Never Mind Peak Oil, What About Uneconomic Oil?

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There has been a lot of attention recently to the longer term viability of global fossil fuel reserves. Due to the fall in oil, natural gas and coal prices, the FT reports this week that all the oil majors have slipped into loss as a result of of the low oil and natural gas prices.

Why Manufacturers Need to Ditch Purchase Price Variance

That’s not the reason for the viability questions, though, that attention is due more as a result of future climate change legislation raising the cost of carbon-based fuels. Another article leads with comments made by Glencore Plc’s chief executive, Ivan Glasenberg, in the company’s recent sustainability report.

Glencore’s Bullish

Reacting to investor concerns (not just at Glencore but at all energy companies) he is quoted as saying “Although climate change issues are part of the political, societal and regulatory landscape, we do not believe that the global energy reality will economically support carbon measures that would prevent us from fully utilizing our fossil fuel reserves.”

In essence, what he is saying is a middle way will have to be found between reducing CO2 release and continuing to provide energy at an economically viable cost. Some investors have taken what they see as a moral stand such as the Church of England who have sold their investments in coal mines.

Others, like the heirs to the Rockefeller family and Stanford University are getting out more on economic grounds fearing assets will be “unburnable” if the world is to keep the rise in global warming below 2%. Some scientists have estimated that 80% of the world’s coal will never be mined if this objective is to be met, although it has to be said this does not account for the possibility that technology will ride to our rescue.

Humans do have a habit of coming up with technological developments to overcome challenges. Economically viable carbon sequestration for example could make coal viable even in a world demanding near-zero release of CO2 into the atmosphere. As the article points out, many energy companies appear to cling to the belief their assets will be in the economically recoverable 20% rather than the unrecoverable 80% – which clearly they cant all be.

Although Glencore has major exposure to the sector – they are the world’s largest seaborne coal shipper – they can viably argue theirs are among the lowest-cost and they are more likely than most to be the last coal man standing, and still turning a profit come what may.

Paris Match

Much will hinge on the outcome of this December’s climate change conference taking place in Paris, it is hoped the UNFCCC will achieve consensus among polluters on binding targets. Optimistically, by the end of the meeting, it is intended that all the nations of the world, including the biggest emitters of greenhouse gases, will be bound by a universal agreement on climate.

The chances of success in this respect were increased late last year when China and the USA reached a breakthrough agreement to reduce CO2 emissions. Notably the USA committed to cut carbon emissions 26% and 28% on 2005 levels by 2025 – a marked acceleration of its existing goal to reduce emissions by 17%.

China said it “intends” to start cutting carbon emissions in 2030 and make “best efforts” to peak emissions before 2030. It also agreed to increase the share of non-fossil fuels energy consumption to around 20% by 2030, a target it is already on its way to achieving as the world’s biggest investor in renewable energy.

As the world’s two biggest polluters, it was crucial that these two countries should be on board if the conference in Paris was to have any chance of success. It now looks more likely that binding targets will be agreed and as a consequence policy changes will develop over the next few years that could raise the cost of carbon and make existing fuels less viable.

Whether you agree with the climate change argument or not is irrelevant, the impact on you, your business and society will happen regardless. Fossil fuel resource companies are therefore looking at their position on the cost curve and, regardless of what is being said in public, you can bet it takes up board time.

Which almost as a postscript raises a question: if governments are serious about limiting a rise in global warming by reducing carbon dioxide emissions, surely they would be advised to spend some of the billions they will be raising in carbon taxes and fuel taxes on research into carbon sequestration. If we could economically use that 80%, which some are suggesting may never be burnable, it would keep the lights on for billions in the developed and developing world alike without costing us the planet.

 

Comment (1)

  1. joe says:

    This theory of cost driving efficiency in turn saving earth is pie in sky stuff. Efficiency merely ensures that more of us can each burn some, rather than less burning more. Net result is global warming and all our coastal cities under water. There is no escape,its thermodynamics. We could reduce carbon emissions to a slow enough pace for earth to deal with emissions naturally, or invent a speedier process. Either we balance the carbon budget or nature will. It’s an academic choice. Will we voluntarily dismantle capitalism in favour of a lower energy state? To choose to have cake and eat it is going to take a miracle.

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