October 24, 2013 4:42 pm

Investors warn moves to curb climate change will hit fuel demand

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Investors managing assets worth about $3tn have written to the world’s largest oil, gas and coal companies, calling on them to prepare for a possible decline in demand for fossil fuels caused by policies to fight the threat of climate change.

The letters, signed by 72 investors including several US state pension systems and fund managers such as Scottish Widows and Aviva, warn the companies that they may be investing in production capacity that will never be used.

The correspondence reflects growing concern among many investors about the prospect that fossil fuel reserves will be “stranded assets”, which cannot be extracted and used without causing dangerous global warming.

The letters were sent to 45 companies, including large oil and gas producers such as ExxonMobil, Royal Dutch Shell and BP, and mining groups including BHP Billiton, Rio Tinto and Peabody Energy.

They urge the companies to carry out a “risk assessment” of the consequences of a global move to cut greenhouse gas emissions by 80 per cent by 2050, a reduction that has been estimated as giving a reasonable chance of limiting the rise in global temperatures to an acceptable 2°C.

The investors asked the companies to carry out the risk assessment in time for their 2014 annual meetings, generally in the first half of next year, and to publish details about their conclusions, subject to the constraints of commercial confidentiality.

About 30 companies have now replied to the letter, Ceres said, some rejecting the idea outright, some saying they planned to comply with the request and most saying they would consider the proposal.

Andrew Logan of Ceres, the investor network that works on environmental and social issues, which co-ordinated the letter, said: “Investors have already been burned by coal, because of the sudden drop in demand in the US, and there’s a concern that oil is going to go the same way.”

Mainstream forecasts of energy demand put out by government agencies, oil companies and consultancies still point to sustained growth in global demand for fossil fuels, including coal and oil, driven by emerging economies.

Mr Logan said: “We’re not necessarily predicting the future. But there are credible scenarios people have put forward that raise questions about the energy industry’s business model, and whether the pace of its capital spending makes sense, given those future prospects.”

HSBC has estimated that in a world where carbon emissions were constrained, oil and gas companies could lose 40-60 per cent of their market capitalisation.

The International Energy Agency, the rich countries’ think-tank, has said only one-third of the world’s proved reserves of fossil fuels can be used by 2050 if the world is to stay within the 2-degree limit, unless there is widespread use of carbon capture technology.

Anne Stausboll, chief executive of Calpers, the California state employees’ pension fund, said: “We cannot invest in a climate catastrophe.”

The investors’ letter warns that if demand for fossil fuels were to decline sharply, prices would slump. It calls on oil and gas companies to review their capital spending on finding and developing new reserves, which totalled $674bn last year for the 200 largest groups, and to assess the long-term potential of those reserves alongside “alternative uses of capital”.

Many large oil companies have already been returning capital to shareholders, sometimes under pressure from activist investors. Carl Icahn, one of the leading activists, has taken positions in Chesapeake Energy, the shale gas and oil producer, and Transocean, the offshore drilling contractor, and put pressure on them to curb capital spending and improve shareholder returns.

Craig Mackenzie, head of sustainability at Scottish Widows Investment Partnership, said there had been an assumption among investors that a potential decline in demand for fossil fuels was a long-term issue, but he saw a possibility that it could come much sooner.

“There is a series of questions we need to ask oil companies about how they think about risk, and incorporate it into project sanctioning,” Mr Mackenzie said.

“In a world where oil demand is weaker, and the oil price goes lower, then it doesn’t make sense to invest in projects with high break-even points.”

Investments in production in the Arctic or in the oil sands of Canada might be particularly vulnerable, he added.

Simon Wardell of IHS, a consultancy that forecasts continuing growth in oil and gas demand, said he agreed a decline in consumption was possible, but “none of this is going to happen very quickly”.

He said the dominance of petrol- and diesel-fuelled vehicles, and the lack of an alternative to oil-based fuel for aircraft, meant that change was likely to take decades.

He added: “If we do see a big drop in consumption, then we will see the price of oil fall, and that will give its competitive position a kick.”

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