The Bank of England and an announcement from Germany’s largest power company could cost oil investors trillions of dollars. As governments adapt more stringent climate policies, there is a strong possibility that oil investors could lose out on trillions of dollars’ worth of coal, gas and oil deposits which could then become stranded government assets.
In a major announcement, the Scandinavian financial services company Storebrand ASA (STB) said it would divest from its 19 fossil fuel companies. Storebrand ASA, which has $74 billion in assets, later said the list has increased from 19 to 35, and it consists of 10 coal utilities, 10 sand-oil miners and 15 coal producers.
In a phone interview with Christine Torklep Meisingset, Storebrand’s head of sustainable investments, she said the decision was “purely a climate related and financial decision”. Ms. Torklep added that the company took stranded assets into consideration and that companies which invest in carbon related projects are “very vulnerable” to shifting climate change regulations and policies.
Oil investors vulnerable as companies divest from fossil fuel
As oil prices continue to drop, regulators and operators have taken steps to reduce fossil fuel exposure. EON SE, Germany’s largest utility, just released a statement their aging oil fields and power stations are being removed as the company focuses on sustainable and renewable energy.
In a related development, a letter from the Bank of England Governor Mark Carney came to light. The letter, which Mr. Carney addressed to Parliament, states that his staff had been advised to assess the potential impact of stranded gas, oil and coal reserves on insurance companies, investors and banks. The letter also said the effect on the financial system is being considered.
In view of this, UK House of Lords member Nicholas Stern said that the world is prepared to show its “resolve on climate related issues”. Mr. Stern, who used to be the World Bank’s chief economist, also said that fossil fuel investment is now a “risky” undertaking.
Some oil companies still confident in their position withinthe energy industry
In spite of this, major players in the oil industry feel confident. Exxon issued a statement to oil investors that the company is “confident” there is no chance of oil reserves getting stranded. Chevron CEO John Watson also addressed the issue and declared, “We’re going to be in the fossil fuels business for a long time.”
In general, the response of oil companies to the question what to do with the threat of renewable energy was “What threat?”
However, the figures suggest the oil investors and companies will feel the effects sooner than later and this idea has oil investors concerned. Mark Lewis, one of the senior analysts at Paris’ Kepler Cheuvreux SA, says steps to curb fossil fuel production to keep temperature increase to a maximum of 2 degrees Celsius will cost gas, oil and coal companies $28 trillion in the next twenty years.
According to Lewis, oil investors and companies are in the same position as German utilities a decade ago, which dismissed the growth of renewable energy. Already, traditional power producers in Europe face difficulty as governments provide subsidies and support for clean energy, and analysts say this trend will continue in the coming years.