Investing in fossil fuels is ‘a bet on the future’

The way energy investors react to the financial analysis that describes up to 80% of fossil fuel reserves as “unburnable” will determine whether or not the world successfully tackles climate change, according to a leading green entrepreneur.

Jeremy Leggett, founder and chairman of solar developer Solarcentury, told delegates at last Thursday’s Transformational Business Conference, organised by the Financial Times (FT) and the International Finance Corporation (IFC), that the investment community will ultimately “define how this drama plays out”.

Analysis by Carbon Tracker, the non-governmental organisation that Leggett chairs, suggests that the vast majority of oil, gas and coal reserves cannot be burnt if the world wants to stay below 2C of global warming – the point at which scientists say would trigger runaway climate change.

In this scenario, investments in such stocks are described as “stranded assets” – meaning they are essentially worthless. Using this analysis, high-profile investors such as Storebrand and Rabobank have divested from fossil fuels, with the campaign also spreading across universities and religious institutions.

But Wim Thomas, chief energy adviser at oil giant Shell, argued at the FT/IFC event – sat alongside Leggett in a panel discussion at London’s InterContinental Hotel on Park Lane – that such claims were perhaps overstated.

“The announcement of the death of oil and gas is a bit of an exaggeration, because when we do our long-term energy scenarios, which really goes up to the end of the century, we still need oil and gas”, Thomas said.

“Why do we need them? Because you can’t do everything with renewables. Renewables are mainly electrons, and the world also needs a lot of molecules in the energy system for chemicals, transport and other applications. Hydrocarbons, if you like it or not, are here to stay… You can electrify around 65% of the global system; the rest – 35-40% – still has to come from molecules.”

He added that Shell’s own analysis into long-term scenarios showed that the world could “practically [decarbonise the] global energy system” with technologies like carbon capture and storage (CCS) – used in power stations to capture carbon emissions and store them underground.

Responding to Thomas’s comments, Leggett said, “Wim’s stated what Shell’s bet is. Basically, there’s a bet on the future that fossil fuels are going to be that important to us way into that future. Others in the oil industry have a different view.”

Shell initially entered the renewable energy market in the early-2000s, with investments in technologies like wind and solar. However, it sold its solar business to German firm SolarWorld in 2006 and in 2009 said it would no longer be investing in solar, wind or hydropower because they were uncompetitive.

Leggett described the firm’s current involvement in renewables as “marginal”. He added, “Investors are going to have to back [Shell’s business model]. The more people look at how bullish we are in the cleantech industry – despite the setbacks we’ve had since the honeymoon period of 2006, as we describe it – we’re now bouncing back big time.”

He said the renewables industry was “locked in a civil war with the energy incumbency – not just oil and gas, but coal and nuclear. It often feels to me literally like two warring tribes”.

Leggett concluded, “This, I think, will set us back collectively… It may ultimately – I hope this is wrong – not enable us to get to a coherent energy infrastructure of the kind we could have that would promote our prospects of defeating the terrible threat of global warming, but also the air quality threats, the social threats, the geopolitical threats of overreliance on oil and gas in far-off places.

“Investors are going to be vitally important to this, and how you react to the bet that Shell is placing… how you react to this massive overhang, this carbon bubble as we call it, this amount of fossil fuel resources that literally is not going to be able to be burnt, much of it, if we’re going to have a fighting chance of staying below the danger threshold of 2C. That, I think, is ultimately going to define how this drama plays out.”

Photo: Zero Emission Resource Organisation via Flickr

Further reading:

Shell forced to answer tough questions on environment, ethics and governance at AGM

IPCC report proves fossil fuel investors are ‘wrecking our future’

ExxonMobil remains convinced that the world needs fossil fuels – despite climate risks

Al Gore: world risks creating carbon bubble akin to financial crisis

Investors worth $3tn put pressure on fossil fuels industry to rethink future