New OxCARRE research: Fossil fuel producers under threat

Rick van der Ploeg writes on

Fossil fuel producers under threat

Oil and gas producers face three threats: prolonged low oil and gas prices, tightening of climate policy and a tough budget on cumulative carbon emissions, and technological innovation producing cheap substitutes for oil and gas. These threats pose real risks of putting oil and gas producers out of business. They lead to the problem of stranded assets and a significant downward valuation of oil and gas producers. This calls for divesting from and shorting coal, oil, and gas. The economies of oil- and gas-rich countries are typically in a deplorable state, since they did not use their past windfalls to build up buffers and invest in a diversified economy. More rapacious depletion of their oil and gas reserves will not help. After the crash in oil and gas prices these countries are facing serious problems and it is difficult to see how they will cope with the outlined threats.

Published in Oxford Review of Economic Policy, available here [oxrep.oxfordjournals.org].

World Energy Outlook cautiously optimistic on shift to low carbon future

The International Energy Agency issued its World Energy Outlook [worldenergyoutlook.org]. It's heavy on the connection between energy demand and climate change and aims to give some projections on short and long term developments.
Some interesting quotes from the Executive Summary [iea.org]:

There was also a tantalising hint in the 2014 data of a de-coupling in the relationship between CO2 emissions and economic activity, until now a very predictable link.

By 2040, Asia is projected to account for four out of every five tonnes of coal consumed globally, (...). However, its continued use around the world is compatible with stringent environmental policies only if it is used in the most efficient way, with advanced control technologies to reduce air pollution, and if progress is made in demonstrating that CO2 can be safely and cost-effectively captured and stored.

Despite the shift in policy intentions catalysed by COP21, more is needed to avoid the
worst effects of climate change. There are unmistakeable signs that the much-needed
global energy transition is underway, but not yet at a pace that leads to a lasting reversal 10 of the trend of rising CO2 emissions.

Pipelines through native land. Developments in Northern British Columbia.

Oil and gas retrieved in Canada's most northern parts and Alberta's tar sands is generally speaking geographically far from 'world markets'. Proposals to fix this with new pipelines have faced delays because of such things as environmental risks highlighted by the those that rely on the land for other sources of income. For instance, this is among the reasons for the delay of the KeystoneXL pipeline, proposed to bring Alberta's oil to refineries in Southern USA.

The other route is to bring the oil and gas westwards through British Columbia, where it can reach the coast, and carriers can ship it to Asia, where major demand growth is expected to come from for the future. Although these proposals too ran in objections of First Nations, and alternative route, proposed by another company, has recently won their support.

Many pipeline proposals for the route west have run in strong opposition from First Nations in Alberta. Their opposition is to large extent based on the risk that a pipeline poses to their traditional hunting and fishing ground. Although poverty is major problem in some of those communities, proposals by international construction companies have not everyones favour. "The answer is still no" [fernwoodpublishing.ca], a book consisting of series of interviews conducted by two academics with representatives of the region, details their arguments and objections to such plans, in this case particular the one proposed by Enbridge.

An another gas pipeline was recently rejected by Lax Kwa'laams who where offered CA$1B for their consent of a gas terminal on their lands, an island in front of the B.C. main coast in the region of Price Rupert, at the mount of the Skeena river. The dangers that the first nation sees has both to do with the construction phase, that could harm marine life in an area used by salmon to mature before moving up-river, the impact of pipeline on the seabed marine life, as well as the impact on marine environment of daily arrival and departure of LNG carriers. For these reason they recently rejected the plan (CBC.ca, Globe and Mail, HuffingtonPost.ca).

As these articles highlight, and is also part of the discussions in the "The answer is still no", it is not that First Nations reject every such development, although this is occasionally how it is portrayed (sometimes quite viciously, labelling environment protestors and first nations terrorists, Globe and Mail, see also the recent interview with the newly elected Ms Universe, Ashley Callingbull-Burnham). A direct competitor proposal to the Enbridge pipeline, Eagle Spirit Energy Holding, recently gained (newswire.ca, prnewswire.ca) the support of First Nations, including those of Lax Kwa'laams. The trick? Eagle Spirit offers [financialpost.com] a different stake in the project to first nations, proposes a route that circumvents more of the vulnerable waters, going more through grounds of first nations supportive of the plan, and ends in a different area at the coast where it is expected to cause less environmental harm to the wider region. It helped too that the company is headed by members of local first nations, and the plan was made in direct consultation with first nations in B.C. and in cooperation with first nations in Alaska and Alberta. This contrasts with the lack of sincere consultation of Enbridge as perceived by First Nations.

The underlying dynamics are about balancing the (deemed inevitable) development of arctic and other previously hard to extract natural resources, the impact of such developments on local communities to their traditional income sources (forestry, fishing, hunting etc), their (hedonistic) value of the local environment and the benefits that may accrue to local communities from resource extraction. A non-negligible factor also appears to be the process through which these plans are pushed through and property rights. Much of the power of first nations comes from their rights as traditional dwellers of the land, whereas the federal and provincial government still tends to see these lands as theirs, or crown land, to do with as they please.

Although I tried my best, I'm not entirely confident that I presented all facts and views entirely correct. Comments are welcome below or by email.  

Azerbaijan jails journalist who exposed president's family links to gold mine ownership

A court in Azerbaijan sentenced, Khadija Ismayilova, a journalist to 7.5 years in prison for tax evasion and embezzlement (see reports by the Guardian, incl. response of mother, FT, and Radio Free Europe).

Working for Radio Free Europe, she has exposed the links of the family of the President Aliyev to profitable Azerbaijan businesses, including a Gold mine [rferl.org] in the west and mobile phone operator.

However, the gold mine is not the 'big thing' in Azerbaijan (the mine reportedly contains US$2.5B worth of minerals), oil and gas is. Although there is strong interest in this story from western governments, including the US [rferl.org], and international organisations, Azerbaijan position in the supply of natural gas from the Caspian sea to the same countries, makes a criticism muted. BP has largest stake in the gas project Shah Deniz in Azeri Caspian Sea, next to Socar, the national oil and gas company, followed with smaller stakes of others. Norway's Statoil and France' Total recently sold [bloomberg.com, see also FT] their stakes in the project.

Some human rights organisations now press governments to consider sanctions [eurasianet.org] on Azerbaijan for its crackdown on and jailing of human rights activists and journalists. As the article in Eurasianet indicates, the potential for sanctions has recently increased as the geopolitical position of and western corporate interests in Azerbaijan have diminished.

The situation that would make potential action against the Azeri government possible, may simultaneously also be the reason why the government is behaving as it does. Weakened links with western countries may make it feel more independent. At the same time, de decline of energy prices makes there less of the spoils to around, which may explain the resulting tendency of the more autocratic leaning governments to start using the stick to stay on top. This was also something that came up during our visit to Baku in February.

Ms. Ismayilova thought it funny she was jailed for things that she accuses the government and presidential family of. She wrote in her closing statement [rferl.org] to the court that she would continue exposing government abuse from prison.

Iran deal, Who get's to the riches first?

With the Iranian nuclear deal steadily progressing, there are reports on western oil companies trying to make deals with Iran on developing their oil and gas production. I found two conflicting reports on who's in the lead, European or US companies.

The Economist wrote a few months ago:

American officials, for their part, are diligently tightening the screws. When a large delegation of French businessmen returned from Tehran last year, many were warned by the American embassy in Paris that they should tread carefully and not sign preliminary contracts in Iran if they wanted to retain access to American financial markets. A group of Germans received a similar warning a few months later. The thought of having their dollars frozen under American banking sanctions, or of being locked out of America’s capital markets altogether, has cooled enthusiasm for doing business in Iran. 

Yet some foreign businessmen moan that American companies are not playing by the same rules. Rather than operate openly in Iran, many American firms are busily using local front men. One such middleman in the oil and banking business, who is a frequent visitor to Iran’s oil ministry, says prime contracts have already been snapped up. “If there is a nuclear deal, you will find overnight that the Americans have signed one-year options on the best projects,” he says. “The Europeans will be queuing up, but they will end up negotiating with Exxon Mobil and Chevron, just as happened in Libya.”

Such talk is particularly galling to companies from Western countries that were reluctantly pulled into applying sanctions. “We can’t help but think we have been played by the Americans,” says one European business leader.

Yet the Financial Times writes,

For the likes of Royal Dutch Shell, Eni of Italy and France’s Total, among those whose officials have met Iranian counterparts in Tehran, that day may be months away. Negotiations with US energy groups — absent since the nationalisations that followed the 1979 Islamic revolution — could be even further off. A complex range of restrictions will need to be rolled back in the US.

and further

Legislation and executive orders impose such wide-ranging restrictions on US business dealings with the country that American companies take them to mean that even hypothetical discussions about post-sanctions contracts are illegal. Not one US oil company says it has held talks about possible deals with Iran. Exxon’s understanding of the law is that its executives are barred from talking about business with any Iranian officials. Chevron says that it “acts in full compliance with US law and does not engage in business discussions with Iran.” Conoco, similarly, says it is not engaged in any such talks.

I find the FT report more convincing. The one "middleman" the Economist puts forward doesn't sound very credible when saying that contracts have already been "snapped up".  The rest sounds very speculative (I'm not familiar with the case of Libya or which time period this person was referring to, but probably the time that Ghadaffi signed the nuclear non-proliferation treaty, and became a 'respectable' leader again).

Shift from Coal to Gas? Not too quick please, says BHP Billiton Chief

The CEO of BHP Billiton, Andrew Mackenzie, takes issue [ft.com] with vocal natural gas producers who claim that gas should replace coal in energy production as fast as possible as a bridge to an economy based on lower CO2 emission.

I think there is a marketing ploy, which is ‘give up coal and burn more gas.’ (...) I am not against the trend, but come on — the last time I looked there was plenty of carbon in methane and there is huge amounts of carbon in oil, and the carbon emissions from transport are just as much a problem as the carbon emissions from coal-fired power stations.

Personally, I've noted especially the aggressive ad campaign of Statoil, claiming that gas is the energy of the immediate future until renewable energies can take over.

So what's his favoured solution? So he actually doesn't disagree with the shift to gas, even if it's a "marketing ploy", as long as it'll be slow. In the mean time, carbon capture and storage (CCS) should be developed. CCS is currently not a very popular strategy in the mix of CO2 reductions, partly due to costs, which may go down once further research and pilot programs are executed. The time required to develop the technology further will probably be measured in decades.

So that's where I'm not fully understanding the claim. On the one hand, coal producers state that pressure to "close coal" [oxcarre.blogspot.com] "a very western, rich country solution" [ft.com], given that it's a cheap and abundant source of energy for developing countries.
McKenzie stated in an earlier interview, “I don’t think the answer is to keep it [coal] in the ground because energy prices will just shoot up.” [ft.com]
However, if he then then argues that there should be a global carbon price and investments in one of the most expensive CO2 reducing options, then doesn't this inevitably increases the price?

NYT: gas and middle-east peace

The New York Times reported [nytimes.com] on how the special structure put around the exploitation of the gas field in the Israeli part of the Mediterranean may help create economic linkages that ultimately could help in fostering peace with its neighbours.

Natural gas is both a geopolitical tool and a target in Israel, where a newfound bonanza of resources has the potential to improve ties with energy-hungry Egypt, Jordan and even the Palestinian Authority.
But the linchpin of this diplomatic push is not an Israeli official, a Middle Eastern king or an American ambassador. It is an oil company in Texas.