Two developments in the last week are
turning the heat up on oil companies: HSBC released an analysis finding
oil majors at significant risk from "unburnable" reserves, and a pension
fund has agreed to consider divestment from fossil-fuel companies in
response to NGO pressure. This signals growing concern among
conventional investors that climate change could be creating a "carbon bubble" in equity markets.
Climate change scenarios
Concerns
around carbon dioxide emissions are growing as climate science grows
ever firmer on CO2's contribution to climate change. International
research bodies – including the International Energy Agency, or IEA –
model three possible scenarios for the future in terms of the number of
degrees Celsius of average global warming by 2050.
The six-degree scenario, or 6DS, is
basically Armageddon. 6DS is the scenario we are expected to see if we
continue on our current trajectory. The four-degree scenario, or 4DS, is
certainly better, but the World Bank released a report in November 2012
emphasizing that 4DS must also be avoided. The bank projects
"unprecedented heat waves, severe drought, and major floods in many
regions, with serious impacts on human systems, ecosystems, and
associated services." These effects would lead to spreading tropical
diseases, crop failure, inundation of island nations, and more.
World governments and institutions have
repeatedly committed to staying below the two-degree scenario, or 2DS.
To be clear, scientists still warn that a two-degree Celsius increase is
the level at which atmospheric feedback loops could trigger dangerous
climate change. Therefore, it is this scenario that HSBC used as the
basis for its study.
Unburnable reserves
To achieve 2DS, the IEA calculates that no more than about 1,440
gigatons of carbon can be emitted globally by 2050. Emissions have
already reached 400 gigatons, which leaves only around 1,000 gigatons –
or just a third of current proven reserves – to be burned.
HSBC's analysis looked at European oil majors. Norway's Statoil ASA (NYSE:STO) is the worst affected, with approximately 17% of its market capitalization at risk. HSBC also calculated that 6% of BP plc (NYSE:BP)'s reserves are at risk, along with 5% of Total S.A. (NYSE:TOT)'s and 2% of Shell's
. However, HSBC finds that a bigger threat to the sector's value comes
in the form of reduced demand, which could lead to lower oil and gas
prices. In that event, the potential value at risk for leading fossil
fuel players could increase to 40%-60% of current market capitalization.
The analysts think investors have not priced in this risk, probably
because it seems so far off.
But is it so far off? The IEA said in
2011 that on its current trajectory, the world could exhaust its carbon
budget by 2017. In 2012, the IEA said that energy efficiency
improvements could offer a further five-year reprieve. Even then, the
next decade is likely to be when the excrement hits the fan. HSBC
projects that a decrease in demand for high-carbon projects could lead
to project cancellation, especially for controversial and high-cost
projects.