"Falling demand and rising investment risk is likely to slash the value of oil, gas and coal reserves by nearly two thirds, sending shock waves through the global economy by hitting companies, financial markets and countries reliant on exports, finds a new report from Carbon Tracker. It warns that the fossil fuel industry is approaching terminal decline because of competition from clean technologies and tougher government policies to achieve climate targets and increase energy security. The COVID-19 crisis is now accelerating this: demand for oil could fall by 9% in 2020 according to the International Energy Agency."
This AfricaFocus Bulletin contains the press release and executive summary from this new Carbon Tracker report, as well as excerpts from a report on South African civil society demands that Standard Bank remove board directors linked to the fossil fuel industry for conflict of interest.
Notably, other reports and news stories reinforce a dual message: first, that continued investment in fossil fuels is increasingly risky, and, second, that nevertheless movement away from fossil fuels will still be bitterly resisted by vested interests and require increased government action and civil society pressure to move more rapidly.
There is already a strong market for business solutions providing integrated strategies for transition to 100% renewable energy, illustrated by those offered by the Finnish company Wärtsilä. In a recent op-ed Wärtsilä manager Risto Paldanius argues that energy storage technology already has enormous potential. His claim that this could soon make blackouts in Africa ancient history is likely over-optimistic, but the company is a global leader in integrated power solutions.
It has modeled 145 countries and regions to find the optimal way to produce electricity from 100% renewable energy sources. The model explores how the power system of each of these regions would look like if they were to be optimally built from scratch, not considering the burden of existing power plants. Each region has unique solar and wind conditions which makes the optimal energy mix for each region unique, as it explains in a short video, as well as a 19-page white paper, both available at this link: https://www.wartsila.com/energy?wvideo=65829ph0kx
In addition, the following links are a sampling of recent updates:
[Note: In some cases date and title are clear from the link, and are not written separately to save space.]
Global and USA developments
BBC, June 9, "Could the coronavirus crisis finally finish off coal?" https://www.bbc.com/news/science-environment-52968716
Financial Times, May 28, "Clean power stocks outperform fossil fuel peers during pandemic" https://www.ft.com/content/08675019-1386-49ac-a718-031d6ab85051
"Clean power stocks have weathered the coronavirus crisis better than their peers in oil and gas, new research has shown, as the oil price shock and pandemic shift the landscape for energy investing. US clean power stocks rose 2.2 per cent in the first four months of the year, while their fossil fuel peers fell 40.5 per cent, according to a study by Imperial College London and the International Energy Agency. The S&P 500 fell 9.4 per cent during the same period."
New York Times, June 15, "Clean power stocks outperform fossil fuel peers during pandemic" https://www.nytimes.com/2020/06/15/business/energy-environment/bp-oil-gas-write-down.html
GreenTechMedia, June 16, "BP Adopts $100 Carbon Price Assumption for 2030, With Big Implications for Clean Energy" https://www.greentechmedia.com/articles/read/european-oil-majors-ready-to-scale-up-energy-transition-investment
"For BP, some drilling projects just don't make sense anymore. The European oil major said this week that it will write down as much as $17.5 billion from its oil and gas portfolio while baking in a new carbon price forecast of $100 per ton by 2030 — up from the $40 figure it factors in now."
Common Dreama, "Research Shows 'Linking Climate Policy to Social and Economic Justice Makes It More Popular'" https://www.commondreams.org/news/2020/06/12/research-shows-linking-climate-policy-social-and-economic-justice-makes-it-more
African Energy Chamber, June 15, "Angola expects to implement a USD 400 million two-phase project in the clean energy segment" https://www.africa-newsroom.com/press/governments-commitment-to-diversify-angolas-economy-continues-to-offer-opportunities-for-investors-in-the-power-sector
Friends of the Earth, June 15, "Gas in Mozambique: A windfall for the industry, a curse for the country: New report exposes how the French state and companies fuel violence and devastation in Cabo Delgado's gas boom" https://www.foei.org/resources/gas-mozambique-france-report
For previous AfricaFocus Bulletins on climate and the environment, visit http://www.africafocus.org/intro-env.php
Announcements: Legacies of Anti-Apartheid Movement
AfricaFocus rarely publishes announcements, but these three notes that came to my attention the week of the July 16 anniversary of the Soweto uprising in 1976, called for making an exception. All three of these are likely to be of interest to many readers of AfricaFocus:
Zeb Larson published in Teen Vogue an article laying out lessons of the anti-apartheid movement for activists today.
A virtual memorial for leading anti-apartheid activist Jennifer Davis was announced for July 11.
And Donna Katzin, retiring as executive director and founder of Shared Interest, which was founded in 1994 to support efforts targeting the structural legacy of apartheid inequalities, sent me the announcement of the job search for her successor.
Please share with those in your networks who might be interested.
Countries must plan orderly exit from oil, gas and coal
London/New York, June 4 - Falling demand and rising investment risk is likely to slash the value of oil, gas and coal reserves by nearly two thirds, sending shock waves through the global economy by hitting companies, financial markets and countries reliant on exports, finds a new report from Carbon Tracker.
It warns that the fossil fuel industry is approaching terminal decline because of competition from clean technologies and tougher government polices to achieve climate targets and increase energy security. The COVID-19 crisis is now accelerating this: demand for oil could fall by 9% in 2020 according to the International Energy Agency.
Arnot Power Station, Middelburg, South Africa. Credit: Wikimedia
The size of the fossil fuel economy suggests its decline could pose a significant threat to global financial stability. Companies across the fossil fuel system are worth $18 trillion in listed equity, making up a quarter of the total value of global equity markets, and they account for $8 trillion of corporate bonds, more than half the non-financial corporate bond market. Unlisted debt — much of it owed to banks — may be four times greater.
The World Bank valued future profits from oil, gas and coal at $39 trillion in 2018 , but Carbon Tracker's report finds that if demand falls by 2% a year in line with the Paris Agreement and discount rates rise in line with increased risk, future profits would collapse by nearly two thirds to just $14 trillion. It also shows that producers expecting a return to business as usual could be banking on much higher profits — well in excess of $100 trillion.
Kingsmill Bond, Carbon Tracker Energy Strategist and report author, said: "We are witnessing the decline and fall of the fossil fuel system. Technological innovation and policy support is driving peak fossil fuel demand in sector after sector and country after country, and the COVID-19 pandemic has accelerated this. We may now have seen peak fossil fuel demand as a whole.
"This is a huge opportunity for countries that import fossil fuels which can save trillions of dollars by switching to a clean energy economy in line with the Paris Agreement. Now is the time to plan an orderly wind-down of fossil fuel assets and manage the impact on the global economy rather than try to sustain the unsustainable."
Companies like Exxon are still forecasting continued growth in demand for fossil fuels, and the fossil fuel system as a whole has been investing $5 trillion a year on new supply and demand infrastructure. But Shell's recent dividend cut, Repsol's decision to write off €4.8 billion of assets last year, and growing bankruptcies in the US shale oil sector are all symptoms of an industry undergoing structural change.
Decline and Fall: The Size & Vulnerability of the Fossil Fuel System sets out how falling demand for fossil fuels leads to overcapacity, driving prices down, and cutting profits and company share prices. Many companies will be forced to write off assets, cancel investment or even go bust. Even companies which remain profitable will make far less money than before.
The fossil fuel system is enormous, with physical supply and demand infrastructure worth $32 trillion, and its decline could send shockwaves through the global economy. It includes: producers of coal, oil and gas; companies which make and run power stations, cars, trucks, planes and ships; the steel, cement, petrochemical and aluminium industries which are heavy users of fossil fuels; and the companies which supply and build their infrastructure.
The collapse in the scale of future fossil fuel profits could threaten the stability of petrostates — countries whose economies rely on oil export income. The world's biggest earners are Saudi Arabia, Russia, Iraq and Iran, and countries that are particularly vulnerable include Venezuela, Ecuador, Libya, Algeria, Nigeria and Angola.
Investors will be hit because as returns fall, there will be less capital available for dividends and interest payments. In the UK, for example, the oil and gas sector generated 24% of dividends from the FTSE Index in 2019. Markets might sell down stock in anticipation of peak demand long before assets are written down.
Companies worth $6 trillion are particularly vulnerable because they are operating in sectors expanding the fossil fuel system, from builders of LNG facilities and oil pipelines to makers of conventional car engines and gas turbines.
The fossil fuel system is highly vulnerable to disruption. Even before the COVID crisis growth in fossil fuel demand was below 1% a year and clean technology is now meeting an increasing share of world energy demand.
Renewables are already the cheapest form of bulk energy production in 85% of the world, and electric vehicle batteries are comparable with the cost of conventional car engines. Electricity companies are rapidly switching to renewables while carmakers are shifting production to electric vehicles. This is significant because electricity consumes more than a third of global fossil fuel production and the greatest demand for oil comes from the automotive sector.
Governments are supporting clean technology in order to meet the Paris climate targets and tackle air pollution from fossil fuels, which kills 4.5 million people a year. Energy security is also a big incentive for China and India, which are heavily reliant on fossil fuel imports.
The report notes that fossil fuel importing countries - home to 80% of global population - also have a financial incentive to back renewables because they have been transferring over $2 trillion a year in profits to the petrostates.
It warns investors: "There is far more risk inherent in the fossil fuel system than is conventionally priced into financial markets. Investors need to increase discount rates, reduce expected prices, curtail terminal values and account for the clean-up costs."
Decline and Fall
The size and vulnerability of the fossil fuel system
Carbon Tracker Initiative June 2020
About Carbon Tracker
Carbon Tracker is a team of financial specialists making climate risk real in today's markets. Our research to date on unburnable carbon and stranded assets has started a new debate on how to align the financial system in the transition to a low carbon economy.
Renewable costs are below those of fossil fuels. Five years ago, fossil fuels were the cheapest baseload. The collapse in renewable costs means that for 85% of the world, renewable electricity is the cheapest source of new baseload. By the early 2020s it will be every major country. Because of the rise of cheap renewables, the fossil fuel system is ripe for disruption.
This disruption will have profound financial implications for investors as a quarter of equity markets and half of corporate bond markets are 'carbon entangled'.
Those responsible for our pension schemes should sit up and take notice; but even greater concern should be felt by financial regulators, as they grapple with finding the right tools to manage the risks of a deflating 'carbon bubble'.
The world faces two contrasting pathways. Either it can secure the 'trillion dollar green gigafall', the trillions that can be generated at low cost from the sun and the wind - particularly benefiting the poorest inhabitants of the world currently dependent upon high cost fossil fuel imports. Or it can stay locked into business as usual, tied into a declining industry that both threatens the global economy with the worst effects of a warming planet, and damages investors with losses, low returns and destabilised equity and credit markets.
Graph shows performance, compared to S&P, for indexes for oil, utilities, and coal.
In Carbon Tracker's first report, some ten years ago, entitled 'Unburnable Carbon - are the World's Financial Markets Carrying a Carbon Bubble' we highlighted that listed fossil fuel companies have the potential to develop enough reserves to take the world way beyond 3 °C.
Our second report, 'Unburnable Carbon - Wasted Capital and Stranded Assets', noted that if we can't burn what we have already found, why continue to invest in the fossil fuel industry's expansion? Yet today, we know that some $1 trillion is spent annually on expanding supply and this report goes more into these numbers. Before we wind down the fossil fuel system, we need to stop expanding it.
Some argue that 'fossil fuels will go away of their own accord' as the result of the rapid progress made by cleaner technologies and the collapse in demand for fossil fuels driven by the terrible COVID-19 epidemic. Unfortunately, as this report makes clear, financial markets are still heavily tied in to the fossil fuel system.
So what are our recommendations? In the same way that our first report was aimed at financial regulators, this one is also to be carefully read by those responsible for financial oversight. We advise now a rapid acceleration of disclosure and reporting systems around climate risk that allow investors to properly calculate risk. Thus analysis should be based on actual Paris alignment (which requires contraction of supply and demand), not models based on the neverland of 'we'll have it sorted out in 2040'. This requires companies to implement the appropriate accounting measures, particularly relating to asset write-downs and depreciation.
We believe companies will face major asset write downs as it becomes clear that high-cost fossil fuel supply and demand infrastructure has limited value. An example of this in 2019 was Repsol, which took €4.8bn of write-downs on its fossil fuel assets. Because of leverage, this was only 8% of assets, but 16% of equity.
To avoid the impacts of a disorderly wind down, we expect regulators to require companies to undertake tougher impairment tests. For example, by providing clear guidance frameworks for asset impairment, including goodwill, in line with the goals of the Paris climate agreement. This would include fossil fuel encumbered companies having to publish stress tests, consistent with the Paris goals, on the financial impact of changes in the useful life of assets; changes in the fair valuation of assets; the effects on impairment calculations because of increased costs or reduced demand and changes in provisions for onerous contracts because of increased costs or reduced demand. Running supply of fossil fuels down to meet what the science demands means rapid contraction of oil and gas supply and the closure of around one coal fired power station a day.
With proper risk disclosure, credit and equity analysts will be better able to test the resilience of individual fossil fuel companies to the financial storm. A storm which, as this report sets out, is fast descending upon us.
Mark Campanale, Founder & Executive Chair
Jon Grayson, CEO
Standard Bank board: Fossil fuel ties brought to light
Seven of Standard Bank's 18 board members are conflicted on climate change-related matters by virtue of their ties to the fossil fuel industry.
ESI Africa, June 8, 2020
Fourteen climate justice NGOs from around the world, led by shareholder activist organisation Just Share, have called on Standard Bank's shareholders to vote against the election/re- election of climate-conflicted directors at the upcoming AGM.
Standard Bank acknowledges that "climate risk is recognised as one of the material risks facing the group". The bank is a founding signatory of the UN Principles for Responsible Banking (UNPRB), which "set the global benchmark for what it means to be a responsible bank".
Principle 1 of the UNPRB ("Alignment"), commits signatory banks to "align [their] business strategy to be consistent with and contribute to individuals' needs and society's goals, as expressed in the Sustainable Development Goals, the Paris Climate Agreement and relevant national and regional frameworks".
One of the Paris Agreement's three main objectives is "making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development". The financing of fossil fuels, in particular new fossil fuel exploration, extraction and production, is not compatible with the Paris Agreement.
A large proportion of Standard Bank's board members have ties to South African fossil fuel companies, including Sasol (the country's biggest carbon emitter after Eskom), Exxaro and BP Southern Africa. Five of the seven directors with fossil fuel ties are up for election or re-election at the company's AGM on 26 June. …
If all of the directors standing for election or re-election are elected at the 26 June AGM, directors with fossil fuel ties will represent 42% of Standard Bank's independent directors (5/12); 47% of its non-executive directors (7/15); and 41% (7/17) of the board as a whole .…
Board members with a conflict of interest are required by the Companies Act, 2008 to declare those interests and to recuse themselves from board meetings during consideration of any matter in relation to which they are conflicted. …
In these circumstances, responsible investors holding Standard Bank shares are faced with no good options: either these board members will recuse themselves, creating a corporate governance void when the board considers some of its most important strategic issues as, by the bank's own admission, climate-related matters are; or they will not, compromising the ability of the board to provide climate- competent leadership.
[Article continues at https://www.esi-africa.com/industry-sectors/business-and-markets/standard-bank-board-fossil-fuel-ties-brought-to-light/. Also see additional coverage at https://www.dailymaverick.co.za/article/2020-06-09-climate-change-activists-target-standard-bank-board-over-fossil-fuel-links/#gsc.tab=0
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