What carbon asset bubble?

Fuel Fix:
Lately, it has been fashionable to talk of “stranded carbon assets” that will emerge as a risk to investors as pressure to mount a serious global climate policy increases. The thinking behind the carbon bubble analysis, recently presented by Al Gore, is that up to two thirds of fossil fuel reserves will not be monetized if the world is to remain below the 2 degrees increase in the global temperature that scientists say is the limit before the planet suffers devastating and irreversible damage.

In light of a possible carbon asset bubble risk, former Vice President Gore suggests “investors should determine the extent to which carbon risk is embedded in current and future investments.” In the first academic foray on the topic, my colleagues and I at UC Davis Graduate School of Management and University of Otago have done just that. In our new study, “Science and the Stock Market: Investors’ Recognition of Unburnable Carbon” we found that investors did have a detectable market response to the initial scientific disclosure on the implications for fossil fuels regarding the need to stay below 2 degrees of warming. In fact, some 63 American oil companies shed $27 billion in market capitalization in 2009 in the immediate aftermath of publication of the findings reported in a 2009 article in the prestigious Nature journal of science that only a fraction of the world’s existing oil, gas, and coal reserves can be emitted if global warming by 2050 is not to exceed 2 degrees above pre-industrial levels.

Our findings show that markets may not be “irrational” where carbon emission limitations are concerned. In a recent report, The Carbon Disclosure Project (CDP) recently noted that five major oil companies –Shell, Chevron,ExxonMobil, ConocoPhillips and BP -are starting to account for coming carbon limits in their business plans. Fuel fix reported last week that ExxonMobil disclosed in its briefings on its highly regarded World Energy Outlook that it was factoring in a carbon cost of $60/ton in the future, based on scenarios that take into account existing and looming climate regulations worldwide. Refiners are already taking greenhouse gas emissions reducing steps in California which launched a carbon cap and trade and low carbon fuel standard this year. And some companies, notably Shell and Chevron, have announced new carbon capture and sequestration (CCS) additions to major long term mega projects in Canada and Australia. The fact that some oil companies are already embarked on CCS is likely the main reason why investors do not consider oil and gas reserves as “stranded” or “unburnable” and why oil company stocks are not being shunned by institutional investors. There is likely a general presumption that when tighter regulation comes in place, CCS will be deployed widely and therefore massive oil and gas reserves on balance sheets will still be able to be monetized.

Under its 2 degrees scenario, the International Energy Agency (IEA) estimates that CCS will provide 14 % of cumulative emissions reductions between 2015 and 2050 compared to a business as usual scenario. Under the 2 degrees IEA scenario, CCS represents one-sixth of the required reduction in emissions from fossil fuels in 2050. Globally, approximately $23.5 billion in public support has been made available for CCS demonstration to date. CCS uses a combination of technologies to capture the CO2 released by fossil fuel combustion or an industrial process, transport it to a suitable storage location and store it in a manner that prevents it from entering the atmosphere and contributing to climate change. Such storage to date is typically in underground formations or structures, like depleted oil fields or saline formations. The implementation of CCS is expected to raise considerably the investment costs for fossil fuel production and use. However, on a percentage basis, given today’s high global oil and gas prices, the added costs for implementation of CCS is relatively small. For example, in Australia where the carbon tax was imposed in the same time frame as the science articles from Nature, the added costs for the addition of CCS to the major Gorgon LNG project was less than 2% of the total capital costs of $55 billion. The Gorgon natural gas project includes the world’s largest carbon dioxide injection and sequestration facilities, sequestering 3.5 mtpa of CO 2 deep below Barrow’s Island in offshore Western Australia and adding $1 billion to the project’s total cost of $55 billion, or a very small percentage increase of 1.81% (in total costs run roughly $3,500 per installed ton per year of liquefied natural gas production capacity of 15.6 mtpa). Australia’s $23/ton tax on carbon was projected to add about $0.20 to $0.25 per MMBtu to the cost of delivered natural gas for various new projects such as Wheatstone and Ichthys. This would represent a manageable cost escalation if prices for Asian LNG remain in the $12 to $18 per MMBtu range seen in that market since the Fukushima nuclear accident increased spot prices for Asian LNG dramatically since 2011, but would have been a competitive burden were LNG prices to fall significantly.
There is still no good alternative for transportation fuel.  The Tesla and the Leaf are not the answer in their current format.  That is one reason why the market for carbon based energy is unlikely shrink.  Alternative energy has so far been inefficient and intermittent, meaning they need a dependable back up like natural gas.   Natural gas is also a candidate to replace gasonline and it appears the most viable if infrastructure is even in place.

Exxon says that carbon based energy will continue to dominate through at least 2040.


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