This is a guest piece by James Rowe, an Assistant Professor of Environmental Studies at the University of Victoria in British Columbia and a member of the Corporate Mapping Project, a research alliance investigating the power of the fossil fuel industry in Western Canada. This piece originally appeared on openDemocracy.

The world’s largest producers of oil, Saudi Arabia and Russia, agreed to a production freeze in February 2016. This deal holds production at the near-record highs that were reached in January in an effort to stop the plunge in world oil prices. But even if other key producers like Iran and Iraq agree, it won’t address the supply glut that has been driving prices into the ground.   Saudi Arabia could be doing more to orchestrate a production cut, and the Saudis would certainly benefit from a price bounce—the Kingdom ran a budget deficit last year of nearly US$98 billion. So why is the House of Saud content to keep the world swimming in cheap oil?   The motivation for Saudi Arabia’s passive response to the price crunch is the source of much speculation, but the consensus is that the Saudis are working to protect market share—primarily by driving high cost ‘unconventional’ production like US shale oil out of the market. There is a larger force, however, that has not received enough attention in efforts to divine Saudi intentions: the ‘carbon bubble.’

What is the Carbon Bubble?

The carbon bubble refers to the overvaluation of fossil fuel companies and petrostate treasuries given the need to rapidly reduce C02 emissions if catastrophic climate change is to be averted. “Catastrophic” is the technical term for predicted climate change if global warming cannot be limited to at least 2 degrees above its present level.   The International Energy Agency estimates that 60 per cent of known fossil fuels need to stay in the ground to avoid breaching that limit (even more if the 1.5-degree target codified in Paris is used). The earth’s carbon budget (or what can safely be burned) is much smaller than the fossil fuel reserves that are available for extraction and combustion.   According to the Carbon Tracker Initiative we have five times more reserves than can be burned.    However, these unburnable reserves are already factored into company share prices and budget projections for petrostates like Saudi Arabia. When policy making catches up with ecological necessity and scientific advice, these reserves will become financially worthless and the carbon bubble will burst.   Recent climate policy deals in Alberta and Paris are only the beginning of a tightening policy environment for fossil fuel producers.   Given the massive wealth and influence of fossil fuel companies it would be naive to count on political and economic institutions to legislate for planetary liveability without massive popular pressure. Thankfully that pressure is growing daily. Powerful examples include proliferating divestment campaigns, Indigenous-led resistance to pipeline construction in Canada, and 350.org’s campaign against the Keystone XL pipeline.   The existential threat posed by climate change is giving these activist efforts an urgency that it would be risky to bet against. “We are not defending nature, we are nature defending itself” was a slogan popularized on the streets of Paris during recent United Nations climate negotiations.   In this context of accelerating climate change and mounting popular protest, the hands of legislators are likely to be forced. When legislation aligned with a 1.5-degree world comes into effect, the carbon bubble will drop back down to earth.

Peak Demand and the Carbon Bubble

Traditionally, the Organization of Petroleum Exporting Countries (OPEC) has coordinated production levels to stabilize oil prices. But in this case Saudi Arabia, OPEC’s most powerful player, has resisted calls for cuts and has convinced its Persian Gulf allies to do the same (the United Arab Emirates, Kuwait and Qatar).   The evidence suggests that the carbon bubble is central to Saudi Arabia’s decision making.   U.S. State Department cables released by WikiLeaks reveal a Saudi regime that is worried about the impact of climate legislation on national income. Eighty per cent of the Kingdom’s budget is derived from the petroleum sector, so the prospect of not being able to sell the country’s vast oil reserves due to global emission limits poses a massive economic and political threat to the ruling monarchy.

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“Saudi officials are very concerned that a climate change treaty would significantly reduce their income,” wrote the U.S. ambassador to Saudi Arabia in a memo in 2010. As global concern over climate change intensifies, the Saudis have begun factoring in the reality of “peak demand.”   In 2013, before oil prices started tumbling, Ali al-Naimi, Saudi Arabia’s petroleum minister, told reporters “demand will peak way ahead of supply.” In the lead up to climate negotiations in Paris, he acknowledged that “in Saudi Arabia, we recognize that eventually, one of these days, we are not going to need fossil fuels. I don’t know when, in 2040, 2050, or thereafter.”   This admission is aligned with the scientific consensus on climate change. What makes it remarkable is that the comment comes from the oil minister of the world’s preeminent petrostate. The Saudis have snapped out of denial and are actively working to diversify their economy and plan for a post-carbon world. According to Naimi, the Kingdom plans to become a “global power in solar and wind energy.”   Saudi Arabia does not, however, deserve congratulations. Like corporate producers of oil such as Exxon, the Saudis have played a dangerous and obstructionist role in climate negotiations. Saudi Arabia has been a regular winner of the “fossil of the day” award from civil society groups at UN negotiations. The leaked cables from the U.S. State Department reveal frustration over the Saudis’ “schizophrenic” approach to climate change: aggressively pursuing market share in renewable energy while simultaneously blocking international negotiations.   It is in Saudi self-interest to extend the age of oil. Given the ecological necessity and political plausibility of a massive energy transition, however, the Saudis appear to be positioning themselves for the next best option: gobbling up as much of the earth’s remaining carbon budget for themselves before the bubble bursts. Isn’t it better to sell at a lower price than to receive nothing at all from vast unburnable reserves?

Cutting a Big Slice of Carbon Pie by Keeping Oil Prices Low

The production cost for a barrel of Saudi oil is approximately US$10. ‘Unconventional’ sources like tar sand oil cost approximately US$40 to produce. With oil currently trading at around US$35 per barrel, Saudi Arabia is much better positioned to manage the downturn than unconventional producers. With large financial reserves the Kingdom can sustain short-term losses in revenue. Moreover, Saudi efforts to pursue large budget cuts show a commitment to a low price environment (though popular unrest over austerity budgets may change this calculus).    By keeping prices relatively low and outcompeting higher-cost producers, the Saudis not only protect short-term market share. They also ensure that by the time demand shocks arrive, the Kingdom will have sold what it could while its reserves were still burnable. And if Minister Ali al-Naimi’s surprising vision comes to pass, by midcentury the Saudis will diversify into competitive producers of solar and wind power.   The current downturn in oil prices does not appear to be slowing growth in renewable energy. Increasing cost-competitiveness and the different markets served by renewables have been key buffering factors during the petroleum price crash. In the long run, according to Naimi, solar is “more economic than fossil fuels.”   Government legislation that forces producers to keep fossil fuels in the ground is supposed be the needle that bursts the carbon bubble. The looming threat of that legislation, however, may have been enough to start the bubble’s deflation already. All commentary on Saudi motivations during the current price plunge is speculative, but Saudi Arabia’s concern over peaking demand due to climate change, along with its heavy investments in renewables, points to a strong link between a low oil price and a deflating carbon bubble.    

What a Deflating Carbon Bubble Means for Citizens, Governments and Investors 

If “peak demand” is a central part of the Saudi calculus, then a big rebound in oil price is unlikely anytime soon. The implications of this prospect are enormous. For example, with persistently low oil prices, regions betting on Liquified Natural Gas (LNG) and shale oil as economic drivers will lose out.   Similarly, new pipelines for transporting Alberta tar sands oil to market (like Energy East) may become unnecessary due to slower growth. The economic argument against unconventional oil and gas development just got supercharged.   On the financial front, low oil prices mean that falling share prices among fossil fuel companies are unlikely to rally over the long term. When the carbon bubble collapses completely these investments will fall still further. By betting on a post-carbon future and initiating the carbon bubble’s deflation, the world’s primary petrostate has fortified the economic case for fossil fuel divestment. Institutional investors like the Rockefellers Brothers Fund that have recently divested their portfolios of fossil fuel companies have already benefitted from the move.   Working to avoid catastrophic climate change can feel hopeless in the face of corporate-funded denial and obstruction. But the collective efforts of activists, climate scientists, and educators appear to have convinced the world’s largest producer of oil that fossil fuels have no future. The post-carbon world is fast emerging from the shell of the old.  Those still in denial about this transformation are in danger of becoming fossilized themselves.

Image: Bryan Burke

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If oil prices continue their slide downward, the cancellation of high-cost oilsands projects are likely, but just because prices rebounded in the past and investment returned, does not mean that is a guide for the future, warns James Leaton, research director of the Carbon Tracker Initiative.

Thursday night at the Royal Ontario Museum in Toronto, Leaton told the crowd of over 170 people the Alberta oilsands are a big target for investors looking to reduce risk because of the high capital expenditure (capex) costs.

“The oilsands are Canada’s elephant in the atmosphere,” said Leaton, an originator of the “carbon bubble” theory. “We see investors moving away from high-cost, high-carbon projects, so there is a challenge that capital is not going to automatically flow to Alberta anymore.”

Source: Carbon Supply Cost Curves: Evaluating Financial Risk to Oil Capital Expenditures from Carbon Tracker Initiative, May 7, 2014.

Investors and oil companies may de-leverage their portfolios of risky projects in the face of new carbon regulation or even from other factors like the decreasing costs of renewable energy, vehicle efficiency improvements in key markets, and economic growth rates in China, Leaton said.

Before the oil price started plummeting, Royal Dutch Shell PLC, Total SA, and Statoil ASA cancelled oilsands projects because of the high costs and lack of access to markets.

In a media conference yesterday finance minister Joe Oliver said the federal government has taken the drop in oil prices into account in its fiscal forecasts.

“When we took into account the oil price decline which had already occurred, we made the assumption that the prices would stay at the low level for the entire period,” Oliver said.

The sinking oil price provides companies an opportunity to re-evaluate the resiliency of their business models and projections that oil demand will keep growing, Leaton told DeSmog Canada in an interview after the talk.

Carbon Bubble theory impacting oil firms

The carbon bubble theory argues oil companies are overvalued based on their proven fossil fuel reserves — a large amount of their reserves are stranded assets because they cannot be burnt if the world is to avoid catastrophic climate change.

Once the carbon bubble, like the tech or housing bubble, pops it would bring dramatic re-evaluation of oil companies, resulting in massive layoffs and major industry restructuring. In Canada, the oilsands represents two per cent of the country’s GDP and 90 per cent of the economic benefit goes to Alberta.

Pressured by activist shareholders, ExxonMobil and Shell have publicly rejected this theory. Shell told their shareholders the methodology underpinning the carbon bubble “has significant gaps,” arguing energy demand growth will keep the world wanting oil for years to come.

In March, Exxon released a 30-page document to shareholders saying they “are confident that none of our hydrocarbon reserves are now or will become stranded.” In reviewing Exxon’s report to shareholders, the Carbon Tracker Initiative found the document, far from assuring stakeholders, underestimated the threat climate action poses to the company’s carbon reserves.

“If some of your biggest shareholders write to and say: ‘we are worried about how you are spending capital’, you should be able to write back on two sheets of paper and explain how you are spending capital, rather than 30 pages of fluffy stuff,” Leaton said.

On Tuesday activist shareholders filed a resolution seeking increased dividends or share buy backs for investors, rather than invest in expensive, carbon-intensive oil projects.

“This shows the investors are not satisfied with the response because it didn’t address their issues,” Leaton said.

Ontario is working with Carbon Tracker

In attendance at the talk, Ontario Environment and Climate Change Minister Glen Murray told Desmog Canada afterwards that his government was conducting extensive stakeholder discussions about a new approach to price carbon in Ontario.

Included in those discussions are conversations with the financial industry about potential stranded assets. Three of Canada’s five big banks are the largest investors in the oilsands.

“We are working with Jim and Carbon Tracker to develop that policy discussion…” to bring forward to the financial industry, Murray said.

Influencing activism

The Canadian Association of Petroleum Producers predicts oilsands production to double from nearly 2 million barrels a day to over 4 million by 2025.*

Tim Gray, executive director of Environmental Defence, also spoke at the talk and told Desmog Canada the public doesn't want the pipelines to help fuel the rapid expansion of the oilsands.

“There are two billion barrels of production there a day and that will continue to generate revenue,” Gray said. “Those are relatively low cost assets…Why not use the wealth being generated from the current level of development to invest it that [low-carbon economy] transition.”

“What the Carbon Tracker Initiative has done is show that putting all of our eggs into the tar sands basket is a very risky economic move,” Keith Stewart, climate and energy campaigner with Greenpeace Canada, said. “We could end up with multi-billion dollar white elephants which are weighing our economy down and miss out on the green-energy revolution which could lift us up.”

The event was organized by Environmental Defence and The Pembina Institute.

*An earlier version of this article stated billions, rather than millions, of barrels.

Image Credit: Kris Krug

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This past week was, in the continually escalating climate change war, one of great disconnect, confusion and uncertainty.

While there is no doubt that humankind finds itself in the middle of a much-needed transition away from the business-as-usual model of burning fossil fuels, powerful and manipulative forces continue to resist a growing movement to use greener, cleaner energy.

Many of those sinister forces are headquartered, or operate in, the United States which boasts the world’s greatest economy while being the second worst emitter of greenhouse gasses after China.

So it came as a shock to many mainstream media outlets this week when the third U.S. National Climate Assessment report said Tuesday that climate change is already negatively affecting the United States and the future looks even more dismal if coordinated mitigation and adaptation efforts are not immediately pursued.

“Climate change, once considered an issue for a distant future, has moved firmly into the present,” notes the massive NCA report.

Looking at impacts on human health, water, energy, transportation, agriculture, forests, and ecosystems across the country’s eight major regions, the report painted a bleak picture for the U.S. and the rest of the world if governments don’t quickly agree to aggressively fight climate change at the domestic and international level.

After all, the saying goes, an atmosphere overheated and polluted by emissions from oil, coal and gas doesn’t respect national borders. This is one fight we all share and the chickens are coming home to roost.

An urgency to act did not escape the eye of The New York Times editorial board which, after reading the NCA report, zeroed in on just three regional climate change catastrophes in the making.

Singling out the “the climate-change deniers in Congress and industry allies” for contributing to climate change, the editorial noted the southwestern part of the country is expected to get drier, see increased wildfires and reduced agricultural harvests. The eastern seaboard, meanwhile, will have more destructive storms and higher sea levels. And forests will die in Alaska while more permafrost melts, speeding up the release of greenhouse gasses such as methane.

But it wasn’t all doom and gloom.

Observers were saying the report may give President Barack Obama more power to deal with climate change, the environment and energy issues through administrative amendments during his last 2.5 years in office. Indeed, the White House issued a media release saying the report underscores “the need for urgent action to combat the threats from climate change, protect American citizens and communities today, and build a sustainable future for our kids and grandkids.”

Two days later, the Carbon Tracker Initiative said investors could lose more than $1.1 trillion worth of investments to potentially unburnable fossil fuel deposits if governments act to fight climate change by agreeing the deposits need to stay in the ground.

The report identifies oil reserves in the Arctic, oilsands and in deepwater deposits at the high end of the carbon/capital cost curve. Projects in this category “make neither economic nor climate sense” and won’t fit into a carbon-constrained world looking to limit oil-related emissions, Carbon Tracker stated in a press release.

In addition, the report emphasized the high risk of Alberta oilsands investment, noting the reserves “remain the prime candidate for avoiding high cost projects” due to the region’s landlocked position and limited access to market.

“Our analysis also shows that if demand for oil is not substantially reduced we are clearly heading for a level of warming far in excess of 2°C,” the report said, “which reveals that there is no free lunch here for investors.

“Either policy and technological tipping points will reduce demand in line with our analysis or we will face levels of warming described as catastrophic by many.”

Speaking of potential catastrophes, Queensland on Thursday approved what would become the largest coal mine in Australia despite fears that an accompanying port could damage the Great Barrier Reef which is already seeing corals dying from climate change developments.

If that approval — which still needs to be given the go-ahead by the national government before the $16-billion mine can be built — seems strange, it’s also worth knowing that almost 80 per cent of Queensland is now dealing with a prolonged drought that some are linking to climate change caused by burning fossil fuels.

Lastly, but certainly not least, Lloyd’s of London, the world’s oldest insurance company, now wants insurers to incorporate future climate change scenarios into their business models since damage from extreme weather-related events have cost a reported $200 billion over the past 10 years.

On Thursday, Lloyd’s released a report saying that extreme weather cost the insurance industry more than $127 billion in 2011 alone, making it the record year for natural catastrophe.

Trevor Maynard, leader of Lloyd’s exposure management and reinsurance team, said climate change is expected to continue to happen even if strong action is taken to cut greenhouse gases.

“The urgent need to mitigate carbon emissions remains as critical now as before,” Maynard added.

Image Credit: Tim J Keegan via Flickr

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Despite an international agreement to reduce emissions from carbon-intensive sources, oil and coal companies continue to pour hundreds of billions of dollars a year into finding new fossil fuel deposits containing enough carbon to more than double global climate pollution emissions.  

This is the conclusion of a new report finding that $674 billion was spent globally last year alone on the discovery of new fossil fuel deposits that will likely never be used. 

The report, Unburnable Carbon 2013: Wasted Capital and Stranded Assets, authored by researchers at the Carbon Tracker Initiative, Grantham Foundation and the London School of Economics and Politics, describes the idea of a "carbon bubble" that is the result of global fossil fuel reserves that already far exceed the maximum amount we can afford to burn and still avoid the most disastrous effects of climate change.

Despite this growing carbon bubble, and the inevitable movement towards a greatly reduced reliance on carbon intensive fuels in the future, energy companies continue to pour billions of dollars into discovering new fossil fuel reserves. 

If this all plays out as researchers predict, energy companies will end up with a potential $6 trillion in stranded assets that will never be exploited – oil and coal reserves that the world will not need.

According to the report:

"The analysis shows that between 60-80% of coal, oil and gas reserves of publicly listed companies could be classified ‘unburnable’ if the world is to achieve emissions reductions that mean an 80% probability of not exceeding global warming of 2°C."

This conclusion is based on the most optimistic reduction targets resulting in only 2 degrees Celsius of warming, but even at 3 degrees of warming (a totally disastrous scenario), the report concludes that there would still be "significant restraints on our use of fossil fuel reserves between now and 2050. Yet companies in the oil, gas and coal sectors are seeking to develop further resources which could double the level of potential CO2 emissions on the world’s stock exchanges to 1,541 billion tonnes."

These companies are investing billions and billions without taking into account even these most conservative reduction projections.

Professor Lord Nicholas Stern of Brentford, Chair of the Grantham Research Institute on Climate Change and the Environment, said:

“Smart investors can already see that most fossil fuel reserves are essentially unburnable because of the need to reduce emissions in line with the global agreement by governments to avoid global warming of more than 2°C. They can see that investing in companies that rely solely or heavily on constantly replenishing reserves of fossil fuels is becoming a very risky decision. But I hope this report will mean that regulators also take note, because much of the embedded risk from these potentially toxic carbon assets is not openly recognized through current reporting requirements.”

So what about Canada and its tar sands operations?

Are we creating a massive carbon bubble? You bet. I will be exploring this further in the coming days.

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