Shell’s 2013 annual report includes an interesting statement about the company’s potential death.
“Over time, we expect that a growing share of our CO2 emissions will be subject to regulation and result in increasing our costs,” it reads.
“Furthermore, continued attention to climate change, including activities by non-governmental and political organisations, is likely to lead to additional regulations designed to reduce greenhouse gas emissions. If we are unable to find economically viable, as well as publicly acceptable, solutions that reduce our CO2 emissions for new and existing projects or products, we may experience additional costs, delayed projects, reduced production and reduced demand for hydrocarbons.”
Why not come right out and say it? “We may find we have a business model that no longer works.”
Suppose you were an investor in Shell and you read that; suppose you heard that Shell had cancelled drilling in the Arctic in 2014 due to investor and management concerns about soaring costs; and then you heard that the biggest sovereign wealth fund in the world was to discuss a complete withdrawal from investing in oil, gas and coal in the year ahead. Would you perhaps be a bit worried?
You should be, for this is the world we are living in today. Last month, the $840bn Norwegian state pension fund announced it would be debating a complete withdrawal from fossil-fuel investment. This is one of the funds that investors watch most closely. It owns fully 1.3% of the value in the world’s stock exchanges. It has $44bn invested in oil companies, including Shell.
The fund has already halved its investments in coal. Meanwhile, the fossil-fuel divestments by other funds are continuing. Storebrand, a near neighbour in Oslo, has divested from 29 coal and tar-sands companies, citing fears that such investments might become stranded by climate policymaking. In the US, 17 foundations announced in January that they are divesting from all fossil fuels. The world’s largest coal miner, Coal India, had to abandon a share offering in the face of investor scepticism. As recently as October 2010, it had been seen as one of the most valuable investments in the emerging economies.
Analysts are taking notice. A January report by HSBC concluded that a low-carbon policy environment could cut the asset value of coal on the London Stock Exchange by 44%.
Non-trivial as the divestment threat is, the pressure on capital expenditure is worse. Without the money to invest in finding new reserves to replace depletion, fossil-fuel companies no longer have a route to grow. They are in wind-down mode. And across the world today, these companies are staring this fate full in the face.
Giant miner BHP Billiton has announced that 2013 was its peak year for coal capex, and it has no new spending planned. Rio Tinto is busy selling coal assets. The oil majors have watched their capex treble since 2000, while discoveries actually drop. Many are clearly having cold feet. Steven Kopits, a most respected oil analyst, warns that exploration and production companies are cutting capex “one after another”.
Even the “boom” in American shale is involved. “Dream of US oil independence slams against shale costs”, a Bloomberg headline read on 27 February. Investment is hitting the buffers, and the reason is clear: independent producers will be spending $1.50 drilling for every dollar they get back in oil and gas sales this year.
In Britain, the parliamentary Environmental Audit Committee warned that the carbon bubble poses a “serious threat to the UK economy”.
“The government and Bank of England must not be complacent about the risks of carbon exposure in the world economy,” committee chairwoman Joan Walley said. “Financial stability could be threatened if shares in fossil-fuel companies turn out to be overvalued because the bulk of their oil, coal and gas reserves cannot be burnt without further destabilising the climate.”
But increasingly, financial stability is being imperilled by the routine capital requirements of the fossil-fuel industries, never mind climate policy. That only adds to pressures piling on the energy incumbency for mass changes in business models.
I leave the reader to think through the implications for renewables.
Jeremy Leggett is founder and non-executive chairman of international PV company Solarcentury. His latest book, The Energy of Nations: Risk Blindness and the Road to Renaissance, is published by Routledge