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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A new report released by the London-based Carbon Tracker Initiative finds more than $283 billion in potential liquefied natural gas (LNG) projects worldwide are likely unfeasible in a carbon-constrained world. The report identifies $82 billion in potential Canadian LNG projects — almost entirely in B.C. — potentially headed for the rubbish bin.

If the world is to limit global warming to an increase of 2 degrees Celsius, “energy companies will need to be selective over which gas projects they develop,” the Carbon Tracker Initiative stated in a press release. Many high carbon, high cost LNG projects will simply need to be abandoned. LNG is natural gas cooled and compressed to a liquid form for transportation via tanker.

“Investors should scrutinize the true potential for growth of LNG businesses over the next decade,” James Leaton, Carbon Tracker’s head of research, said. “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 size of the gas industry in North America could fall short of industry projections — especially those expecting new LNG industries in the U.S. and Canada,” Andrew Grant, lead analyst at Carbon Tracker and co-author of the report, said.

“Natural gas is complex when seen in the context of a climate-constrained world,” Mark Fulton, advisor to Carbon Tracker and a co-author of the report, said.

Although often seen as performing better than coal in a climate sense, leaked gas known as fugitive emissions from extraction, processing and storage, significantly increase the fuel’s global warming potential. As DeSmog has previously reported, the climate impact of fugitive emissions from B.C.’s gas industry may be dramatically underreported.

“It can deliver better outcomes than coal, but gas must continue to work on reducing its fugitive emissions and there is a possibility that if it reaches too large a share of the energy mix then in the longer run this could still be incompatible with a 2⁰C outcome,” Fulton said.

B.C.’s LNG Gamble

The report’s findings call the B.C. government’s LNG ambitions into question.

The Liberal government under Premier Christy Clark has promised three LNG facilities will be up and running by 2020. There are currently 20 proposed LNG projects for B.C., with the government relying on a projected $175 billion in industry investments.

Yet co-author Mark Fulton said incoming investments might not be such a sure bet in the current market.

The report argues a “perfect storm” of cheap renewables, decarbonization pledges and global health concerns have thrown major gas projects and the future of LNG into suspension. “2015 has only confirmed the direction of travel away from fossil fuels.”

“As far as we can see,” Fulton told the Canadian Press, “from our demand scenario the LNG market is pretty fully built out in terms of supply for the next seven years at least. It wouldn’t be a great bet in our view…to expand further at this time.”

Much of the B.C. government’s LNG plan relies on a strong market in Asia as it transitions away from coal, although the report finds the lower cost of renewables means regions are “leapfrogging” straight to renewables rather than relying on gas as a bridge fuel.

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Pressure is mounting on the University of Victoria Foundation’s board to rid itself of investments in fossil fuel related stocks, but, for now, the board is continuing to gather information and is sticking with the investing approach it fine-tuned last year.

Divestment supporters turned out in force Monday evening for a forum on climate change and divestment, organized by UVic and Pacific Institute for Climate Solutions, with speakers ranging from Suncor Energy Inc. vice-president Steve Douglas to Malkolm Boothroyd, a spokesman for Divest UVic, and wild applause for those in favour of immediate divestment showed where the sympathies lay.

If it’s wrong to wreck the Earth’s climate, it is wrong to invest in fossil fuels, Boothroyd said.

“Responsibility means leaving those fossil fuels in the ground. We can’t have it both ways. UVic has got to make a decision and I believe it is UVic’s responsibility to divest from fossil fuels,” he said to a standing ovation from some of the audience.

For panel member Crystal Lameman of the Beaver Lake Cree Nation, the basic question comes down to taking any possible action, including divestment, to stop problems caused by “extreme resource extraction” in the Alberta oil sands.

“If you breathe the air and drink the water, this is about you,” she said.

But supporters of divestment already have it both ways as petroleum products are in everything from lipstick and Lycra to cell phones and paint said Douglas, emphasizing that divestment does not solve climate change. He argued 90 per cent of oil reserves on the planet are controlled by governments so reducing investments in the small percentage of private companies will not help.

The conundrum is that there is no doubt that climate change is real and burning fossil fuels is one of the culprits, but fossil fuels are essential to modern life, he said.

“How do you reconcile those two ideas?” he asked.

“How do we transition our energy system to meet the energy needs of the future in a climate challenged world? … We have to transition in a way that doesn’t dislocate our economy and our social system.”

Last year, UVic professors and other groups demanded that all new investment in companies whose primary interests are fossil fuel extraction, processing and transportation should be frozen and that the administration should initiate a three-year divestment plan.

However, the University of Victoria Foundation, which manages the $370-million endowment fund – used for scholarships, bursaries and research –  wrote to the university’s board of governors in September saying that it would maintain its current responsible investment policies that incorporate environmental, social and governance considerations. As part of the Foundation’s efforts to explore direct involvement in organizations that promote responsible investing, the board voted to become a signatory to the United Nations Principals for Responsible Investment.

Last September $39-million of the endowment fund, or about 10.5 per cent of its assets, were invested in energy sector stocks.

The lack of action is infuriating some of the UVic students, who were gathering names on a petition Monday evening.

“I don’t think the university students are going to stand for anything less than divestment,” said Ida Jorgenson.

“I think this is an issue that is not going to go away. In the end they are going to have to confront it.”

The divestment movement is taking root at universities throughout North America, with active campaigns at about 30 Canadian universities including Simon Fraser University and the University of B.C, where faculty is currently voting on whether to ask the board of governors to change its policy on responsible investment.

However, while some herald it as a positive step to address climate change, others believe it is misguided.

The moral high ground is in climate solutions, not in the drop in the bucket represented by university divestment, said Cary Krosinsky, a Yale University lecturer and co-founder of the Carbon Tracker Initiative.

“If we are serious about (addressing climate change) we need a global initiative. We need a really big action. Divestment doesn’t even come close,” he said.

However, divestment does not necessarily mean a loss for the endowment fund and portfolios that have divested from fossil fuels performed well during the last year, he said.

But for panelist and Vancouver Sun columnist Stephen Hume, the issue is trying to address climate change in a polarized environment.

“Among the delusions is that there’s a them and us. There is no them, only us,” he said.

“This isn’t a theatre. It’s a canoe and we are all in that canoe and we had better start paddling in the same direction or we’re going to tip over and we are all going to drown,” he said.

That means the involvement of government, said Hume, exhorting students to get out and vote.

The theme was picked up by PICS executive director Thomas Pedersen, who challenged the audience to take action on climate change by voting.

“Make this an issue of key political importance in the federal election,” he said.

Image Credit: Daily Collegian via Flickr

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This is a guest post by Cameron Fenton, Canadian Tar Sands Organizer with 350.org.

This week, the cover of the Economist proclaimed "the fall in the price of oil and gas provides a once-in-a-generation opportunity to fix bad energy policies." The article teased on the cover explains how low oil prices create the space for governments to make rapid leaps to change energy policy instead of "tinkering at the edges" urging policy makers to use this moment to "inject some coherence into the world's energy policies."

The article gets a lot of things right. Eliminating fossil fuel subsidies and forcing big polluters to pay for the mess they're making are crucial policy steps, but the piece also presents some more dubious proposals. The last paragraph of the Economist piece is the perfect example of the inherent dangers ahead.

After calling for policy measures to constrain climate change, the author encourages that "governments should be encouraging the growth of seamless global energy markets" through steps like approving the Keystone XL pipeline or lifting restrictions on energy exports. It's the logic of free-market economics laid out in Naomi Klein's Shock Doctrine applied to the climate crisis – that moments of crisis be exploited to reduce regulations and open markets.

Without a big, bold and diverse climate movement these ideas may never have a chance, or worse could be transformed into policies that leave out or sacrifice those communities on the frontlines of climate change and extraction. If we've learned anything in the past decade about climate policy it's that just because policy makes sense, that doesn't mean it will happen.

It's now up to us to seize this moment, not to follow politicians but to push them and demand the kind of energy revolution that the best scientific minds on earth are saying we need. This is a moment build on the momentum of the Keystone XL fight to hold politicians to higher standard, to refuse to accept weak policy and empty commitments on climate.

According to the Carbon Tracker Initiative, $1.1 trillion of potential capital expenditure on fossil fuel projects, including $271 billion in tar sands developments, require a price of oil above $95 a barrel. With the current price hovering close to half that, Stephen Harper's government has been forced to delay the release of their 2015 budget until April. 

An eight year push to expand the tar sands is now coming face to face with the reality of the beginning of the end of the fossil fuel age, and it's something that neither Harper nor big oil are equipped to deal with.

The fossil fuel industry's business model, echoed in the policies of the politicians they prop up, is to extract every dollar and barrel they can before the bottom drops out. It's a model of business as usual that has set us on a crash course, both economically and climatically.

Like past crises, like the 2008 recession, it's unlikely that those truly responsible – CEO's and their political allies – will feel the biggest hit. Instead it's the workers, thousands of who have already been laid off, the communities and the people who will be left out in the cold.

Much of the time, movements move slow and steady, but sometimes we have a chance to sprint. This is one of those moments, and if we wait too long we might miss it. The good news is we don't have to start from scratch. The beginning of the end of the fossil fuel age has started at campus divestment campaigns, in frontline communities organizing against extraction, where local communities are stopping new fossil fuel infrastructure, and together in the streets at mass mobilizations like the Peoples Climate March.

This is the climate movement's moment to seize. It's a moment for the labour movement and climate movement to join together to demand investment in re-tooling and re-training workers to build the new economy.

It's a moment to divest from dangerous fossil fuels like tar sands and reinvest in the solutions that are here and growing, especially those being led by those communities most impact by extraction and climate change. It's a moment to recognize that climate justice needs racial, social and economic justice, and most of all, it's a moment to be bold.

Image Credit: Natural gas flaring in North Dakota by Tim Evanson.

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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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Coal, the fossil fuel that largely sparked the industrial revolution, may be facing the beginning of the end — at least in terms of generating electricity.

There are increasing signs of the demise of the world’s dirtiest fossil fuel, from a global oversupply to plummeting prices to China starting to clean up its polluted air.

Last week, the Carbon Tracker Initiative published an analysis — Carbon Supply Cost Curves: Evaluating Financial Risk to Coal Capital Expenditures — identifying major financial risks for investors in coal producers around the world.

Saying the demand for thermal coal in China, the world’s largest emitter of toxic greenhouse gases, could peak as early as 2016, the analysis also highlights $112 billion of future coal mine expansion and development that is excess to requirements under lower demand forecasts.

“In particular it shows that high cost new mines are not economic at today’s prices and are unlikely to generate returns for investors in the future,” said an accompanying media release.

“Companies most exposed to low coal demand are those developing new projects, focused on the export market . . . With new measures to cap coal use and restrict imports of low quality coal in China, it appears the tide is turning against the coal exporters.”

The analysis added that China’s desire to reduce imports will impact prices and asset values for export mines in the U.S., Australia, Indonesia and South Africa.

“King Coal is becoming King Canute, as the industry struggles to turn back the tide of reducing demand, falling prices and lower earnings,” Anthony Hobley, CEO of Carbon Tracker Initiative, said.

A recent article in Mining Weekly also says the coal industry is indeed facing tough times.

The article noted Coal Association of Canada president Ann Marie Hann agreed that about half of the global coal output at current pricing was being produced at a loss.

“Until a global rebalance between demand and supply takes place and the global economy rebounds, the coal industry will unfortunately probably see some more bad news over the coming months,” Hann said.

The story added that the prices for thermal coal, which is used to generate electricity, had fallen in recent years from about $190 per tonne in mid-2008 to $75 per tonne this year, while metallurgical coal (used to make steel) had dropped from a high of more than $300 per tonne in late 2011 to less than $120 per tonne.

To perhaps make matters worse for the coal industry, it is being publicly attacked by the oil and gas sectors, which are trying to position themselves as cleaner fossil fuels.

According to the Responding to Climate Change website, a number of the world’s leading oil and gas companies voiced their concerns about climate change at last week’s UN Climate Summit, arguing they can offer a future coal cannot.

“One of our most important contributions is producing natural gas and replacing coal in electricity production,” Helge Lund, Statoil’s chief executive, was quoted as saying.

Kevin Washbrook, a director for Voters Taking Action on Climate Change, a Vancouver organization that has fought against a proposed new coal export facility at Fraser Surrey Docks, agrees the thermal coal sector is in decline.

“I think coal is in everyone’s sights these days because coal is climate change,” Washbrook told DeSmogBlog. “Coal has to be on the chopping block for sure.”

Washbrook added the UN, the International Energy Agency, big banks and insurance companies are acknowledging that the vast majority of coal must stay in the ground if humankind is to avoid catastrophic, runaway climate change.

“We need to see this current downturn [in the thermal coal sector] for what it really is — our last good opportunity to leave coal behind and start the transition to emission-free energy sources.”

Photo Credit: Arnold Paul, Wikimedia Commons

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A total of $1.1 trillion USD earmarked for risky carbon-intensive oil sector investments need to be challenged by investors, according to a new report released today by the Carbon Tracker Initiative.

The research 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 states in a press release.

The report highlights 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.

“The isolated nature of the [oilsands] market with uncertainty over export routes and cost inflation brings risk.”

Oilsands major Canadian Natural Resources Limited (CNRL), the company responsible for the mysterious series of leaks at the Cold Lake oilsands deposit, has the largest total exposure to high-cost and high-risk oil investments, valued at a potential of more than $38 billion between now and 2025.

Production forecasts, the basis of capital investment decisions, often rely on business-as-usual assumptions of economic growth and energy demand. But given potential changes in cost, fossil fuel consumption and emission constraints, industry demand projections may need to be reconsidered.

The report’s authors recommend such projections be “stress-tested” for a variety of future scenarios.

Recent efforts by socially responsible investment firms, such as Trillium Asset Management, to limit environmentally egregious investments, as well as the growing divestment movement throw the future of especially expensive and carbon-intensive oil reserves like the Alberta oilsands into question. They face the very likely potential of becoming “stranded assets.”

Previous Carbon Tracker research suggests about two-thirds of the world's proven fossil fuel reserves need to remain in the ground if international targets to remain under a 2 C temperature rise are to be met.

“For the first time, this report bridges the worlds of oil project economics — in terms of both the marginal cost of supply — and carbon, allowing investors to gauge where risk lies, given a range of demand scenarios,” Mark Fulton, adviser to Carbon Tracker Initiative and a former Head of Research at Deutsche Bank Climate Advisors, said.

“It makes it clear that investors have reason to engage companies on many high-cost and high-carbon-content projects.”

The report recommends investors identify companies investing the majority of their capital in high-cost projects, set thresholds for investor exposure and demand greater transparency and disclosure from industry.

The seven global “majors,” which include BP, Chevron, Shell, Exxon Mobil, Total, ConocoPhillips and Eni, represent the bulk of potential oil production and have high exposure to deposits in expensive locations with expensive-to-produce oil types, such as bitumen from the Alberta oilsands.

Several oil companies have taken steps to address their carbon investment risk. Most notably, Exxon Mobil recently announced they will begin reporting more fully on risky carbon assets in response to investor pressure.

Around $21 trillion of potential capital expenditure would need to be invested by the oil sector in high-risk projects by 2050 to keep the industry afloat, according to the report. But this investment “would not pay for itself in a world where demand is lower and that continues to take climate change and air quality seriously.”

“Many investors are concerned about the growing amount of capital that the oil companies have thrown at low-return, carbon-heavy projects,” Paul Spedding, a former-HSBC Oil & Gas Sector Analyst, said.

Major oil companies need to change their strategy, he added.

“As this report shows, returns are falling and costs are rising. To reverse this, a greater focus is needed on higher return, lower cost assets. If this means lower capital investment and higher dividends or buybacks, so much the better. This analysis is important as it provides the data investors need to challenge proposed investments on the basis of returns as well as carbon content.”

Image Credit: All images courtesy of Carbon Tracker Initiative.

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