“Stranded assets.” It’s a term that appears more frequently as climate action becomes more popular across the planet. If, during this month’s climate change conference in Lima, Peru, countries put forth bold initiatives to reduce carbon emissions and invest more heavily in renewable energies, there is a serious possibility that untapped deposits of oil, gas and coal will remain untapped. Today, these assets are worth trillions of dollars. If the world gets serious about climate change, they could become worthless in a matter of decades or even sooner.
Divestment – a movement to get universities, companies, private individuals and other organizations to sell off their fossil fuel stocks – has scored a few notable victories. In May, Stanford University became one of the first high-profile American institutions to divest from coal, and this past September the Rockefellers – a name that has been associated with oil for the last century – declared that they would sell off $50 billion of their own fossil fuel assets.
Last year, Sotrebrand ASA, a Scandinavian financial services company that manages $74 billion of assets, joined the divestment movement, saying they would divest from 19 and then later 35 fossil fuel companies.
“It was a financial and climate-related decision, and there was very much a consideration of stranded assets,” Christine Torklep Meisingset, Storebrand’s head of sustainable investments, told Bloomberg. “Companies that specialize in carbon-intense projects are very vulnerable to climate policy and shifting regulations.”
Some in the fossil fuel industry don’t view divestment as a threat. After all, the G20 still pays out an annual $775 billion in fossil fuel subsidies. Global Divest-Invest has only collected about $5 billion worth of assets, and Exxon has a market share of $400 billion.
“We’re going to be in the fossil fuels business for a long time,” said Chevron Chief Executive Officer John Watson in a September 30 interview.
It’s worth noting, however, that ExxonMobil is now disclosing stranded-carbon asset risks to its investors.
The conversation is changing, and forward-thinking companies are choosing to adapt. This week, Germany’s biggest energy utility announced that it will split itself into two companies, one focused on conventional fuels and one focused on renewables and decentralized energy efficiency. The renewables company will be keeping E.ON’s name.
At the Lima climate conference, the UN’s Climate Chief, Christiana Figueres, said, “The world has changed when the Rockefeller family decides that they are going to divest from fossil fuels.”
The shift away from conventional fossil fuels may ultimately be one of financial pragmatism rather than any green agenda. Oil is currently $80 per barrel and Goldman Sachs has predicted that it will hit $75/bbl in 2015. Dennis Gartman has said it will go even lower.
“I think crude oil goes demonstrably lower over the course of the next several years,” he said on CNBC. “It goes the way of whale oil at the turn of the 20th century when crude oil came on line. Energies tend to be replaced, one, by a different type, and the old energy loses its value completely. Crude oil is going to go a lot lower. Who cares whether it goes to $50, $40. That’s not what’s important. The trend is clearly downward. Oil prices are going to go a lot farther down.”
Without higher oil prices, many oilsands and deepwater projects will be cancelled, and without investors, oil will become as financially as it is physically toxic.
“Investors who haven’t yet come to grips with the stranding problem are like the classic scene in the Road Runner cartoons where the coyote runs off the edge of the cliff, and his legs keep moving for quite a long time before gravity takes hold,” former Vice-President Al Gore recently said. “There are investors out there whose legs are moving in mid-air.”
“Before very long there will be a widespread recognition that most of these assets are never going to be burned,” he added.