Assuming, perhaps optimistically, that governments really do get a grip on “zero-carbon” policies and that the costs of renewable energy continue to fall significantly, where does that leave the traditional fossil fuel industry?
Coal is effectively dead. More than 100 leading global financial institutions have pulled the plug on funding, imposing restrictions on investments into the sector. In India renewables were not just marginally, but 20% or 30% cheaper than new coal, even two years ago. British coal plants are shutting down ahead of a 2025 ban. Even in the US, more electricity was generated from renewables than coal for first time ever this June – as in the 36 countries of the OECD overall. ‘The fate of coal has been sealed. The market has spoken’. We could see the end to the use of coal globally by 2050.
Oil and gas are not yet in that position, but the trends don’t look good for those industries either. Financial markets are becoming concerned that oil companies’ market values, based on reserves yet to be exploited, may be exaggerated.
A recent Carbon Tracker report says oil and gas companies are on track to spend $6.5trn (€5.89trn) on new production by 2030. That would be in line with a world where global warming is limited to 2.7°C rather than a 1.6°C pathway. Under the 1.6°C scenario, oil and gas production would need to reach $4.3trn (€3.89trn), creating a $2.2trn (€1.99trn) gap of potentially stranded assets. In effect, every oil major is betting heavily against a 1.5°C world and investing in projects that are contrary to the Paris goals. Investors are likely to increasingly challenge companies’ spending on new fossil fuel production.
The Paris Agreement’s 2°C objective requires a carbon budget of cumulative greenhouse gas (GHG) emissions that cannot be exceeded. The budget for 2011–2050 is around 1100 GtCO2 (gigatonnes of carbon dioxide), while global fossil fuel reserves hold around three times this amount. This implies that 33% of oil, 49% of gas and 82% of coal reserves need to remain underground. The 1.5°C target translates into an even smaller carbon budget.
Oil companies remain in denial. Shell – pioneers of scenario planning who should know better than to rely on one preferred future – suggests these arguments are a “red herring”. They argue that “a bigger risk is prematurely turning your back on oil and gas.”
Saudi Arabia is also confident – or is it just looking longer-term? It is selling small shares in the state-owned Aramco oil company for the first time, and investors seem keen on the potential profits. Why is it selling? Because it is trying to reduce its reliance on oil. The aim is to diversify the country’s economy in the next decade under a programme dubbed Vision 2030, making use of the country’s vast desert for solar power generation. Long-term geo-politics will look very different if oil is no longer the driver of the world economy.
The EIB, the largest public bank in the world, announced this year that it would end lending to new gas projects, having already curtailed funding for coal and oil. This would free up more money for renewable energy developments. However, a final decision was deferred at the October meeting. Executives of the bank, which is owned by EU member states, said the plan was still on course and would probably be approved next month. EIB sees itself becoming the “EU Climate Bank”.
In the UK, 300 MPs are backing a campaign calling on the £700m Parliamentary Pension Fund to divest from fossil fuels. A survey of around 100 institutional investors said that they plan to triple fossil fuel divestment rates over the next decade. They plan to move $920 billion (£725.9bn) out of fossil fuel investments in the next ten years.
If the fossil fuel industries are to be under such pressure, then the investment community and the whole financial system will face repercussions. We will look more into this, and the actions of central bankers to address it, next time.
Written by Huw Williams, SAMI Principal
The views expressed are those of the author(s) and not necessarily of SAMI Consulting.
SAMI Consulting was founded in 1989 by Shell and St Andrews University. They have undertaken scenario planning projects for a wide range of UK and international organisations. Their core skill is providing the link between futures research and strategy.
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