Sunday, December 08, 2013

Climate risk: stranded assets, fracking and CapEx challenges LAPFF 2013

It is not often that you see a Texas based oil and gas executive in a UK debate on climate risk.

This was the last presentation of the day.  Chair David Pitt-Watson started the debate by pointing out that there is more carbon in the ground than we can burn and if we were able to burn all the carbon we would fry. He also contrasted how much is spent on oil and gas exploration with that on developing green technologies.

If the financial crisis of 2008 was predictable since they were giving mortgages to those who could not pay them back then the forthcoming carbon crisis is equally predictable and with greater consequences the loss of 10 points GDP.

Craig Mckenzie, Head of Sustainability at Scottish Widows (left) spoke of the risk that oil and gas companies were being valued on the basis of unburnable carbon reserves and investing in production capacity that will never be used. Is the coal mining industry on a death spiral? Is there an oil "cost curve" which means that the oil price will fall and companies will not generate a return for expensive wells?

A good point about fracking is that you can close down coal power stations, this caused a fall in carbon emissions in USA to 1994 levels. The downside is the greater use of water in extraction, danger of polluting groundwater, it may cause a methane leak into atmosphere, earthquakes and disruption.  The benefits may out sway the downside but not everywhere.

Faith Ward, investment adviser to the UK Environmental Agency pension fund (on right) spoke about their audit on carbon footprints of the companies they invest in and the "Green Light Report" by ShareAction. She believed that LAPFF can provide leadership to long term investors on the risks of climate change.

The last speaker was Sarah Teslik from the oil and gas Apache Corporation.  She started by saying she is happy to play the villain and will not deny everything that has just been said. But the average length of time for a company in the US S&P or UK FSTE index is only 11-14 years. They don't stay that long despite all companies saying they have a bright future. She doesn't share everyone's confidence about making predictions over the next 20 years. When she was younger she was an environmental campaigner. Every claim made about the future at that time has proved to be wrong. 

There is a false argument about the "stranded assets" issue. We have gone through half of the worlds carbon reserves in the last 100 years that took 300 million to make. It is false to suggest that  "reserves" will have to be written off. The rules on reserves is highly regulated by the USA regulator the SEC. They are 3 types of reserves - probably, possible and proven. "Proven" must be ready to produce tomorrow.

"You should sweat about the other stuff... Oil wells are getting more expensive.... Sun power and oil are all energy.... its the getting to it that costs....what should keep you up at night is the geopolitical risk.... 90% of reserves are not in the "West".... They are in other countries where they naturally want to run things themselves and often they don't care about return but want to control supply for strategic reasons.... this is what should worry you". Finally she concluded that technological change and advances could solve the problems associated with climate risk.

There was quite a sparky but constructive Q&A with David getting some stick about not being a "neutral" chair on this subject. While I am firmly in the "sweating" camp about the risk of climate change it was good to see a polite, well argued and informed debate on this subject.

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