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OPINION: Jeremy Leggett

A debate is growing in the capital markets about whether carbon-fuel assets are at risk of being stranded — rendered unuseable by trends and events, including policies to combat global warming.

ExxonMobil and Shell are to be congratulated for recently injecting a much-needed degree of transparency into the argument.

Carbon Tracker, the financial think-tank that I chair, has stimulated much of this debate with a series of reports since 2011. We argue that significant elements of fossil-fuel resources are at risk, particularly if policymaking continues to focus on a 2°C global-warming ceiling, and that capital expenditure planned for developing these resources is in danger of becoming money wasted.

ExxonMobil and Shell have responded to these ideas in open letters to stakeholders. Although ExxonMobil made its case in measured language, Shell accused those of us who worry about the potential for carbon-fuel asset-stranding of trivialising the climate debate and of “alarmist” arguments.

The fossil-fuel industry allocates nearly $700bn a year to access and expand oil and gas reserves, while handing out dividends of much less than this. Given such sums, if there is any risk at all of wasted capital, investors would do well to scrutinise these plans carefully.

Some are doing so. Shareholder questions about the wisdom of expenditure plans and the adequacy of dividends have already caused Shell to cancel plans for exploring in the Arctic in 2014. Its involvement in the $50bn project at Kashagan, in Kazakhstan’s zone of the Caspian Sea — an oilfield once deemed a profitable supergiant but now showing every sign of becoming a record white elephant — will add to those pressures in future years. So will the recent writing off of at least $2bn invested in US shale.

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Carbon Tracker’s latest report, published on 8 May, shortly before the Shell letter, tries to help investors analyse risk in these matters. Our team, led by former Citigroup head of research Mark Fulton and supported by HSBC’s former head of oil and gas, Paul Spedding, used supply-cost analysis to dive deep into potential capital expenditure, province by province and company by company. They looked at high-cost projects that would be vulnerable to weaker demand for hydrocarbons, driven by climate policy, slowing economic growth, energy efficiency and the rapid rise of renewables.

The research identified many of the domains targeted by the oil majors as being at some risk if costs of exploration and extraction rise, among them Canadian oil sands, ultra-deep water in the Atlantic, and the Arctic.

Since the majors’ letters came out, the International Energy Agency has warned that Opec production must rise if we are not to risk an oil shock this year. Militias are running amok in Iraq, jeopardising production. Accordingly, the threat to oil majors may not just be limited to the lower oil-price scenarios that the latest Carbon Tracker report focuses on, but to high-price scenarios too.

This is not to trivialise the climate debate, it is to open a new dimension of it — one that links it to the capital markets, an element that has essentially been missing hitherto.

As for the alarmism that Shell sees in this approach, the key thing is that investors will be able to judge for themselves, given the long essays the hydrocarbon majors have now provided for shareholders to sift through and follow up on.

The core of the ExxonMobil and Shell arguments is that they completely discount the risk of policymakers acting to set the world on a road map to the 2°C ceiling. Hence, they claim, their existing reserves are not at risk, and, by implication, nor are any resources they target their exploration at, for decades to come.

Really? Former Deutsche Bank head of energy research Mark Lewis, now with Kepler Cheuvreux and a leading light on the Carbon Tracker advisory board, immediately responded that this thinking was naively binary and complacent. Climate policy is much more nuanced than the oil giants wish to think, he argues, and it is not limited to international agreements.

Am I alarmist, or trivialising debate, in raising this? Time will tell. On all our watches.

All the evidence for this article can be found at www.jeremyleggett.net

Jeremy Leggett is founder and non-executive chairman of international PV company Solarcentury. His book The Energy of Nations: Risk Blindness and the Road to Renaissance is published by Routledge

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