The end of the fossil-fuel age is in sight. That’s making it increasingly risky to invest in coal, oil, and gas. It’s time for pension funds and other investors to vote with their feet, against fossil energy companies who refuse to change course. The dividends from fossil fuels can be reinvested in sustainable energy.
Boiled down to four sentences, that is the message of Mark Campanale , cofounder of Carbon Tracker. The analysts in this British think tank translate climate change and the energy transition into the language of financial markets. Last year in Paris, the world agreed to emit no more CO2 than its forests and oceans can absorb by the second half of the century. What does this mean for the future of the energy companies? How should investors respond to it now?
Campanale has an answer. Earlier this year, he was in Amsterdam to give a lecture and hold a series of meetings with investors, bankers, pension funds, and journalists.
The first insight: something’s wrong with fossil-fuel business models
But Campanale’s story begins in the City of London. Starting in the 1990s, he worked as a financial analyst specializing in sustainable investment funds. Over the years, he began to think that something strange was going on with coal, oil, and gas companies.
- These companies did not consider climate change or the advent of green energy to be risks, or at most negligible ones.
- They did not understand that once we tackle climate change, some of their reserves will stay in the ground.
- And no one knew how much oil, coal, and gas had to stay in the ground to keep global warming below 2°C.
During a weekend stay at a friend’s home near the Scottish border, Campanale and some good friends discussed the issue over wine at her kitchen table. And so the “carbon bubble” was born: the idea that a large quantity of fossil fuels will have to remain unused if the world is to become more sustainable.
If the world is to become more sustainable, a large quantity of fossil fuels will have to remain unused
He started to do some calculations with one of these friends, Nick Robbins, and together they founded Carbon Tracker. In 2011 they published their first full analysis of the “unburnable carbon”. From their analysis, it emerged that fossil-fuel companies have about five times more CO2 in their reserves than they could ever burn, if we are to preserve a livable climate on earth.
That CO2 has to stay in the ground.
The victory march of the divestment movement
Through a sponsor from the Rockefeller Foundation, that first report – they printed just 100 copies – landed in the inbox of journalist and activist Naomi Klein, who forwarded it to her colleague Bill McKibben, who wrote a searing article in Rolling Stone magazine, which in turn stoked the divestment campaign run by students at dozens of American universities.
With the Carbon Tracker figures in hand, students were able to pressure university administrations to dump their interests in the fossil-energy companies. (The argument being, as long as they kept investing in fossil energy, they were helping to destroy the environment.)
Campanale sympathizes with the divestment activists and is (still) feeding them arguments. Speaking at the Pakhuis de Zwijger Center in Amsterdam earlier this year, Campanale said;
- Oil and gas companies’ estimates about future demand are incorrect. They think, because the world’s population is continuing to grow and becoming more prosperous, that demand for oil and gas will continue to grow. But they have not sufficiently taken into account the rapidly dropping costs of sustainable energy, which in fact will reduce demand for oil and gas.
- Coal, oil, and gas companies are intending to spend $2 trillion over the next ten years on projects that are unnecessary in a 2°C scenario. If we’re to achieve these climate goals, says Campanale, all new exploration must stop immediately.
- It is the Western, publicly listed companies such as Shell and BP who have launched the most expensive and most high-risk projects. These companies have invested in shale oil extraction in the U.S., exploring the North Pole, oil extraction from tar sands in Canada, and the ocean floor. This makes them vulnerable in a world that is quickly making the switch to sustainability, and it makes investing in these companies increasingly risky.
Campanale is hardly the only one preaching this message. Last year, for instance, U.S. investment bank Goldman Sachs calculated that $1 trillion in investments already made by oil companies will no longer be profitable if the oil price drops below $70 a barrel. At the current oil price of about $30, many more of these investments are unprofitable. The idea that a large portion of the reserves will have to stay in the groundis now a widely acccepted idea: President Obama, the IMF, the presidents of a number of national banks, and progressive investors have already embraced it.
Running faster and faster just to stay in place
For Campanale, it is unfathomable that oil and gas companies still consider no scenarios that include falling demand for their products. They ignore the possibility that sustainable energy is developing faster than expected – something that’s happened continuously over the last ten years). And what happens if the price of oil stays low and these expensive fossil-fuel projects never climb out of the red again?
It’s the shareholders who will then pay the price. The signs are all there. Just look at these graphs showing the change in expenditures by three listed oil and gas companies and the change in production – that is, what they actually get out of the ground.
Source: Carbon Tracker (data), The Correspondent (visualisation)
It’s clear that Shell, ExxonMobil, and Chevron increased spending enormously between 2009 and 2013, while their production remained stable or decreased. In the past two years, they’ve scaled back expenditures, but production is lagging behind. Put simply: These companies have to keep running faster just to stay in the same place. One of the consequences is that oil and gas companies are getting deeper and deeper into debt in order to finance their quest for new reserves.
Stockholders must pressure the boards of these companies to put a stop to this, says Campanale. The only credible strategy for the future, according to him, is to contract and decline. Proceed with only the essential, affordable projects and then go into a controlled bankruptcy. That’s how Campanale put it when he spoke in Amsterdam’s Pakhuis de Zwijger.
Reason enough, I thought, to talk with him some more.
Mark Campanale speaking at the Pakhuis de Zwijger Center in early 2016, in Amsterdam
Can stockholders really make the difference?
I meet Campanale the next day in the restaurant of his hotel in Amsterdam’s historic center. Although his schedule is crammed full of meetings with wealth managers, bankers, and journalists, he’s relentlessly energetic, answering my questions before I’m halfway through asking them.
As we shake hands, he shows me a present he was given during an earlier meeting: one of those touristy caps with big ear flaps and Amsterdam on the front. It looks awful with his anthracite gray suit, and we have a good chuckle. “Great, isn’t it?”
Financial markets have greater power then governments
Financial markets have greater power than governments, Campanale said in the Pakhuis, and investors are smarter and swifter than governments. Why does Campanale have so much faith in “the market,” and why does he expect so little from the government?
“Financial markets are what the politicians listen to,” he answers. “They will never take on the financial markets. We’ve often got this idea that the financial markets are this uniform group of people, who have a common view of everything: ‘markets are good, trade unions are bad, governments are bad.’ Actually, it’s not as simple as that. Financial markets are made up of expressing the wishes of citizens. The old joke about capitalism is that the workers took control of industries 50 years ago, just nobody ever got around to telling them. The workers own companies through their pension funds. Movements [like the divestment campaign] want to make pension funds accountable again to the interests of the citizens. And you can see now that some of these funds are acting on it."
Wanted: Activist pension funds
“Investors and large pension funds, such as the Norwegian pension fund, the Netherlands’ APG, and the American CalPERS and CalSTRS, have already made it clear that they don’t want any new risky or expensive oil and gas projects,” says Campanale.
Demonstrators during the Flood Wall Street protests, 2014. Photo from ANP
“Now they can bite the bullet and say, ‘Let’s not wait for the oil price to recover. Let’s make tough decisions, and actually put in place boards for these companies that are prepared to transition to a low-carbon future.’ This is the moment to change course, like Total, who is investing in solar energy. Big stockholders can force a change of course this way”.
If the oil and gas companies don’t listen, pension funds will have to vote with their feet, says Campanale. Sell their stocks and invest the money in sustainable energy. It doesn’t have to happen overnight but can start with small steps.
Campanale knows that not all investors are ready or willing to do this. But even the hedge funds, who have no accountability to the public, agree with some of the Carbon Tracker analyses. They’re letting themselves be guided by sound risk analyses and are turning their backs on the riskiest companies, in the shale-oil and coal industries. Campanale believes not so much in the positive power of “the market” as in the fear of investors who are realizing they hold high-risk investments.
Large companies have to contract
The Carbon Tracker analysts are trying to show where these high-risk investments are. Their answer: mainly in listed companies. If the world gets to work on staying below the 2° scenario, a large part of these companies’ planned investments will be unnecessary.
Source: Carbon Tracker and ETA analysis of Rystand UCube and Wood Mackenzie Ltd GEM
“What we want these companies to do is to unilaterally announce, ‘we’re not going to develop those projects,’” says Campanale. This means that the coal, oil and gas companies must stop expanding and choose what Carbon Tracker calls an ex-growth strategy.
Once they are no longer focusing on growth but on the most profitable projects, then they’ll automatically contract. “The American company ConocoPhillips has already done that. They decided to get rid of low-margin projects and just focus on the smaller but more profitable ones. The shareholders rewarded them, because it earns them more money. The same has happened with London-based Tullow Oil. The day after they announced they would get rid of some projects, their share price went up.”
CEOs should be rewarded for making their companies leaner and more profitable, says Campanale, or for choosing sustainable growth over fossil growth.
An orderly run-off
If fossil energy companies put the focus back on creating shareholder value – instead of their own survival – they might come to the conclusion that it would be more profitable if they ceased to exist one step at a time. Campanale calls it “an orderly run-off,” or “cashing yourself out”.
He claims that Shell, for example, could be an unbelievably profitable company if it were to commit to an ex-growth-strategy now. If it carries on with business as usual, that will tighten the noose around investors’ necks, according to Campanale.
What if fossil energy companies were forced to release more information about the amount of CO2 in their reserves? Then financial analysts could better estimate how much risk these companies are carrying
Apparently, companies like Shell see their responsibility differently. They think that even 40 years from now they’ll still be providing oil to consumers. “But what about the responsibility to citizens of the planet in 40 years’ time?” asks Campanale. “It’s not like climate change is reversible. It’s permanent. What about that responsibility? They don’t like to talk about that. They like to talk about this mysterious customer in 2030, that no one knows the name of. Because they’ve seen a population growth chart. It’s bizarre. Pension funds like APG have to say to oil and gas companies: It’s okay to let go now.”
But isn’t that asking too much of pension funds, to take such an activist position? Campanale thinks it’s a matter of responsibility – to those receiving pensions today, as well as those in 2050. And yet he hasn’t set all his hopes on pension funds. Carbon Tracker is trying to reach all the crucial players in the financial ecosystem to try and change this mentality.
Campanale names as an example the accountants and financial regulators who determine the rules of the game. What if fossil energy companies were forced to release more information about things like the amount of CO2 in their reserves? What if they had to be transparent about the consequences of stricter climate policy on their current growth scenarios? Then the financial analysts could much better estimate how much risk these companies are carrying. “We need to take our analysis into the heart of Wall Street,” says Campanale.
A deadly spiral
Still, this sounds like a rather Western – and thus limited – approach. Imagine we put the thumbscrews on the listed companies, and the capital market for their high-risk investments dries up. Will that also impact state-owned companies, who are holding on to the largest share of the fossil-fuel reserves?
Demonstrators during the Flood Wall Street protests, 2014. Photo from ANP
“Yes. State-owned companies still require capital, which is why Rosneft, Gazprom, PetroChina, and Coal India are partly listed. Why have all the African and Chinese mining companies come to list in London? Because that’s where the capital is.”
If that capital dries up, then they have a problem too. Moreover, investors can be scared off by the fact that investments in oil and gas companies carry not only economic risks, but also more and more political risk.
And then there’s still the low oil price, which is making prospects for the sector look even worse. In a turbulent world with a low or shaky oil price, investors will be less and less inclined to invest in high-risk fossil megaprojects that only offer a long-term yield, says Tim Burke, chair of the green think tank E3G, in an interesting analysis of current oil prices. That makes sustainable energy projects much more predictable and thus more and more attractive, says Burke. His words echo what Campanale and the Carbon Tracker team have been claiming for years now: We may be witnessing the beginning of a downward spiral from which the oil and gas industry cannot escape.
—Translated from Dutch by Anne Hodgkinson
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