranded.

Carbon Tracker reports have shown that due in part to the declines in the price of renewable energy, coal and oil use must decline in future decades to tackle climate change, potentially stranding $1tn of oil projects.

However, it is not just coal and oil that are at risk, despite the lower emissions profile, investments in liquefied natural gas (LNG) are also in jeopardy. This is the conclusion of a thinktank Carbon Tracker report, which has been backed by the Bank of England and the World Bank.

The report indicates that billions in gas projects will be stranded by climate change action. Adhering to emissions targets to keep temperatures below the 2 degrees upper threshold limit will render obsolete more than $280bn worth of LNG projects, including $82bn of LNG plants in Canada.

“Investors should scrutinise the true potential for growth of LNG businesses over the next decade,” said James Leaton, Carbon Tracker’s head of research. “The current oversupply of LNG means there is already a pipeline of projects waiting to come on stream. It is not clear whether these will be needed and generate value for shareholders.”

The report ranked the future gas projects being considered by cost and found that those producing gas at over $10/mmBtu risked being stranded by an international crackdown on emissions. The analysis concluded that the vast majority of LNG is unlikely to find a market by 2025.

A number of major institutions in Britain that oversee billions in pension savings are looking at the issue of stranded assets.

A third Guardian article reported that Standard Life, which manages £250bn on behalf of five million savers, undertook research into stranded assets. HSBC and Aviva have also funded a four-year research programme at Oxford University into the risks posed by stranded assets.

“It’s important to see that fossil fuels in general, and coal in particular, are risky bets,” said Brett Fleishman, a senior analyst with 350.org. “When folks are saying divestment is risky, we can say, ‘Well, not divesting is risky.'”

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