http://rabble.ca/blogs/bloggers/environmental-defence/2014/11/investing-dirtiest-most-expensive-oil-carries-financial
Investing in the dirtiest, most expensive oil carries financial risks
By Dale Marshall | November 6, 2014
Lately, we've been hearing more and more about the risky nature of
investing in the tar sands. That's not surprising given how expensive it
is to produce tar sands oil. This past year, the financial risk has been
highlighted three times as major projects have been shelved by companies
-- Shell, Total, and Statoil --with deep pockets. And those projects
were cancelled mostly before the recent downturn in the price of oil.
Now that oil prices have taken a nose dive, the tar sands are looking
even less viable. A new report, released yesterday by the Carbon Tracker
Initiative found that 92 per cent of new tar sands projects need the
price of oil to be at least $95 per barrel in order to justify such
risky investments. The price of Brent crude oil closed at $82.12
yesterday. The report's authors suggest that shareholders of other
companies should question why their projects are still being developed
rather than abandoned, when the cost of oil isn't high enough to justify
the investment.
On top of the cost risk, a different shareholder risk was in the
spotlight again this week as the UN-backed Intergovernmental Panel on
Climate Change (IPCC) released its report on the science and economics
of climate change. The IPCC report reinforced an earlier finding that,
in order to keep average global temperature from rising to dangerous
levels, at least 75 per cent of the known fossil fuel reserves need to
stay in the ground.
The share price of an oil company is affected by many things but one of
the biggest influences is its oil reserves, the amount of oil that is in
the ground but that a company can economically drill and recover. What
happens to oil companies' share prices when investors realize that three
quarters or more of the companies' assets must stay in the ground and,
from an investment point of view, are essentially worthless? (This
situation, when companies having an inflated value because their fossil
fuel reserves are overvalued, is sometimes referred to as the "carbon
bubble.") Companies and their shareholders should expect a pretty big
hit to their bottom lines in the future.
This "carbon bubble" warning to coal, oil, and gas companies and their
investors isn't just coming from climate scientists. Leaders in finance
have also been raising the alarm. Last month, Mark Carney, the governor
of the Bank of England, told a World Bank seminar that avoiding
dangerous levels of global warming means that the "vast majority of
reserves are unburnable."
These two risks -- the vulnerability of oil reserves and the cost risk
-- are highest for companies in Alberta, given that oil from the tar
sands is significantly dirtier and more expensive than conventional oil.
Around the globe, a growing movement is divesting from the tar sands and
other fossil fuels. The movement is driven by concerns for our shared
climate, which of course is also the motivation for Environmental
Defence's work.
But as the Carbon Tracker report makes clear, there are financial
reasons to divest as well, which is why the Carbon Tracker suggests that
companies, pension plans, and funds move their money out of the tar
sands. This is one of the many instances where economic and
environmental interests are aligned. Shareholders holding stocks in
companies operating in the tar sands should heed the warning, expect
more projects to be cancelled, and rethink where they’re putting their
money.
[Another risk for the tar sands is that natural gas - which they use
extensively - has gone up in price (NYMEX) by 20% in the past 2 weeks
alone. I'm not forecasting the future price, but if one of my major
input costs was that volatile and rising that fast, I would see it as a
real risk factor. Even if the price doesn't put the tar sands on the
financial ropes, it may encourage some of their current suppliers to
look at getting product to more southern markets to benefit from the
higher price themselves. It is also worth noting that the natural gas
price rise is going in the opposite direction of other fossil fuels;
coal, oil and bitumen.]
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