Climate Risk Set to Impact Oil Sands Development

It must be depressing being a banker these days. As stock markets plunge, banks go to the wall and confidence crumbles you will be looking for a safe place to invest your money.

Gold is looking a good bet these days, but what about oil and tar sands? Not long ago, investing in Canada’s tar sands might have been seen as investing in a safe bet: Secure and safe oil with a guaranteed market just over the border. Not any longer.

Fund managers and campaign groups will tell a meeting today that investors in companies such as Shell and BP who are investing in tar sands are facing growing risks as a result of the companies’ involvements in the dirty technology.

The campaign groups, including Oil Change International, Greenpeace and WWF, as well as some socially-responsible investment funds, are warning that developing the oil sands is not only environmentally damaging but also financially risky. This is because it is increasingly likely that a price will be put on carbon dioxide emissions in North America, threatening the viability of oil sands projects.

A report by Greenpeace, and Platform, with input from Oil Change International argues that conventional oil production generates an average of 28.6kg of carbon dioxide per barrel, whereas oil sands production generates 80kg-135kg per barrel.

James Marriott of Platform, argues “Our argument to investors is that there is an investment reason not to go further into something that is full of risk.”

In a related move, F&C Management, the UK’s oldest investment trust, has teamed up with Oil Change International, Ceres, and a group of US and Canadian fund managers to halt the Securities Exchange Commission regulators softening the rules on tar sands. They are also arguing that new rules should take account of the carbon impact of oil sands reserves.

Elizabeth McGeveran, senior vice-president in F&C’s governance and sustainable investment team, said: “The energy consumption required to extract a barrel from Canadian tar sands is very different to a barrel of crude from the Gulf of Mexico. Understanding climate risk will assist investors in understanding and evaluating reserves”.

Greenpeace UK issued the following release this morning:

OIL MAJORS “UNDERESTIMATING INVESTOR RISK” ON TAR SANDS – NEW REPORT
Unconventionals “could be to the oil industry what sub-prime lending was to the banking sector”

London, Tuesday 16th September 2008

A new report warning of increasing financial risk in the Canadian tar sands sector has won the backing of several influential investment firms including Holden and Partners, Innovest, and Co-operative Asset Management (1). The report claims that shortfalls in the strategic reserves of oil majors BP and Shell are leading to a ‘distortion of management perspectives’, resulting in potentially catastrophic underestimates of risk.

The report is released on the same day that a number of large investment funds, senior analysts and financial advisors meet in London to criticise the long term strategy of the oil majors (2). Both BP and Shell have become increasingly involved in the production of oil derived from the tar sands sector in Alberta, Canada. The sector now accounts for some 30% of Shell’s proven reserves.

The timing places further pressure on the oil majors following recent interventions from investors such as F&C asset management and Co-Operative investments (3). The report, co-authored by Greenpeace and PLATFORM and entitled BP and Shell, Rising Risks in Tar Sands Investment (4), examines a number of factors which threaten the long term profitability of the sector:

•    Low carbon fuel standards under consideration by US presidential candidate Barack Obama and already implemented in California threaten to close sections of the American market to products derived from tar (5).

•    The result of the current election in Canada could significantly affect the regulatory climate for tar sands development, as the opposition Liberal party are strong supporters of a carbon tax.

•    The falling price of oil threatens to reach a threshold below which investment in tar sands is no longer economically viable, as was articulated on September 12th 2008 by the CEO of Total, Christophe de Margerie. (6)

•    Acute labour shortages and the rising cost of delivering gas to the Albertan tar sands threaten to stifle the planned expansion of the sector.

•    An unrealistic reliance on untested carbon capture and storage (CCS) technology risks leaving the companies with huge stranded assets in the future, as international climate change regulations are strengthened at Copenhagen next year.

•    The extensive clean up operation and potential future litigation from local communities carry significant brand risk.

•    The tar sands industry will have a significant impact on climate change, exposing both BP and Shell to severe reputational risk as its impacts are felt around the world.

John Sauven, Executive Director of Greenpeace UK said:

“We always knew that tar sands were a risk to the climate, but now it’s becoming clear that they’re a risk to the bottom line as well.”

Reacting to the report, James Marriot, from Platform said:

“The conditions that made tar sands attractive for investment over the last decade are beginning to disappear. BP and Shell need to rethink their energy strategy”.

Mark Hoskin, Senior Partner at Holden & Partners said:

“The recent banking crisis has shown how the financial markets can totally misjudge both the risks and values inherent in company balance sheets. Oil companies depend on oil reserves for their market values. BP and Shell are two of our most trusted UK stocks, but it is a shocking fact that 30% of Shell’s oil reserves are in tar sands.

“This report unveils how dangerous this approach is. There is a good chance that tar sands could be to the oil industry what sub prime lending was to the banking sector”

Dr. Matthew Kiernan, CEO of Innovest said:

“This incisive report could scarcely be more timely or welcome. The development trajectory of the Canadian oil sands will play a critical role – and, heretofore a largely unappreciated one internationally – in determining the fate of the global climate challenge. Major investors worldwide should pay close attention.“

Andrew Dlugolecki, Director of Andlug Consulting said:

“This report sets the record straight about a dead-end strategy which oil majors are using to delay the inevitable- a move to carbon-free transport. The idea that oil sands will enhance energy security is delusional. Investors should do all they can to challenge this misguided use of shareholders’ money, which will make global warming worse, and instead call for a new approach that is based on the reality of climate change.”

Matt Crossman, Ethical Research & Corporate Engagement at Rathbone Greenbank said:

“Investment in tar sands brings into tension the many elements of the sustainability agenda. The scale of the associated environmental impacts and the level of regulatory risks makes the issue of material concern for investors, and raises questions about the commitment to sustainability made by leading players in the oil industry “.

The Canadian tar sands are estimated by some to contain 173-179 billion barrels of oil. However, the process of extracting bitumen from tar sands and upgrading it to synthetic crude oil is three to five times more greenhouse gas intensive than conventional crude oil extraction.

Upgrading a single barrel of tar sand bitumen for use in a conventional refinery also requires 500 cubic feet of natural gas, leading to massive demand for gas and supply infrastructure in remote and inaccessible regions of Canada.