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Fossil Fuel Industry Faces 'Existential Threats' as Shareholders, Regulators Push for Emissions Cuts

The oil, natural gas and coal industries have found themselves under increasing pressure from shareholders, activists and government officials to reduce carbon emissions, with their fortunes and the stability of the Earth's climate now locked in a zero-sum game, according to a Rice University energy expert.

Jim Krane, the Wallace S. Wilson fellow in energy studies at the James A. Baker III Institute for Public Policy, recently published a 19-page working paper, "Climate Risk and the Fossil Fuel Industry: Two Feet High and Rising."

"The risks to the industry correlate with progress on climate goals," Krane said. "Climate's gain is the industry's loss and vice versa."

The Obama administration's multi-faceted actions to curb greenhouse gas emissions, said Krane, are prime examples of the upheaval facing the energy industry (see Daily GPIAug. 2). However, U.S. regulatory attempts to reduce carbon are not alone.

The Bank of England’s governor has called for leaving large portions of oil, gas and coal reserves in the ground. The International Energy Agency, the global industry watchdog, has said that two-thirds of known fossil fuel reserves possibly should never be burned in an effort to prevent average global temperatures from rising by more than 2 C (see Daily GPI, March 16). Pope Francis, meanwhile, also has called for "swift and unified global action" on climate change.

"For fossil fuel businesses, such statements represent existential threats," Krane said. "By Citicorp's estimate, large-scale resource abandonment translates into an eye-watering $100 trillion in foregone fossil fuel revenues by 2050."

Carbon emissions are falling, the U.S. Energy Information Administration noted in May (see Daily GPI, May 16). U.S. emissions decreased in 2015 and were 12% below 2005 levels.

The consequences of international action to reduce emissions further remain in doubt, but the call to action is making life "increasingly difficult for businesses that profit from fossil fuels," he said.

For the energy industry, a new set of risks has arisen. Legal and shareholder actions targeting Big Oil's stance on climate change are common, with producers urged to become more transparent in their reporting. ExxonMobil Corp. is in a legal war with some state attorneys general about its transparency in climate change research (see Daily GPIAug. 10).

Meanwhile, activist groups are blocking pipeline approvals and are gaining traction at the highest level, with some pipelines now tabled, including the Keystone XL system to move Canadian heavy oil to the Gulf Coast.

The coal industry is taking the brunt of the pressure today, and its fortunes rest with developing nations, where decisions to seek development are being met by international pressure to choose "an alternate path," Krane noted.

However, it's not a dire for natural gas enthusiasts. "In fact, many anti-carbon policies that would damage coal would benefit gas, whether carbon taxes, cap-and-trade schemes, or other restrictions."

By contrast, oil is "insulated by its unique and valuable role in transportation." But that doesn't mean the oil industry is unaffected by pressures from within and outside.

"Expectations of escalating restrictions encourage increases in current production," Krane said. "Environmental regulation could, through the 'green paradox' lead to lower oil prices, increased demand, and a gain in market share by low-cost producers like Saudi Arabia at the expense of higher cost ones like those in North America."

Because upstream investments typically are based on 20- or 30-year timelines, the possibility exists that financial returns will be impacted by climate action and a turn to more renewables, Krane said.

"Competition among producers for market share will be complemented by competition between fossil fuels and renewables. Divestment and policy risks will magnify the challenges."

Sectors threatened by climate change, such as insurance companies, may press for more divestments by fossil fuel companies. In turn, institutional investors and individuals may reward companies based on "future proofing" and penalize those they deem too exposed to carbon.

Royal Dutch Shell plc's takeover of gas-focused BG Group plc is one example of how former oil-directed producers have moved toward capturing more natural gas reserves. ExxonMobil Corp. did the same with its takeover of onshore expert XTO Energy Inc. a few years ago, assuring it would become the No. 1 gas producer in North America. France's oil major Total SA has taken a different path, betting on renewables and battery storage.

"Whether through taxes, legal restrictions, moral arguments, favoritism for competitors or hampered access to financial markets, the industry faces a future that is less accepting of its current practices," Krane noted. "Some businesses will not survive. For others, the risks warrant changes in strategic direction."

However, while businesses "may face existential threats from climate action," Krane said, "these are dwarfed by a far greater risk -- the possibility that climate actions may fail."

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