Warning to Fossil Fuel Investors: Coal and LNG Markets Shrinking Due to Competition From Renewables
In both cases it is competition from renewables, principally wind and solar power, that is being blamed for the threat. The cost of electricity from renewables continues to fall in Europe and Asia as the numbers of wind and solar installations grow in both continents, cutting demand for imported gas and coal.
Two separate reports on coal and gas were published at the same time as a round of annual financial reports from oil companies showed that this third fossil fuel could be in serious trouble too.
Despite massive cutbacks on exploration and development, companies like Shell and BP still need a price of US$60 a barrel by the end of this year if they are to break even on many of their current projects—almost double the current market price.
Overproduction of coal, gas and oil spells trouble for investors in mines, pipelines, ports and the other infrastructure needed to transport fossil fuels round the globe. The cost of development requires a long lifetime for the equipment and a high long-term guaranteed price for the fuels if investors are to get their money back.
The first report, Stranded Assets and Thermal Coal, found that Australian and U.S. coal assets were the most vulnerable. Australian mines were particularly at risk because of their heavy reliance on exporting coal to markets that were rapidly shrinking.
Australia exports three times as much coal as it consumes locally, but two of the world’s largest markets for coal, India and China, are cutting imports. India’s imports fell by 34 percent last year and China’s by 31 percent. Australia’s mines were also seen as high-risk because of environmental regulations and the widespread opposition to their development.
U.S. coal assets were risky because of competition from cheap gas for the same markets. This meant exporting coal and competing in a world market where there is already a significant surplus.
In the Dark
The report said company statements made it clear that investors were not being given the full picture of the risks from environmental regulation and policy.
Many countries pledged in the Paris agreement reached last December to cut their coal use. If these pledges were kept, the report said, then much of the coal currently shown as an asset would have to be left in the ground.
A separate report, on liquefied petroleum gas (LPG), also raises the possibility that investors may lose their money. The trade is based on the fact that gas is cheap in the U.S. and expensive in Europe, so the expense of liquefying it and transporting it to Europe is offset. Large investments are being made in the pipelines, ships and ports required to transport it.
There are two problems outlined in the report, LNG and Renewable Power. The first is that the price of gas, which is tied to that of oil, has dropped in Europe, squeezing the margins of the companies that are spending large sums setting up the supply line.
The second is that the market for gas is itself shrinking as the output of the solar panels and wind farms increases. Unless gas investors can see a long-term return from a stable market they will not make a profit and LPG becomes high-risk.
Predictions on the future of fossil fuel investments all hinge on the price of oil. With big oil companies—and many countries—needing the current price to double to more than $60 a barrel to break even on their current investments. Everybody in the business believes it is only a matter of time before prices double again.
Paul Spedding, former global co-head of oil and gas research at HSBC, an adviser to Carbon Tracker, said he believes the price of oil may never recover. Structural changes in the energy markets, more efficient electric cars, batteries and hybrid solutions no longer favor oil. The European Union for example is already reducing its demand by 1.5 percent a year.
Similar drops can be expected elsewhere as governments strive to meet their targets under the Paris agreement. If that happens, an oil surplus will become the new normal and investors in major oil companies will face a difficult future.
YOU MIGHT ALSO LIKE
By James O'Hare
There are 20 million people in the world facing famine in South Sudan, Somalia, Nigeria and Yemen. In developed nations, too, people go hungry. Venezuela, for instance, is enduring food insecurity on a national level as a result of economic crisis and political corruption. In the U.S., the land of supposed excess, 12.7 percent of households were food insecure in 2015, meaning they didn't know where their next meal would come from.
Artists are taking the climate crisis into frame and the results are emotional, beautiful and stirring.
So you've seen the best climate change cartoons and shared them with your friends. You've showed your family the infographics on climate change and health, infographics on how the grid works and infographics about clean, renewable energy. You've even forwarded these official National Oceanic and Atmospheric Administration graphs that explain the 10 clear indicators of climate change to your colleagues at the office.
As the Trump administration moves full speed ahead on boosting the oil and fossil fuel industry, opposition to increased pipeline construction is cropping up in different communities around the country.
By Simon Evans
Last Saturday, two dead whales washed up on the coast of Suffolk, in eastern England, and a third was spotted floating at sea.
What happened next illustrates how news can spread and evolve into misinformation, when reported by journalists rushing to publish before confirming basic facts or sourcing their own quotes.
By Monica Amarelo and Paul Pestano
Sun safety is a crucial part of any outdoor activity for kids, and sunscreen can help protect children's skin from harmful ultraviolet rays. Kids often get sunburned when they're outside unprotected for longer than expected. Parents need to plan ahead and keep sun protection handy in their cars or bags.
By Joe McCarthy
A lot of people take part in community clean-up efforts—spending a Saturday morning picking up litter in a park, mowing an overgrown field or painting a fence.
A coalition of conservation groups and others announced Thursday that a historic number of comments and petitions of support have been submitted to the U.S. Department of the Interior in support of Bears Ears National Monument. Despite the entirely inadequate 15-day comment period ending on May 26, more than 685,000 comments in support of Bears Ears National Monument have been collected.