STEP 03 RECOG­NI­TION OF THE RISKS OF FOS­SIL FUEL IN­VEST­MENT

With car­bon diox­ide con­cen­tra­tions in our at­mos­phere hit­ting 400 parts per mil­lion last week – the high­est level in hu­man his­tory – the sun is set­ting on fos­sil fu­els as a good in­vest­ment.

Element - - Planet - By Andy Ken­wor­thy

The New Zealand Govern­ment ap­pears to have in­ter­preted the fact that ma­jor off­shore oil com­pa­nies are sud­denly in­ter­ested in our oil re­serves, tucked deep un­der one of the most re­mote lo­ca­tions in the world, as a sign that it is time to cash in. Iron­i­cally it is ac­tu­ally the clear­est in­di­ca­tion that it is too late to do so.

The $3 bil­lion col­lected in roy­al­ties from oil and gas op­er­a­tions since 1970 in Taranaki. The $2.5 bil­lion that oil and gas op­er­a­tions con­trib­ute to New Zealand’s an­nual gross do­mes­tic prod­uct (GDP). The 5,000 jobs this sup­ports. All th­ese fig­ures make dou­bling th­ese num­bers – by open­ing up the East Coast – eco­nom­i­cally en­tic­ing.

But let’s get them in per­spec­tive. Even if they were right, this would mean oil and gas ex­plo­ration would em­ploy roughly the same num­ber of peo­ple in New Zealand as McDon­ald’s. Mean­while, we cur­rently earn $9.6 bil­lion, al­most dou­ble the dreamed of oil and gas in­come, from a tourist in­dus­try based on be­ing ‘100% Pure’. A Min­istry for the En­vi­ron­ment re­port es­ti­mated that a sharp de­te­ri­o­ra­tion in per­ceived en­vi­ron­men­tal qual­ity could lose about 10% of that for a start. And then there’s the dam­age to brands like Air New Zealand, Ice­breaker and Les Mills, which all trade on the im­age of a clean New Zealand, and have all voiced con­cerns through the Pure Ad­van­tage in­dus­try group backed by their CEOs.

Then con­sider that the Gulf of Mex­ico oil disas­ter that in­volved Anadarko, one of the com­pa­nies cur­rently snuf­fling around the East Coast, was con­ser­va­tively es­ti­mated by chief cul­prit BP to have cost US$40 bil­lion (NZ$47 bil­lion) in clean­ing and com­pen­sa­tion.

But th­ese risks may turn out to be mi­nor, com­pared to those pre­sented by cli­mate change and peak oil. Those big roy­alty pay­ments be­long to the age of easy-to-ex­tract oil that is now over. Check the much lower re­turns yielded from ex­pand­ing fos­sil fuel ex­trac­tion into shale oil and frack­ing, the now-nor­mal high price of fuel and the wars and other po­lit­i­cal ten­sions over oil-pro­duc­ing ar­eas the world over.

With the onset of peak oil and cli­mate change there are in­creas­ing in­di­ca­tions that gov­ern­ments, tax­pay­ers and con­sumers are be­com­ing un­will­ing to pay the ever-ris­ing fi­nan­cial and en­vi­ron­men­tal cost of this dy­ing in­dus­try. And cru­cially, there only needs to be an in­creas­ing level of un­cer­tainty in its fu­ture for in­vestors to aban­don it. Al­ready it is be­com­ing less and less eco­nomic to ex­tract and ex­port oil or coal from many ar­eas of the world, es­pe­cially from tricky, far-away sources like New Zealand – wit­ness the com­pa­nies like Petro­bras who have al­ready backed away. Ni­cole Foss, a for­mer Re­search Fel­low at the Ox­ford In­sti­tute for En­ergy Stud­ies, has said: “Com­pa­nies on the un­for­giv­ing drilling tread­mill will be fac­ing in­creas­ing fi­nan­cial risk, and over the next few years, as overex­tended and over-in­debted com­pa­nies go out of busi­ness, we can ex­pect a sup­ply crunch to de­velop.”

The loss of con­fi­dence is al­ready ev­i­dent in the min­ing sec­tor. A re­cent re­port by ac­coun­tancy gi­ant PWC warned: “The global min­ing in­dus­try is fac­ing a grow­ing dis­con­nect, as de­spite record prof­its for the world’s 40 big­gest min­ers in 2011, in­vestors proved fickle, de­mand­ing greater cap­i­tal dis­ci­pline and in­creased share­holder re­turns. A lack of con­fi­dence in the sec­tor’s growth prospects saw mar­ket val­ues plunge 25% to about $1.2 tril­lion and only six of the world’s top 40 min­ers saw their mar­ket value in­crease.”

A grow­ing num­ber of an­a­lysts agree that to have any hope of con­trol­ling cli­mate change we need to keep be­tween two-thirds and 80% of the cur­rent fos­sil fuel re­serves in the ground. This will re­quire the use of in­ter­na­tional reg­u­la­tions and car­bon pric­ing to in­crease the fi­nan­cial cost of fos­sil fu­els to more closely match the real cost to our world and ef­fec­tively price re­mote sup­pli­ers in dif­fi­cult con­di­tions like New Zealand out of the mar­ket. The value of Aus­tralia’s coal re­serves have al­ready been called into ques­tion, and Citi Bank among other fi­nan­cial in­sti­tu­tions has is­sued warn­ings to its in­vestors to heed the risks in­volved.

As a re­cent re­port from the UK’s Car­bon Tracker Ini­tia­tive put it: “Cur­rently fi­nan­cial mar­kets have an un­lim­ited ca­pac­ity to treat fos­sil fuel re­serves as as­sets. As gov­ern­ments move to con­trol car­bon emis­sions, this mar­ket fail­ure is cre­at­ing sys­temic risks for in­sti­tu­tional in­vestors, notably the threat of fos­sil fuel as­sets be­com­ing stranded as the shift to a low-car­bon econ­omy ac­cel­er­ates.”

There is a risk New Zealand is not only bet­ting on the wrong horse, it may end up try­ing to flog a dead one.

ANDY KEN­WOR­THY

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