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Tackling The Oil Industry On Climate Change

‘Protect our climate’ was the rallying cry heard across New York City yesterday, but the underlying message really was ‘stop using fossil fuels.’
by Mindy LubberForbes Sustainable Capitalism Blog Posted on Sep 22, 2014

‘Protect our climate’ was the rallying cry heard across New York City yesterday, but the underlying message really was ‘stop using fossil fuels.’

Here is the plain truth – and you’ve heard it before: We won’t solve climate change unless we wean ourselves off oil and coal and use cleaner energy sources.

But there is a novel solution, and it’s not the one hundreds of thousands of people were talking about on the streets of Manhattan. Take the people making the most money off the extraction of vast oil and coal reserves – the investors who own oil and coal companies – and show them how they stand to lose billions if these companies get it wrong in navigating the transition to a low-carbon economy.

Oil and coal reserves that fossil fuel companies already have are enough to cook the planet. They spend more than half a trillion dollars a year to develop new reserves. The International Energy Agency says that two-thirds of proven coal and oil resources should remain underground if we want to limit global temperature increases to 2 degrees Celsius (3.6 degrees Fahrenheit), the goal set by world leaders attending a United Nations Climate Summit here tomorrow.

Investors are starting to connect the dots. Many of the world’s largest investors are voicing concern that fossil fuel companies are grossly underestimating the financial risks they face as the global economy shifts from high-polluting energy to cleaner alternatives. They’re especially focused on curbing investments in expensive, high-carbon oil projects that simply won’t make economic sense as global oil demand is constrained by carbon emission limits, more competitive clean energy technologies and other factors.

Last fall, these investors, which collectively manage $3.5 trillion in assets, wrote to the world’s 45 largest fossil fuel companies, asking them to disclose how climate change will affect their businesses, including the potential of current and future reserves becoming unusable – or “stranded.” They also filed shareholder resolutions with a dozen companies and held face-to-face meetings with oil giants such as Exxon and Shell.

In their responses to investors, Exxon and Shell argue that a low-carbon economy – and declining global oil demand – are unlikely until the distant future, which is why they’re continuing to invest billions in increasingly expensive, carbon-intensive oil plays. In short, they said, ‘We don’t think world governments will limit carbon pollution anytime soon and until they do, we’ll keep drilling.’

We think this ‘business as usual’ thinking is fraught with risks. Even without a global carbon price, the industry’s financial standing is significantly weaker than it was just a decade ago, when high oil prices guaranteed high profits. Companies are seeing weaker profits, even with oil prices hovering around $100 a barrel. In the case of Shell, which is especially dependent on oil that is expensive to develop, its profits are lower today than they were in 2009, despite a $40 jump in the price per barrel of oil. Exxon’s annual returns in the past five years, like Shell’s, are also lagging behind the S&P 500 index.

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A big reason for the weaker returns is that ‘expensive’ oil is the new norm. More than ever before, oil majors are spending significantly more capital on harder-to-get oil. Capital expenditures by the largest oil companies are now five times the levels they were in 2000.

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And the future profitability of expensive fossil fuels looks even more uncertain. Leading financial firms point to a number of factors that could weaken oil demand faster than the industry is planning, including proliferating carbon-reducing regulations and the increased competitiveness of clean energy. Citi Research forecasts that oil demand could peak as early as 2020 – just six years from now.

Once oil demand drops, prices will fall too. As oil prices dip below $100 a barrel, the profit margins on these projects are thin at best. A recent report by the Carbon Tracker Initiative identifies the top 20 undeveloped high-cost oil projects – representing a whopping $91 billion of capital spending in the next decade – that companies and shareholders should be stopping right now. The projects, a mix of Canada oil sands, ultra deepwater and Arctic ventures, all have ‘breakeven’ points above $95 a barrel.

“To create shareholder value, oil majors need to reduce exposure to exploration projects requiring the highest oil prices, rather than solely pursue production volume,” the Carbon Tracker report concludes.

There is some evidence that companies are responding to these concerns. Under increasing investor pressure, Exxon, Chevron and Shell are reducing capital spending this year, especially Shell which is cutting such costs by 20 percent. Specific projects are being shelved, too, including several in Canada’s oil sands.

Still, these actions are nowhere near the cutbacks we’ll need to have a chance of limiting carbon pollution so that we can avoid excessive warming that will be catastrophic to our environment and economy. All fossil fuel companies must examine, in a far more rigorous way, whether investing shareholder capital on ever more expensive, carbon-intensive sources of energy is prudent in a world that is getting hotter and is transitioning already to a low-carbon future.

Mindy Lubber is president of Ceres, a nonprofit organization mobilizing business and investor leadership on climate change and other global sustainability challenges. For more details, visit www.ceres.org or follow on Twitter @CeresNews

Read the post at Forbes Sustainable Capitalism Blog

Meet the Expert

Mindy S. Lubber JD, MBA

Mindy S. Lubber is the President and a founding board member of Ceres, a non-profit organization that is mobilizing many of the world’s largest investors and companies to take stronger action on climate change, water scarcity and other global sustainability challenges. She directs Ceres’ Investor Network on Climate Risk (INCR), a group of 120 institutional investors managing about $14 trillion in assets focused on the business risks and opportunities of climate change. Mindy also oversees engagements with 100-plus companies, many of them Fortune 500 firms, committed to sustainable business practices and the urgency for strong climate and clean energy policies.

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