Recent studies have warned that a range of fossil fuel assets could become ‘stranded’ because of high extraction costs or regulations to curb climate change.
In this round table, organised by Environmental Finance, with support from HSBC, the Carbon Tracker Initiative and Climate Change Capital, participants discussed the risk to investors.
Participants
Victoria Barron, utilities sector lead, Hermes Investment Management Kate Brett, senior associate, responsible investment, Mercer Investments James Cameron, Chairman, Climate Change Capital Cathrine de Coninck-Lopez, sustainable and responsible investment officer, Threadneedle Investments Graham Cooper, consulting editor, Environmental Finance Tomas Gärdfors, partner, Norton Rose Fulbright Solange Le Jeune, ESG analyst, Schroders Zoe Knight, head, climate change centre of excellence, HSBC James Leaton, research director, Carbon Tracker Initiative Miguel Santisteve, associate director, corporate solutions, NASDAQ OMX Geof Stapledon, vice-president, governance, BHP Billiton
Chaired by Peter Cripps, editor, Environmental Finance
Hosted by Norton Rose Fulbright, London
Peter Cripps: Perhaps we should start with the basics of the stranded assets debate and who better to do that than James Leaton of the Carbon Tracker Initiative.
James Leaton: I am going to try and boil it down into something very simple which, essentially, is around demand and price. Obviously, if the fossil fuel sector is not adjusting supply in line with demand, that is going to affect prices going forward.
So this is really about challenging assumptions. It is very common and easy to predict the future based off last year or the last three years but, with climate change, the one thing we know is that it cannot be the same. Either we have to reduce emissions or there are going to be increasing physical impacts.
This year, therefore, we started doing cost curves for each individual fuel. We started with oil and highlighted some high‑cost, high‑carbon projects that needed more than $95/barrel to give more than a 15% rate of return.
Since then, the Brent oil price has gone down to around $80. So that already demonstrates the value of stress‑testing projects against a range of prices.
We then moved on to coal. It is not in a great state. Maybe a third of production for export is not even covering its costs at the moment. Obviously, the diversified companies have other commodities they can focus on and have already cut back a lot of their thermal coal investments.
But some of the pure‑play operators in the coal or unconventional oil sectors do not have the options that the diversified mining companies or the oil majors have. I also think they are underestimating the pace of development of alternative technologies, and how quickly the costs are coming down.
Peter Cripps: Do you buy into that, James and what will be the implications for investors?
To read the full article from Environmental Finance : part 1 and part 2
