A 7-step plan to avoid stranding your fossil fuel assets

Most coal, oil and gas must stay in the ground to avert climate disaster. What is an energy company to do? We’re here to help

From high to low carbon, our energy systems need to change (Pic: Land Rover/Our Planet)

From high to low carbon, our energy systems need to change (Pic: Land Rover/Our Planet)

By Megan Darby

For coal, oil and gas companies and their investors, the risk of assets being “stranded” is getting harder and harder to ignore.

BP has accepted calls to reveal how much of its oil could be “unburnable” if efforts to limit global warming to 2C succeed. Shell is expected to follow suit at its AGM next month.

HSBC analysts last week became the latest to warn that climate change regulations, disruptive technology and economic shifts are putting dirty energy profits at risk.

The market value of oil and gas companies fell by more than US$ 580 billion in the last nine months as oil prices slumped, they found.

Energy innovation and curbs on emissions are only heightening the risks, they said.

Help is at hand: four investor groups yesterday published a guide for asset owners, swiftly followed by a “company blueprint” from think-tank Carbon Tracker.

RTCC has distilled their considerable wisdom into a handy 7-step plan for avoiding a high carbon car crash.


1)      Accept the science

It shouldn’t need to be said. The scientific evidence for man-made climate change has been overwhelming for decades.

“Human influence on the climate is clear,” says the UN’s top-level science panel. Continuing to emit greenhouse gases will cause further warming, with “severe, pervasive and irreversible impacts”.

Yet some oil executives seem to think they know better. Occasionally, they let slip their contempt for science. More often, they fund lobbyists, think-tanks or sceptic lawmakers to do their dirty work.

It’s understandable – they are threatened by the implications of climate science. It’s also unacceptable. Cut it out.

2)      Assess the climate risks

The most important number in climate change is 2C. That is the internationally agreed limit on temperature rise from pre-industrial levels. Exceeding it will bring severe and unpredictable impacts.

To meet that goal, an estimated 80% of coal reserves, half of gas and a third of oil will need to stay in the ground.

That means some fossil fuels will be unburnable and unsellable. In a rational market, the most expensive projects should be the first ones to ditch: tar sands, Arctic and deep water oil.

Take a long, hard look at your coal, oil and gas ventures. Are they compatible with a safe future climate? If not, you’re not just burning the planet, you’re burning money.

As technology improves, electric cars could reduce the need for petrol (Pic: Mariordo)

As technology improves, electric cars could reduce the need for petrol (Pic: Mariordo)

3)      Don’t underestimate technology

Climate regulations are not the only threat to fossil fuel demand. Some low carbon technologies are pretty appealing in their own right.

Energy efficiency improvements mean more comfortable homes and less reliance on fuel imports to fill up the petrol tank, for the same money.

Renewables are getting cheaper and solar panels make a lot of sense in parts of the world that haven’t got round to installing an electricity grid.

A dramatic advance in battery storage – key to drive a shift to electric cars and back up variable wind and solar power – would “transform the energy economy”, HSBC says.

4)      Ban bad bonuses

It is no use having good climate risk policies if your payment structure encourages reckless behaviour.

Make sure any bonuses are based on value, not volume.

It is ok to reward staff for keeping costs down and maximising returns to shareholders. Do not give them incentives to replace reserves at any expense.

5)      Make it mainstream

We are talking about a fundamental business risk. Don’t leave it to the sustainability team to write reports that nobody reads.

Everybody from the project manager to the chief financial officer needs to be on top of the risks of an energy transition.

You may not think a radical shift to low carbon energy is likely, but you have to admit it is possible. Bring it up in every committee.

Pic: http://401kcalculator.org

Pic: http://401kcalculator.org

6)      Cashback not investment

So you have scrutinised, quantified and evaluated every corner of your business – what is the upshot?

Well, you’re almost certainly going to find some of your planned investments are too risky. Cancel them.

Take that cash and give it back to shareholders, either by buying back some shares or increasing dividends.

7)      Diversify or die

Alternatively, invest in lower carbon options. For pure coal mining companies, this could be tricky, but oil and gas businesses are not irredeemable.

You might lean towards gas, which can arguably play a role in cutting emissions if it displaces coal from the mix.

Or you could go the whole hog and back renewables, if you think you have the expertise.

This hasn’t always gone well. BP notoriously dropped its “Beyond Petroleum” experiment.

But experience of building oil platforms at sea could prove useful in developing offshore wind farms, for example. And there is the great white hope of carbon capture and storage.

Whatever you decide, you need to have a credible plan that is consistent with a safe world. Good luck!

Read more on: Blog | Climate Finance | Comment | Energy | | |