Investors warn of ‘carbon bubble’ as Shell predicts climate regulation will hit profits

Oil giant Royal Dutch Shell has warned that its profits are likely to be affected by international efforts to curb climate change, as campaigners say investors should steer clear of fossil fuel stocks.

In its annual and strategic report for 2013, Shell says that increasing concern over climate change will lead to new regulations that will hit the company’s production profitability and delay some of its projects.

The report notes that Shell expects its future production to come from “higher energy-intensive sources than at present” – sources such as its tar sands operations in Canada.

However, the company admits that it may have to find “publicly acceptable” and “economically viable” ways to reduce its greenhouse gas emissions.

This suggestion is born of the fear that governments will impose a price on CO2 emissions for all companies, as nations mobilise to try and limit global warming to 2C. “This would result in higher energy, product and project costs”, the company notes.

The report suggests that an increased focus on natural gas and biofuels, along with greater investment in carbon capture and storage technology and energy efficiency, could be a solution.

Campaigners say that Shell’s worries are evidence of the risks that fossil fuel companies now present to investors.

“Shell’s most recent announcement should serve as a stark warning for investors to pull their funds out of fossil fuels”, said Tim Ratcliffe, European divestment co-ordinator at the campaign group 350.org.

“First of all, it is inherently wrong to support an industry whose business model is based on wrecking our future.

“Secondly, fossil fuel companies are currently grossly overvalued. Eighty per cent of their oil, coal and gas reserves need to stay underground to limit global warming below 2C, which will turn them into stranded assets.”

Ratcliffe added, “This makes these investments a highly risky gamble.”

Earlier this month, a committee of MPs also warned that the potential overvaluation of high-carbon assets presents a serious threat to stock markets.

Meanwhile, two reports published last week further strengthened the case for fossil fuel divestment, warning against investment exposure to the so-called “carbon bubble”.

All this follows a difficult year for Shell. When the price movements of oil are accounted for, full-year profits for 2013 dropped to $19.5 billion (£11.9 billion) from $25.3 billion (£15.4 billion) in 2012. 

Speaking in London on Thursday, Shell chief executive Ben van Beurden announced a “reinforcement” of the company’s priorities.

“In 2014, we will make hard decisions about our next phase projects,” he wrote in the strategic report.

Shell’s poor performance, which was blamed partly on the “deteriorating operating environment” affecting its efforts in Nigeria, saw the firm suspend its highly controversial plans for oil exploitation in the Arctic region.

Since 2005, the company has spent around $4.5 billion (£2.7 billion) exploring for oil of the Alaskan coast, but is yet to drill a single well.  

Further reading:

Shell ‘reinforces’ priorities as campaigners warn of investor risks

Shell’s profits tumble amid pursuit for Arctic oil

‘Carbon bubble’ risk reinforces the case for fossil fuel divestment

MPs issue stark ‘carbon bubble’ warning to investors and finance world

Majority of Britons unaware of ‘carbon bubble’ investment risks