Home' Trinidad and Tobago Guardian : July 24th 2014 Contents BG28 THE ECONOMIST
BUSINESS GUARDIAN www.guardian.co.tt JULY 2014 • WEEK FOUR
In September 2013 a group of insti-
tutional investors with US$3 trillion
of assets under management asked
the 45 biggest quoted oil firms how
climate change might affect their
business and, in particular, whether
any of their oil reserves might become
"stranded assets," unusable if laws to curb
emissions of carbon dioxide became really
Exxon Mobil and Shell are the most recent
to get back with their assessment of the risk:
"We do not believe that any of our proven
reserves will become stranded, " Shell says.
In many areas of commerce, investors and
managers are trying to harness the power of
markets for environmental purposes. However,
in oil and gas, the business which causes by
far the most carbon emissions, investors and
managers seem set on a collision course.
The oil giants make three arguments. First,
during the next 40 years, the growth in pop-
ulation and national incomes will boost energy
demand, especially in developing countries.
Exxon reckons that fossil fuels will account
for three-quarters of demand in 2040 and
renewables, such as solar and wind power,
only five per cent. Shell puts the fossil-fuel
share at two-thirds. This will keep oil prices
Second, the companies dismiss the idea
that governments will do anything to change
this. As Shell puts it, "We do not see gov-
ernments taking the steps now that are con-
sistent with the 2ºC scenario," that is, con-
straining carbon emissions so as to limit the
rise in global surface temperatures to 2ºC
above preindustrial levels.
Such steps would mean cutting emissions
of climate-altering gases by 80 per cent by
2050, Exxon says, and the prospect of that
lies outside "the reasonably likely-to-occur
range of planning assumptions."
Jeremy Leggett of the Carbon Tracker Ini-
tiative, a group advising the investors, thinks
that oil firms are betting that affordable
energy will trump climate change as a policy
Third, Shell makes a narrower claim: Since
what it calls "proved reserves life"---proven
reserves divided by the rate of production---
is only 11.5 years, its current worth will be
unaffected by regulatory limits in 20 or 30
years time. Although an oil project may run
for decades, the company says, the payback
period is concentrated in its early years, so
it will have paid its way long before tough
laws come in, which of course Shell thinks
will not happen in any case.
So are investors happy that, assuming the
firms are right, their shareholdings will make
oodles of money whatever happens to the
Of course not. Carbon Tracker has written
to Shell to take issue with practically all its
arguments. It says that the proportion of the
world s emissions subject to some form of
legislation has risen from half to more than
two-thirds since 2007, though Australia
recently scrapped its carbon-trading system.
In other words, governments are not as supine
as the firm thinks.
Moreover, it argues, environmentally friend-
ly policies and economic growth are not
mutually exclusive. Most governments want
both, and the companies may well be wrong
to assume that they will sacrifice the first to
get the second.
Carbon Tracker also thinks that Shell is
becoming too dependent on high prices,
pointing out that, by the company s own fig-
ures, the proportion of its potential output
coming from projects with a break-even point
of US$80 a barrel, at current prices, will dou-
ble between now and 2025. This would make
the firm vulnerable to a carbon price which
would switch demand away from oil and
toward low-carbon energy.
The advisory group criticises all the oil
firms for doing too little to diversify their
risks. It says that they are planning US$490
billion of capital investment a year, more than
twice what they pay in dividends, on reserves
that will require an oil price of US$80 to be
economic. True, the firms also are selling
more natural gas, a diversification of sorts,
but overall, the group implies, energy firms
are making a double-or-nothing bet on
The oil firms are almost certainly correct
that governments will not do enough to keep
the rise in global temperatures below 2ºC.
This is still official policy almost everywhere,
though it is only a matter of time before
someone breaks ranks and says that it cannot
The investors may be correct, however,
that managers are betting their firms on high
oil prices, that this is a gamble and that apply-
ing a discount to the value of their invest-
ments may make sense.
Of course, if the oil bosses are right, espe-
cially if the climate does not warm as much
as scientists fear, then investors will want to
put their money into productive oil assets.
If Carbon Tracker is right, though, then they
will dump oil shares---which is what should
happen if the firms are making a huge gamble
that will misfire.
@2014 The Economist Newspaper Ltd.
Distributed by the New York Times Syn-
The elephant in the atmosphere
Jeremy Leggett of the Carbon Tracker Initiative, a group advising the investors,
thinks that oil firms are betting that affordable energy
will trump climate change as a policy concern.
Shell, Exxon and Carbon:
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