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New Report: Coal-to-Liquids and Oil Shale Pose Significant Financial and Environmental Risks to Investors

Dozens of U.S. Projects Now Underway Face Climate-Related Regulatory Challenges, Water Risks and Technological Uncertainties

December 9, 2010 – As pressure mounts to develop unconventional fuel sources to enhance U.S. energy security, a new Ceres report released today shows that coal-to-liquid (CTL) and oil shale technologies face significant environmental and financial obstacles - from water constraints, to technological uncertainties to regulatory and market risks - that pose substantial financial risks for investors involved in such projects.
Boston Dec 09, 2010

As pressure mounts to develop unconventional fuel sources to enhance U.S. energy security, a new Ceres report released today shows that coal-to-liquid (CTL) and oil shale technologies face significant environmental and financial obstacles - from water constraints, to technological uncertainties to regulatory and market risks - that pose substantial financial risks for investors involved in such projects.

Authored by David Gardiner and Associates, the Ceres-commissioned report, Investor Risks from Development of Oil Shale and Coal-to-Liquids, recommends that investors closely scrutinize their portfolios for exposure to these projects and press companies leading the ventures to provide better disclosure on wide-ranging risks and steps for managing such risks. The report comes as oil majors like ExxonMobil, Chevron and Shell, and other companies, are developing at least a couple dozen oil shale and CTL projects, including 12 CTL facilities projected to produce 170 million barrels of liquid fuels per year at a cost of $2 billion to $7 billion per plant.

“There are costs that go along with the benefits of extracting and exploiting these unconventional fuel sources,” said New York State Comptroller Thomas DiNapoli. “Before investors can fully assess the benefits of developing oil shale and liquefied coal projects, we need full disclosure of the environmental, regulatory and technological risks surrounding these unproven reserves. Every investor has to take a strong look at these risks.”

An increased focus on energy security and dwindling petroleum reserves are driving development of unconventional liquid fuel sources in the U.S. The Obama Administration’s recent extension of the offshore oil-drilling moratorium through 2011 has also renewed investor interest in on-shore oil reserves.

More than 25 companies are involved in oil shale development. With technologically recoverable reserves estimated at about 800 billion barrels in the U.S.—three times the size of Saudi Arabia’s proved reserves—oil shale offers vast development potential. Shell’s recent agreement to develop oil shale in Jordan at a projected cost of $20 billion illustrates the potential cost of these projects.

CTL production is projected to rise in the U.S. from virtually no production today to about 91 million barrels per year by 2035, according to the Energy Information Administration. Major companies involved in CTL development include Shell, Rentech, Baard and DKRW.

“Investors with holdings in companies involved in coal-to-liquids and oil shale projects should  ask these companies to open their books and explain their strategies for managing these risky projects,” said Mindy Lubber, president of Ceres and director of the $9 trillion Investor Network on Climate Risk.  “The energy- and water-intensive nature of both coal-to-liquids and oil shale, combined with technological uncertainties and state and federal requirements for low carbon fuels spell diminishing returns for investors.”

The Energy Independence and Security Act of 2007 prohibits federal agencies—including the Department of Defense and the Air Force—from procuring alternative or synthetic fuels, unless contract provisions stipulate that life-cycle greenhouse gas emissions do not exceed equivalent conventional fuel emissions produced from conventional petroleum sources.

“We are leery of investing in oil shale and coal-to-liquids, and have turned down specific opportunities to invest in CTL developers in the past,” said Steven Heim, Managing Director and Director of ESG Research and Shareholder Engagement, Boston Common Asset Management, LLC. “The energy resource seems promising but huge obstacles may be regional water scarcity and the lack of large-scale carbon capture and sequestration infrastructure.

Among the report’s key findings:

Water constraints: Oil shale and CTL development may be constrained by each technology’s need for large amounts of water. Oil shale production requires 1.5 to 5 barrels of water for every barrel produced while CTL requires 5 to 7 barrels of water for every barrel of produce produced.  Water constraints are especially problematic for oil shale production, because the reserves are located in the water-stressed states of Colorado, Wyoming and Utah.

Regulatory Risks: Current and potential regulations seeking to limit carbon dioxide emissions such as low carbon fuel standards and lifecycle emissions requirements pose potentially serious risks to carbon-intensive oil shale and CTL.   EPA’s proposed Tailoring Rule regulating GHG emissions from new sources will also likely apply to CTL facilities.

Core Technological Uncertainty: Oil shale technology is still in the early stages of development, particularly processes that involve heating the oil shale in place and extracting it from the ground. CTL technologies are further along but combining the various technologies into a commercially viable plan still faces operational and technical challenges.

Carbon Capture and Sequestration (CCS) Uncertainty: Given their carbon intensity, oil shale and CTL will be dependent on CCS if they are to survive as low carbon fuel standards and other carbon-reducing regulations take hold.   CCS still faces great uncertainty, however, regarding its commercial viability, public financing levels, enabling policies and potential markets for captured CO2.

Market Risks: The economic competitiveness of oil shale and CTL is contingent on high oil prices. Studies show that CTL is viable as a fuel when the price of oil exceeds $40-55 a barrel. Oil shale may not be profitable unless oil prices are in the $70-95 per barrel range. Neither of these estimates takes into account potential carbon prices, or CCS costs, which are very expensive and would raise the price-per-barrel competitiveness level.

The report calls on investors to give careful thought to these wide-ranging risks and engage with oil companies, CTL developers and end-users such as airlines to further understand the risks that companies are assuming. Investors are also encouraged to evaluate the potential risks in their fixed-income portfolios from state and municipal bonds that are supporting development of these projects.

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