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Mark Campanale Founder Carbon Tracker BCSEA Webinar: The Carbon Bubble - Unburnable Fossil Fuels 11th Feb 2014
• Who we are and what we do
• Carbon budgets – why they count
• Doing the math – an overview
• How much carbon can Canada burn?
• Unburnable Carbon – does it impact valuations?
• Fossil fuels – a challenging future for investors
• Unwinding the carbon bubble
CARBON TRACKER INITIATIVE
Our Mission To change the financial system to deliver climate
security Our Team • Mark Campanale (Founder & Executive Director) • Anthony Hobley (Chief Executive Officer) • James Leaton (Research Director) • Luke Sussams (Senior Researcher) • Reid Capalino (Senior Researcher) • John Wunderlin (Staff Attorney & USA)
• Jeremy Leggett (Chair, Board of Directors) • Alice Chapple (Director) • Cary Krosinsky (Director)
CARBON TRACKER INITIATIVE Our Partners
CARBON TRACKER INITIATIVE: DO THE MATH
“…an easy and powerful bit
of arithmetical analysis first
published by financial
analysts in the U.K. has
been making the rounds…
(it) up-ends most of the
conventional political
thinking about climate
change. And it allows us to
understand our precarious
position with…. simple
numbers”. Bill McKibben
5
LORD STERN ON UNBURNABLE CARBON 2013
‘This report shows very clearly the gross inconsistency between current valuations of fossil fuel assets and the path governments have committed to take in order to manage the huge risks of climate change’ Professor Lord Stern of Brentford, Chair, Grantham Research Institute on Climate Change and the Environment, London School of Economics
Unburnable Carbon: Wasted Capital & Stranded Assets, Carbon Tracker, April 2013
‘Wasted capital and stranded assets’, made the front page of the Guardian, whilst being featured by most major press titles both in the UK and the US, including The Economist, Financial Times, Telegraph, Forbes, New York Times and Wall Street Journal.
6
CARBON TRACKER – REPORTS ON CARBON BUBBLE
UNDERSTANDING CARBON BUDGETS
AN OVERVIEW
TOTAL KNOWN RESERVES OF FOSSIL FUELS
8
Total reserves = 2860GtCO2
(Source: IEA Redrawing the
Energy Climate map 2013)
2C BUDGET: BROKEN IN JUST A FEW DECADES?
2031 2045
80% probability limiting to 2C; IPCC
estimate
THE CARBON BUBBLE
DOING THE MATH
12
• Company-level:
Coal/Oil/Gas Reserves x CO2 factor = Company CO2 potential
• Exchange-level:
Sum of company CO2 potentials = Exchange total
• Global-level:
Sum of exchange totals = Listed reserves CO2 potential
DOING THE MATH: STOCKS OF CARBON
CARBON BUDGET DEFICIT FOR LISTED COMPANIES
Listed reserves are a quarter of all known fossil fuel reserves Current listed reserves (762GtCO2) far exceed a quarter of the total carbon budgets but could double (1541GtCO2) If we break the 2°C budget we very quickly hit 2.5°C and 3°C
13
Potential listed reserves
Current listed reserves
CURRENT RESERVES ON STOCK EXCHANGES
14
LONDON MOSCOW
TOKYO
SHANGHAI
HONG KONG
INDIA
AUSTRALIA JO’BURG SAO
PAULO
NEW YORK
TORONTO
PARIS
GLOBAL TOTAL:
762GtCO2
215GtCO2
113GtCO2 144GtCO2
101GtCO2
388GtCO2
273GtCO2
KEY: ●TOTAL ●COAL ●OIL ●GAS
POTENTIAL RESERVES WITH ONGOING CAPEX
KEY: ●TOTAL ●COAL ●OIL ●GAS
15
LONDON MOSCOW
TOKYO
SHANGHAI
HONG KONG
INDIA
AUSTRALIA
JO’BURG SAO PAULO
NEW YORK
TORONTO PARIS
GLOBAL TOTAL:
1541GtCO2
366GtCO2
286GtCO2
266GtCO2
186GtCO2
715GtCO2
640GtCO2
• Canada’s reserves of fossil fuels are significantly larger than it’s fair share of a global carbon budget:
• Canada’s proven reserves of oil, bitumen, gas and coal are equivalent to 91 Gt of CO2, or 18% of the global carbon budget
• Adding in probable reserves boosts this figure to 174 Gt, or 35% of the global carbon budget
• A more speculative category including all possible reserves is 1,192 Gt — more than double the world’s carbon budget
Canadian Centre for Policy Alternatives:“Canada’s Carbon Liabilities: The Implications of Stranded Fossil Fuel Assets for Financial Markets and Pension Funds”
CANADA’S SHARE OF THE CARBON BUDGET (1)
CANADA’S SHARE OF THE CARBON BUDGET (2)
Even at the high end of a 20 Gt carbon budget, this would imply that 78% of Canada’s proven reserves, and 89% of proven-plus-probable reserves, would need to remain underground.
Source: Canadian Centre for Policy Alternatives released a report “Canada’s Carbon Liabilities: The Implications of Stranded Fossil Fuel Assets for Financial Markets and Pension Funds”
REBALANCING IS NEEDED BETWEEN FLOWS
18
WHAT DOES THIS ANALYSIS MEAN?
• Markets are based on a 6 degree trajectory
• Investors are tied into the markets
• The markets are not responding to climate policy
• The financial world faces a systemic risk
• There is an opportunity to address both financial & climate risk
COAL VERSUS OIL VERSUS GAS
WHAT IS AT MOST RISK OF STRANDING AND WHAT DOES THIS
MEAN FOR FOSSIL FUEL ASSET VALUATIONS?
• Impact on price?
• Coal most exposed
IEA 450 SCENARIO FOSSIL FUEL DEMAND (CAGR %)
-3.5%
-3.0%
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2010-2020 2020-30
Gas Oil CoalGAS OIL COAL
CAGR% 2010-2020 2020-2030
“Only 20% of global coal reserves can be developed by 2050 without CCS in the 450 scenario” (IEA Redrawing the Energy Climate map 2013)
22 22
• Carbon constraints from 2020 will impact discounted cash flow (DCF) valuations of coal assets today
• DCF valuation of UK mining majors’ coal assets could fall 44% if zero coal growth from 2020
• Individual company impacts c4-15% depending on share of coal: diversification spreads the impact
Coal contributes up to 30% of EBITDA among the big four
Market is not pricing in these risks, even though they are material
Impact on DCF on timing of reversion to zero growth
Long lead times makes this relevant to CAPEX plans today
Source: HSBC, Company data.
-50%
-40%
-30%
-20%
-10%
0%
2020 2022 2024 2026 2028 2030 2032 2034
Year of reversion to Low Case
% Im
pact
on
DC
F Va
lue
0
5
10
15
20
25
Anglo BHP Billiton Rio Tinto Xstrata
0.0%
10.0%
20.0%
30.0%
40.0%
Value USDCoal % contribution to 2011 EBITDA - RHS
USD bn
Source: HSBC analysis
* Based on HSBC published report, Coal and carbon – Stranded assets: assessing the risk, 21 June 2012
COAL AND CARBON – STRANDED ASSET RISK
23
PEAK COAL DEMAND – STRUCURAL DECLINE
Air pollution and water scarcity significant drivers on top of carbon
• ‘China will not be the strong driver for thermal coal performance that it has been in the past 3 years’ – Deutsche Bank, June 2013
• ‘The window to invest profitably in new mining capacity is closing’ – Goldman Sachs, July 2013
• ‘Citi argue…that the flattening or peaking of thermal coal demand for power generation in China by 2020 is now a plausible if not likely scenario’ – Citi Research, September 2013
Bahrain DPSA
Rumaila
Campos ExpWest Qurna 1
Kern County
Zubair Iara
CA Shale Oil
Val D'Agri Ph 2Franco
Lula
Ganal & Rapak
Aldous/Avaldsnes
Zaedyus
Tempa Rossa
Whales Park
GuaraCariocaGbaran Ubie Ph2
Cepu ExpUvat Expansion
KinteroniPeregrino S/SW
Margarita-HuacayaPerlaGoM Tiebacks Peru Block 39
West Qurna 2 Mars BMoho Nord
Schiehallion Ph 2 RoncadorHadrian
Yamal GasUganda Bl. 1,2,3 Chuandongbei
Big FootSandridge JVPNG LNG
India KG-D6 Clochas/MavacolaClair Ph 2
Shah GasAppamattox
Bl. 15/06 EastSkrugardVitoNorth Alexandria Hub TiberKaskidaBl. 15/06 West CLOVGhana Gas
Laggan/TormoreGorgon LNG
HebronEgina
GoliatCOP Eagle Ford STL Bakken
AOSP DebottlePrelude FLNG
PazflorWheatstoneShah Deniz Ph 2
Sunrise FLNGBonga N/NW/SWYamal LNGOXY Bakken
BG MarcellusPSVMIchthys LNG
HESS Eagle Ford
Mozambique LNGCaraboboTanzania LNG
BG Haynesville
Jack-St Malo
QCLNGKearl
FCCLAbadi FLNGGLNG Tengiz ExpReganne Bolia-Chota
STL MarcellusKKD Mariner
Shtokman Ph 1Sunrise Ph 1Usan
RDS Unc Gas BressayBlock 61 Oman
Surmont Ph 2 Fort Hills
Terre de Grace
Kashagan Ph 1
Carmon Creek Joslyn
0
10
20
30
40
50
60
70
80
90
100
0 2 4 6 8 10 12 14 16
2020e Net Production, Mboe/d
Bre
akev
en, $
/bbl
US unconventional
gas and LNG
projects
Deepwater GoM
& W.Africa
Low-cost conventional
giants: Brazil, Norway,
Iraq, Guyanas
Marginal LNG,
Heavy Oil
(Citi: Global Integrated Oil to 2020)
UNCONVENTIONALS TO FALL OFF THE COST CURVE
GROWING CAPEX FALLING PRODUCTION
Wall Street Journal, Jan 2014
• Oil sector cannot continue to spend more just to maintain production levels.
• E.g. Shell taking a haircut on its oil shale assets.
26
DO DIVIDENDS AND CAPEX ADD UP?
FOSSIL FUELS: NEW BUSINESS MODELS REQUIRED
Paul Spedding, Oil & Gas Sector Analyst,
April 2013
“Carbon Tracker’s report “makes it clear that 'business-as-usual' is not a viable option for the fossil fuel industry in the long term.
Management should already be looking to new business models that reduce the risk of stranded assets destroying shareholder value .
In future, capital allocation should emphasise shareholder returns rather than investing for growth.”
27
FOSSIL FUEL CREDIT RATINGS AT RISK
“Financial models that only rely on past performance and creditworthiness are an insufficient guide for investors.”
Analysis of oilsands operators: “We note that under a meaningfully lower long-term oil price, the commercial viability of undeveloped reserves and hence the core business model could come into question unless development costs also fall. This could potentially result in a downgrade of more than one notch if we were to place less reliance on undeveloped or probable reserves than at present.”
28
What A Carbon-Constrained
Future Could Mean For Oil
Companies‘ Creditworthiness,
2013
UNWINDING THE CARBON BUBBLE WHAT CAN INVESTORS AND REGULATORS DO?
30
1. Review valuation assumptions Commission equity and credit research which considers different future
scenarios; what happens if 20% probability that Governments take preventative measures on climate?
2. Challenge CAPEX plans Question merit of Company Boards of spending shareholder funds to
develop high cost high carbon projects 3. Disclosure Enhancement Listed corporate owners of fossil fuels should disclose embedded CO2 in
reserves – future emissions 4. Regulation Address climate change as a systemic risk by collaborating with other
investors in challenging financial regulatory framework
OPTIONS FOR INVESTORS: $7 TRILLION QUESTION
31
NOT BREACHING 2 DEGREES CEILING MEANS CANCELLING CAPEX AND WITHDRAWING CASH
Engagement with 45 companies on carbon asset risk
• “Institutional investors must think over the long-term, which means that we must take environmental risks into consideration when we make investments,” said New York State Comptroller Thomas P. DiNapoli
• “Companies must plan properly for the risk of falling demand by stress-testing new investments to minimize the risk our clients’ capital is wasted on non-performing projects.” said Craig Mackenzie, Head of Sustainability at Scottish Widows Investment Partnership
32
1. Assessing systemic climate change risk and the role of capital market regulators in managing financial stability
2. Challenging valuation assumptions and debt risk profiles of publically traded owners of fossil fuels
3. Identifying stranded assets and looking in depth at high capital expenditure fossil fuel projects
4. Reviewing the accounting standards for impaired/stranded/sub-prime assets
5. Investigating the capital raising process and how climate risk is factored into IPO’s and debt raising
6. Exploring the contradiction between climate policy and how capital markets function
SUMMARY OF OUR WORK PROGRAMME
www.policyalternatives.ca
Questions
More information:
www.carbontracker.org
Mark Campanale