Fossil fuel stress testing needed to avoid wasting $2.2tn
With Clean Technology and climate policy reducing the need for fossil fuels, energy companies who fail to transition risk of wasting up to $2.2tn in the next decade, according to a new report from the think-tank Carbon Tracker Initiative. “Misreading these trends will destroy shareholder value,” the authors state. The US is the most financially exposed with $412 billion worth of fossil fuel projects at risk of becoming stranded assets, followed by Canada, China, Russia and Australia. On another note, figures today reveal that things are looking particularly grim for iron ore, which may be on the edge of dropping into the $30 ranger per metric tonne. The London Metal Exchange Index of six base metals is heading for a 26% fall this year and prices are at multi-year lows. Furthermore, the COP21 talks have increased the number of investors rejecting coal, gas and oil, according to campaigners today. As we previously noted, for the world's metals-mining sector to survive, more companies may have to go bankrupt. 

 

Fossil fuel companies are at risk of wasting up to $2.2 trillion in the next decade by pursuing projects that could be uneconomic.

Specifically, the trillions of dollars are at risk, and subsequent lower investor returns are feasible, if fossil fuel companies pursue fossil fuel projects that are uneconomic “in the face of a perfect storm of factors including international action to limit climate change to 2˚C and rapid advances in clean technologies,” according to the report’s authors, the Carbon Tracker Initiative.

A new report, The $2 trillion stranded assets danger zone: How fossil fuel firms risk destroying investor returns, published by the think-tank Carbon Tracker Initiative today, highlights fossil fuel supply that doesn’t make financial or climate sense in a world where there is an almost-unanimous desire to keep global warming to 2˚C over pre-industrial levels. The report also determines the impact this will have on both listed and public companies.

The report concludes that no new coal mines will be needed, that oil demand is set to peak around 2020, and that growth in gas will disappoint industry expectations.

These are simply a few of the dangers ahead of the fossil fuel industry if business-as-usual strategies are left in place.

“Too few energy companies recognise that they will need to reduce supply of their carbon-intensive products to avoid pushing us beyond the internationally recognised carbon budget,” said James Leaton, head of research and co-author of the report. “Clean technology and climate policy are already reducing fossil fuel demand – misreading these trends will destroy shareholder value. Companies need to apply 2˚C stress tests to their business models now.”

In monetary terms, the United States sits as the country with the greatest financial exposure, with $412 billion worth of unneeded fossil fuel projects through to 2025 that are at risk of becoming stranded assets — unneeded, unnecessary, and out of date. The US is followed by Canada with exposure of $220 billion, China with $179 billion, Russia with $147 billion, and Australia with $103 billion.

“Business history is littered with examples of incumbents who fail to see the transition coming,” said Anthony Hobley, CEO of Carbon Tracker. “Fossil fuel incumbents seem intent on wasting capital trying to hold onto growth by doing what they have always done rather than embracing the energy transition and preserving value by adopting an ex-growth strategy. Our report offers these companies both a warning and a strategy for avoiding significant value destruction.”

“Our work shows thermal coal has the most significant overhang of unneeded supply in terms of carbon of all fossil fuels on any scenario,” added Mark Fulton, advisor to Carbon Tracker, former head of research at Deutsche Bank Climate Change Advisors, and co-author of the report. “No new mines are needed globally in a 2˚C world.”

Specifically, the report concludes that over the next decade, planned capital expenditure of $177 billion on new projects and $42 billion on existing ones is unneeded. “It is the end of the road for expansion of the coal sector,” the report states.

Image Credit: Guy Gorek