Climate change raises pressure for divestment from fossil fuels

Pressure is growing for energy firms to pull back from getting fossil fuels out of the ground - but energy needs remain

Shutterstock An oil field
An oil field

Climate activists say the world needs to stop burning fossil fuels to save the planet and prevent warming of more than 2°C.

A recent report University College London (UCL) says to hit this target the Middle East will have to leave 260bn barrels of oil in the ground, an amount equivalent to Saudi Arabia’s entire oil reserve.

The report goes on to say if the latest attempt to secure a global climate deal in Paris in December fails then the world is heading for a ‘catastrophic 5°C of warming’.

These environmental concerns are leading to an increasingly vocal divestment campaign with many activists pressing for investors to dump fossil fuel stocks – over 180 investor groups have done so.

The Guardian newspaper recently launched its own ‘Keep it in the Ground’ campaign which aims to persuade more investors – including the Gates Foundation and Wellcome Trust - to take their money out of the fossil fuel companies it says are driving global warming.

Mark Carney, governor of the Bank of England, has said that the bank is deepening and widening its enquiry into fossil fuel companies’ ‘stranded assets’ and whether they pose a risk to the nation’s financial stability.

Shell also acknowledged the environmentalists’ concerns for the first time when its board of directors agreed to support a resolution, filed by the Church of England and more than 150 other investors, urging it to explain how it is managing its greenhouse gas emissions and investing in low-carbon energy.

And last December it emerged that Ed Davey, the Energy and Climate Change Secretary, raised the prospect that fossil fuel companies assets could be rendered ‘worthless’ by global action on climate change.

Energy and Climate Change Secretary Ed Davey
Energy and Climate Change Secretary Ed Davey

In fact, one well respected energy analyst believes the current oil price slump is being driven by a new tactic to use fossil fuel reserves before they are forced to leave them in the ground.

Elias Hinckley, a leading US energy lawyer, is also a strategic advisor on energy finance and energy policy to investors, energy companies and Governments.

He said: “Saudi Arabia has come to the stark realization - that it is a race to produce, regardless of price, so that it will not be leaving its oil in the ground.

“The Kingdom has effectively opened the valve on the carbon asset bubble and jumped to be the first to start the race to the end of the age of hydrocarbons by playing its one great advantage – a cost of production so low that it can sell its crude faster and hoping not to find itself at the end of the age of oil holding vast worthless unburnable reserves.”

Mr Davey’s comments, which were made to climate activists at the UN’s climate change summit in Lima in December, were quickly condemned as they come at a time when the UK Government is committed to maximising the recovery of reserves from the North Sea.

Oil & Gas UK chief executive Malcolm Webb said: “I must confess I find these statements unsettling. They come, after all, at a time when you and the Treasury are putting great effort into delivering the much-needed regulatory and fiscal reforms that will make the UK North Sea more attractive to investors in oil and gas, not less.

“I am intrigued to understand how such opposing viewpoints can be reconciled.”

Here in the North East a meeting of the NEEC Energy Forum last month raised concerns about the divestment campaign (see panel).

Speaking at the recent NOF Energy Conference Energy: A Balanced Future, in Gateshead, Paul Appleby, an energy analyst for oil giant BP, said the main uncertainty for the energy industry in the coming years is how policy makers will tackle rising emission levels.

Paul Appleby, Head of Energy Economics at BP
Paul Appleby, Head of Energy Economics at BP

He said: “Our projections show that energy use at predicted levels means the target of 2°C warming will be exceeded and this may lead to additional policy measures over and above those already in place.”

He went on to say this may mean the introduction of ‘meaningful global price for carbon’.

Paul Verrill, director of Yarm-based energy analyst EnAppSys believes that the pressure on oil companies to take climate change calculations into assessment of the assets will grow in the coming years.

“We would anticipate that more and more investor presentations given by oil and gas companies will have to address how the world can sustainably consume their reserves if they are to have their full portfolio values recognised.

“We would hope that to do this, these companies embrace investment and promotion of clean energy and carbon sequestration technology.”

While no-one quite knows how much oil and gas is left in the planet – some estimates say around 50% has been recovered - most commentators agree that the oil price slump has been driven by the laws of supply and demand, coupled with a slowing of the global economy.

As more of the US shale oil has come on to the market it has driven the price down from $120 a barrel last June to around $55 now, and OPEC, fearing it may lose its market share has refused to cut production, allowing the price tumble.

The International Energy Agency forecasts that US production will surpass Saudi Arabia’s output of 9.7m barrels a day, and overtake Russia’s 10.3m next year.

According to Citi’s “Energy 2020 Out of America” report, US production surpluses are expected to continue for at least two generations, despite declining crude prices.

At the turning of the decade many commentators were espousing the theory of peak oil, but America’s ability to deliver shale oil and gas and continued technological developments in recovering reserves from deeper ocean depths and inhospitable places, such as the Arctic, make that now look unlikely.

Andrew Davison, a partner at Newcastle law firm Muckle and head of its energy team, said: “There are so many factors to take into account when analysing the oil price that it’s difficult to say whether it actually is a cyclical thing.

“The leftfield on this occasion is the Saudis have not supported the oil price as they have in the past different.

“But I would be surprised if we are coming to a point where oil and gas is redundant. That would mean a huge shift in the world energy markets.”

The new edition of the BP Energy Outlook 2035 predicts global demand for energy is expected to rise by a third from 2013 to 2035 with renewables making significant strides but still only providing 8% of global energy, by then.

Shell boss Ben van Beurden says mankind will need fossil future for many more years and at a recent industry address he outlined his position: “For a sustainable energy future, we need a more balanced debate. Fossil fuels out, renewables in — too often, that’s what it boils down to. Yet in my view, that’s simply naïve.

“Yes, climate change is real. And yes, renewables are an indispensable part of the future energy mix. But no, provoking a sudden death of fossil fuels isn’t a plausible plan.

“Today, three billion people still lack access to the modern energy many of us take for granted. This isn’t just about having a dust buster or a television set. Energy access often makes the difference between poverty and prosperity.

“At the same time, demand is growing. There will be more people on this planet, more people living in cities and more people rising from poverty. They will all need energy if they are to thrive.

“The issue is how to balance one moral obligation, energy access for all, against the other: fighting climate change. We still need fossil fuels for a lower-carbon, higher-energy future. “It is of course true that the use of renewable energy is growing, especially in electricity markets. But it will take some time before renewables can play an equally important role in transport, and the heating and cooling of people’s homes.”

The past 150 years have been marked by frequent boom and bust oil cycles, with each low squeezing longer-term investment and creating the base for the next boom, whenever demand improves again.

But only time will tell if the new dynamics in the market - the end of peak oil, a change of approach from Saudi Arabia and the growing pressure to leave fossil fuels in the ground – will make the future will look different.

NECC’s fears for economy over push for divestment

Concerns have been raised that the divestment movement and premature efforts to decarbonise the energy system could ‘wreck the economy’.

At a recent meeting of the NECC Energy Forum regional members expressed concerns over the growing ‘populous clamour’ of the divestment movement.

NECC policy and research manager Mark Stephenson highlighted how the region, with its strong chemical and process sector is the most energy intensive in the UK, saying we should do all we can to ensure we use our abundant coal and wind resources.

He said: “The traditional fossil fuels - coal, oil and gas - have a large role to play in power generation and as a feedstock for industry but policy makers have now boxed themselves in.

“The decarbonisation and renewable targets of 2020 and 2050 appear arbitrary, and while we all acknowledge the message in campaigns such as the Guardian’s we have to find a middle road that doesn’t wreck our economy.

“Fossil fuels have an important role to play in creating an affordable and sustainable energy system, and maintaining energy security. But for the policy-makers there seems to be an element of throwing the baby out with the bath water.”

He went on to say the NECC is keen to see a greater emphasis on developing industrial scale Carbon Capture and Storage (CCS) systems.

Dermot Roddy, chief technology officer at Newcastle-based coal-to-gas company Five-Quarter, described the divestment movement as potentially ‘hugely damaging’ and felt the same efforts should be used to develop industrial CCS.

Simon Bullock, a climate change spokesman for Friends of the Earth, told Journal Energy: “Climate change is a massive threat to the planet and we have to move quickly - over the next 10 to 15 years. We have to look at using less energy and cleaner energy.”

“We believe the power, transport and heating sectors can be decarbonised by 2030, but our process industries are reliant on fossil fuels and the loss of these would cause economic harm to the UK. We would like to see a decarbonisation target of 2050 for the process, aviation and agricultural industries. We do not want to see UK industry shut down. We are not anti-industry.”

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