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Firms Could Lose $2 Trillion on Unneeded Fossil Fuel Projects

Words by Leon Kaye

The COP21 talks in Paris started this week, and the 12-day conference will be critical in nudging the world’s nations toward agreement on a binding plan to confront climate change and limit global warming to 2 degrees Celsius this century. Whether or not these United Nations-led talks succeed is a huge question, but trends underway reveal that the world is shifting toward a lower, if not low-carbon, economy.

Clean energy technologies are scaling and becoming more cost effective, and more governments and companies are acknowledging the risks climate change poses and are therefore developing plans to cope with an uncertain future.

With these changes in mind, the think-tank Carbon Tracker issued a report suggesting that energy companies that are investing in long-term fossil fuel projects may be putting themselves and their shareholders at financial risk. According to this report, The $2 Trillion Stranded Assets Danger Zone, energy companies worldwide are dismissing advances in technology and changes in policy — therefore exposing them to financial risk as an excess of energy supplies may never generate the financial returns promised to their investors.

Yes, that is 2 trillion with a “T,” and American energy companies would account for over 40 percent of those failed projects, with Carbon Tracker’s projection of $412 billion invested in unneeded projects in the U.S. alone. The energy sectors in nations including Canada, China, Russia and Australia could also suffer, based on Carbon Tracker’s global analysis of energy capital investment projections until 2025 and anticipated energy projection to 2035.

Carbon Tracker’s researchers examined recent events that broadsided the energy industry, along with what the organization forecasts for this sector in the coming decade. Last year presented many harbingers for a shifting energy scenario: the halving of oil prices in only six months; demand for coal in China peaking; weakened currencies endemic within most of the leading resource-exporting nations; and the cancellation or postponement of $200 billion in energy projects worldwide in 2015 alone.

This report also considers the potential growth of the fossil fuel industry while looking at why many projects worldwide may need to be axed in order to stay consistent with the International Energy Agency’s 450 Scenario, one of many suggested plans to limit global warming to 2 degrees Celsius by limited greenhouse gas emissions to 450 parts per million. In plain English, the future, suggests Carbon Tracker, is a bleak one for fossil fuel producers, starting with coal.

While some countries, including India and South Africa, may see some increased demand for coal, Carbon Tracker forecasts no need for new mines. Under the 450 Scenario, 90 percent of future unnecessary coal supplies would be concentrated in China, the U.S., Australia, India and Indonesia.

Meanwhile, the confluence of new technologies and policy will have an impact on the global oil and gas industry as well. Natural gas, according to this report, will see some growth, but at a lower level than most energy analysts have expected. Countries with domestic supplies will still see continued demand, but the capital-intensive liquefied natural gas (LNG) market will prove disappointing to investors. As for petroleum, Carbon Tracker insists demand will peak in 2020, contrary to what many oil companies have been stating publicly. With oil becoming more difficult and expensive to extract, especially supplies derived from offshore deposits, the reports analysts suggest anywhere from 20 to 25 percent of future oil projects will not be necessary.

So, is this wishful thinking on behalf of renewable energy advocates, or a fair warning to an industry that is unwilling to change its ways? The answer is most likely a combination of both.

It is true that that the world’s biggest energy producers (and depending on metrics used, energy consumers), including Canada, the U.S., Australia and China, have adopted new energy and climate policies that should give energy companies enough reason to take a step back and reexamine their strategies. Low energy prices have not slowed renewables’ momentum as they keep improving in performance and cost. But a growing population, not to mention a surging global middle class, could continue to provide a cash cow for energy companies.

A political shift could launch energy policy in a different direction, but at this point the only nation in which this could happen in the near-term is in the U.S. after the 2016 elections. Regardless, says Carbon Tracker, energy companies would be wise to set strategies that say within the IEA’s recommended carbon budget — or lose the confidence of investors who are increasingly aware of the fact that the business climate, just like the world’s climate, is changing.

Image credit: Leon Kaye

Leon Kaye headshotLeon Kaye

Leon Kaye has written for 3p since 2010 and become executive editor in 2018. His previous work includes writing for the Guardian as well as other online and print publications. In addition, he's worked in sales executive roles within technology and financial research companies, as well as for a public relations firm, for which he consulted with one of the globe’s leading sustainability initiatives. Currently living in Central California, he’s traveled to 70-plus countries and has lived and worked in South Korea, the United Arab Emirates and Uruguay.

Leon’s an alum of Fresno State, the University of Maryland, Baltimore County and the University of Southern California's Marshall Business School. He enjoys traveling abroad as well as exploring California’s Central Coast and the Sierra Nevadas.

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