Oil and gas sector ‘grossly overvalued’ – Impax White Paper

Research done by London based non-governmental organisation Carbon Tracker concludes that when stricter regulations on carbon come into play, the market value of fossil fuel companies could drop dramatically, as extraction becomes uneconomic.

This is a key finding contained in the Impax White Paper on fossil fuel divestment, which suggests that along with tighter regulations on carbon, potentially leading to fossil fuel companies being rendered useless, there are growing concernes over the real effects of excess carbon emissions on the environment, and grassroots campaigns calling for mass divestments.

Carbon Tracker’s calculations further suggest that 80% of the world’s proven fossil fuel resources cannot be consumed whilst maintaining the international global warming target of restricting temperature gains to 2°C above pre-industrial levels.

The implication of this is that the fossil fuel company share prices, based on their proven reserves, are grossly overvalued, according to the conclusion in the research.

In their “Unburnable Carbon” report, Carbon Tracker explains that if the world plans to limit atmospheric warming to 2°C, it has a 50% chance if no more than 886 gigatons (Gt) are emitted, as of 2000. In 2011, one third of this allowance has been consumed, with global emissions still rising.

Proven reserves owned by companies and governments combined amount to 2,795 GtCO2 and yet the remaining consumable carbon as allowed by the 50 year policy, to keep emissions within 2°C above pre-industrial levels, only amounts to 565GtCO2. Fossil fuel reserves owned by the top 100 providers represent 745GtCO2. So, as only 20% of the total reserves can be burned unabated, up to 80% of assets are left technically unburnable, and therefore worthless, the research states.

Call for divestment

Impax’ and Carbon Tracker’s information suggests that there are growing calls for investors such as tertiary education establishment endowments to reduce their holdings in companies such as Shell and BP.

Campaigns such as Fossil Free are targeting educational and religious institutions, city and state governments, and other institutions that serve the public, urging them to “divest from fossil fuels, specifically the equity or debt issued by the 200 largest oil and gas companies.”

At the end of 2012, the 200 largest fossil fuel companies had a united market capitalisation in excess of $4 trillion. The models used, however did not take into account the credibility of climate change action slashing their fossil fuel reserves. Carbon Tracker’s figures suggest there may be a ‘carbon bubble’ looming over international stock exchanges.

The old model of ‘big oil’ also faces growing political challenges, including US president Barack Obama’s inaugural pledge to respond to the threat of climate change through the White House’s Climate Action Program. This was reiterated in June 2013, with emphasis on the US Environmental Protection Agency’s (EPA) regulation on emissions from existing coal fired plants, as well as another round of fuel efficiency standards, new efforts at carbon capture and incentives for alternative energy.

The increasingly mainstream response to emissions issues has seen HSBC analysts release a report on the impact on the sector of falling demand for oil and gas. Their suggestion is that if oil prices (net of any carbon tax or cost of pollution permits) were to drop to an estimated US$50/barrel, then European energy companies would see their market capitalisation fall 40-60%.

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