Wednesday, March 09, 2016

Running Scared

They're probably the most powerful corporations of the lot. Their tentacles reach deep into legislatures and palaces around the world. Together they account for assets of some twenty seven trillion dollars, a foundational sum of money for the world's stock exchanges. Royal Dutch Shell, Exxon, Sinopec, Total, BP and Chevron hold pride of place. There are others. In terms of annual revenue, they claim six of the top ten spots.

But what if these energy giants are all actually broke? What then?

Broke? Maybe, if the world decides they're broke. If we decide they're broke then they're broke. How could that possibly happen? If we decide that the overwhelming scientific consensus is right and then decide we want civilization, indeed all life on Earth, to have some future, then we have to take those giants and put them down as you might a beloved pet at the end of life. It's what Hans Joachim Schellnhuber of Germany's Potsdam Institute is talking about when he says nothing short of an "induced implosion" of the fossil fuel giants will possibly save Earth from runaway global warming.

The scientific community has run the math to conclude that, if we're to avoid truly catastrophic climate change, we must leave 80 per cent of proven fossil fuel reserves in the ground, unburned.  Subsequent research suggests the 80 per cent target is too optimistic. It should really be something closer to 90 per cent.

The energy giants hold most of those proven fossil fuel reserves and they're entered on the books in the asset column. It's those reserves that make them wealthy, notionally at least. These companies also carry a lot of debt. It's not cheap exploring for new fossil energy or producing marketable products, especially these days.

Wealth is notional. Until the product is sold and money changes hands, the goods are worth no more than the market will pay. If, suddenly, 80 to 90 per cent of your stockpile is declared unsaleable then you've got the mother of all resource gluts and the price heads to Skid Road (Vancouverites will know what that means).

So, if you're on a board of directors or occupy a top management slot in one of these fossil giants, it's beginning to feel a lot like a replay of EnRon. Think Kenny Lay. Think Jeffrey Skilling.

Corporate lawyers must be a busy bunch advising executives and directors how to navigate their way through the minefield that lies ahead and stretches way past the horizon. They need strategies for defending the integrity and wealth of their companies; strategies for dealing with government agencies, both regulatory and investigative; strategies for dealing with unruly and worried shareholders and investors. They also need strategies to try to avoid spending a good deal of time inside the Greybar Hotel.

They're running scared and possibly you should be too. If we have to decarbonize, abandon fossil fuels and transition rapidly to clean energy, what exactly are we to do about that massive wealth, nearly 30 trillion dollars worth, that will be wiped out? To my understanding that would be an unprecedented fiscal dislocation on a truly global scale. No one seems confident of what the ramifications might be - the spill-over effects.  Which raises the inevitable question of just what sacrifices we're genuinely willing to make today so that Canadians two generations from now can have a habitable land.

This is about as big a plunge as we've ever been asked to take and, frankly, I don't see the popular or political will to do it. That's probably how the energy giants see it too and why they're telling their shareholders where to put their fanciful resolutions.


Anonymous said...

I was surprised to see even CP Rail CEO Hunter Harrison call fossil fuels "probably dead." Looks like denial is getting hard even for the executive class.

The Mound of Sound said...

Thanks for the link, Anon. I hope he's right but find it hard to believe just yet. Harrison speaks of the adjustment an alternative energy transition will require of the railways but what of governments (especially petro-states) and the financial sector? These energy shifts - from sail to coal to oil - are always disruptive but I suspect the move out of fossil fuels will be particularly tough at every level.

Anonymous said...

I think you're right and the lack of political will and urgency is deeply troubling. The most recent First Minister's conference was a joke and simply kicked any sort of action well down the road.

The markets aren't waiting for the politicians though and, as the article on Harrison indicates, the coal market in particular has been hard hit by waning demand. In fact, Peabody, the world's largest coal company is teetering on the edge of bankruptcy. According to the IEEFA, "Peabody, like the coal industry in general, has become a wealth hazard for its shareholders and is now struggling to maintain solvency."

The drop in demand for this dirty fuel is good news for anyone interested in cutting GHGs. A few more coal company bankruptcies may force even a die-hard like Brad Wall to move more aggressively to shut down coal-fired power plants.