Energy Demand Outlook
The ‘Energy paradox’ appears acute if corporate energy outlooks are considered. Long-term energy outlooks are published by many of the leading trans-national oil groups, with most maintaining a commitment to fossil fuel exploration and exploitation to at least 2040 and beyond. Many of these scenarios are potentially incompatible with a two degree carbon constrained world. Where companies recognise climate change at all, it is in the main through adaptation rather than constraint.
BP’s Energy Outlook exemplifies this paradox. They project energy demand continuing to rise to the mid-century point, with up to 60% of additional need being met from fossil fuels. In their outlook in 2035, up to 80% of total energy supplies come from fossil fuels with gas accounting for much of this growth (gas in their projection only finally replaces coal as the predominant energy source in the 2030s).
Coal overall slows to 0.5% growth per annum with gas only overtaking coal as late as 2035. China accounts for 50% of all coal supply by 2035. Coal demand is projected to fall dramatically in OECD countries, but to remain resilient in emerging and non-OECD territories where it is both cheap and abundant.
In BP’s outlook, renewables constitute the overall fastest growing energy source, quadrupling by 2025. However, they view integrating intermittent supply beyond 30% of the total energy supply as representing a built-in constraint to the renewables sector that will ultimately prove self-limiting in terms of growth potential.
A Note on Oil Sands
Oil sands comprise heavy, bitumen based deposits and are highly energy intensive in terms of extraction and production. Whilst present in many territories, they have been extracted principally in Alberta, Canada which holds around 70% of total reserves. In Canada, deposits are either shallow enough to be mined in open-cast fashion or are extracted via Steam Assisted Gravity Drainage (SAGD) method whereby bitumen is softened via the steam injection at depth. The latter method is water and energy intensive, whilst shallow open-cast mining has led to wide-scale environmental despoliation.
On a life-cycle basis, Albertan oil sands (also known as ‘tar sands’) emit more carbon than Brent crude. Analysis suggests Canadian oil sands are between 8-24% higher in carbon intensity than conventional, lighter crudes. Although Canada has set ambitious emission reduction targets, the sector remains a ‘climate outlier’. Many of the world’s largest oil and energy companies have (or had) oil sands in their inventory including BP, Shell, Statoil and Total, however these have come under considerable economic pressure as oil prices declined.
Fossil Fuel Divestment
The concept of a carbon budget and the resulting stranded assets theory has focused investor concerns. Over half of our 2015 client enquiries related to climate change, fossil fuel divestment and fossil fuel free portfolios. We responded by publishing an SRI Expert Brief, looking at Fossil Fuel Divestment. The campaign has attracted strong support among colleges and church groups as well as, for instance, the Guardian’s ‘Keep it in the Ground’ Campaign. Whilst at a simplistic level divestment from coal and oil reserves redirects capital away from hydrocarbon production, it leaves open to question significant contributors to climate change outside of these core sectors e.g. airlines, car manufacturers, power generation, steel making and chemicals.
Nevertheless we do view embedded carbon as an inherent and material risk to portfolios and the final part of this Insight will look at how we have approached the subject and the course of action taken.
We note too, the concerns clients rightly have about climate change and the potential responsibilities of Trustees for instance to ensure climate risk is taken into account. This view was supported by a ground-breaking legal opinion in 2016 that concluded that investment in climate intensive assets is likely to be irreconcilable for environmental, health and poverty related charities, and potentially incompatible for others where the consequences of climate change may lead to the erosion or ‘stranding’ of assets over time.
Climate and Investment
2016 was the first year in human history that atmospheric carbon exceeded 400ppm for every month of the year. 2013 was the last year in which carbon was measured at below 400ppm for the entire year.
The average concentration of atmospheric carbon has risen from 316ppm in 1959, the first complete year of measurement and overall represents a 40% increase since pre-industrial times when the average concentration was assessed as 280ppm (1750-1850).
The impact of warming can already be seen in rising sea levels, the contraction of Arctic sea ice (13% reduction since the 1970s), the increasing prevalence of extreme weather events and ocean acidity affecting marine ecology. All current scenarios are modelled to keep atmospheric carbon below 450ppm (two degrees), the level at which ‘catastrophic climate change’ is widely believed to be irreversible. Global average temperatures are already 1.460C above pre-industrial averages.