Check the share portfolio for CARBON

In January this blog suggested that carbon companies were a SELL.  It became one of our best recorded posts.   Much of that commentary was based on the excellent research conducted by the Carbon Tracker Initiative.  That website is listed at the bottom of this page.


Now the Rolling Stone magazine has given their work much greater coverage with a fantastic article by Bill McKibben; himself one of the renowned authors in this field.  It is five pages but provides an excellent summary of where we have been and are headed.  I exhort you to read it.  Most of the following comes from his article. 

And he starts of with the fact there are only a few numbers anybody needs to know when considering carbon dioxide (CO₂₎ in the atmosphere.  The first is that the temperature around the world has increased 0.8 degrees Celsius.  Which I have written about previously.

The international community has agreed that beyond 2 degrees Celsius is catastrophic for the weather and humans.  So we are nearly half way there already. 

But some reports calculate that even if we stopped increasing CO₂ now, the temperature would likely still rise another 0.8 degrees, as previously released carbon continues to overheat the atmosphere. That means we're already three-quarters of the way to the 2 degree limit target.

The second number that it is important to know is that to reach that 2 degrees,  by mid century humans can only release another 565 gigatons of carbon dioxide into the atmosphere. 

The third important number is that in 2011, the International Energy Agency said that CO₂ emissions rose to 31.6 gigatons. So by the end of this year, that means that we have only 16 years remaining before we must stop emitting ANY CO_2. 

Not just reducing, but stopping.  Cars, power plants, fires, planes, etc.

Now here is the next important number (and a return to our investing theme) the number of CO₂ contained in confirmed coal / fuel / gas fields is 2,795 gigatons.  That is, 5 times higher than what we can burn. 

That is, this is the known reserves in the ground and excludes any future discoveries from exploration. 

Now we can put some further analysis around those numbers.  The first point to make is that for children entering primary school this year, when they graduate, they will face a very frightening world (as McKibben points out).  That is how soon it is.

The second is in our investment portfolios.  At some stage in the next 16 years, we are going to realise – through more catastrophic weather events – that owning shares in the companies that produce this fuel is not a good idea.  

And that is because those 2,795 gigtons is actually on the companies’ balance sheets, and is built into the share price as an asset, and we simply cannot burn it all and survive.  The Carbon Tracker Initiative lists all those companies and you can look it up if you like.  Al Gore puts the number at US$7 trillion of value in carbon related companies, of which one fifth is US$1.4 trillion -  an overvaluation of US$5.6 trillion.

So can we then derive that those company balance sheets are possibly 5 times over-valued? I guess it is a toss-up really.  Kids or carbon.  Australian legislation on what has become known as the "carbon tax" is not the first to introduce it, but it became effective this month.  And as McKibben points out, it is the only way to stop these behemouth companies in their tracks and save this planet. Oh, but sell the shares first huh!

Peak Oil v Peak Carbon v Giant Carbonised Insects

More on how the rug rats of today are going to live as adults, dodging the gnashing jaws of carbonised giant insects:  is it just me or is the oil peak being pushed out further and further?

Over the last few months, and despite limited interest in the industry (other than to shut it down), there seem to be a plethora of new oil deposits found / exploited.  Big ones.  Some media refer to them as giant fields.  If this observation is correct, then Peak Oil is a thing of the past and we are definitely all going to be gobbled. 

As an aside, with so many giant carbonised insects – such as the meter long centipede referred to in an earlier blog – we will also have a new source of food /protein to feed the masses tipped to hit 10 billion in my [old already] lifetime. 

But back to the new oil sources.  Some months ago I read about BP (and others) making a large find off the northern coast of the UK.  Or was it the end of last year?

Anyway another has been announced only last month.  UPI reports “British energy company Premier Oil announced that it made an oil discovery in the Catcher area of the country's territorial waters of the North Sea.”

And remember a few months ago the announcement of the large oil deposit find off the coast of Ireland;  poor ol’ Ireland that has lost its wealth, its income, and a whole generation to austerity??  Exploration company Providence Resources announced the find off the coast of Cork.  The find was referred to as “major”.  The article went on to say ”The coastal Basins surrounding Ireland have long been known to harbour valuable natural resources. It’s estimated that they could produce 10 billion barrels of oil and an unquantifiable amount of gas. In the past, exploration has been held back by a lack of technology and low oil prices.”

As probably more of a political statement, Kurdistan has started shipping oil to Turkey.  Whilst in east Africa, “Tullow Oil, a London-based explorer with the most licences in Africa, said it planned to accelerate drilling in Kenya after making the East African (Kenya) state’s first discovery earlier this year.  Tullow forecast Kenya has the potential to exceed Uganda, where with Total and CNOOC it plans to invest more than $10bn to unlock an estimated 2,5-billion barrels of oil. $4 per barrel.”

But wait, there’s more.

The Norwegian oil firm DNO International said it is ramping up oil production in Iraq as it confirmed an oil discovery in the country's resource-rich Tawke field and has resumed drilling operations in Yemen. DNO, which explores and produces oil and gas in Iraq and Yemen and plans to expand activities in North Africa and the Middle East

And more.

“Online PR News – 05-July-2012 –PierMax Energy Exploration is pleased to announce that, it has made a significant oil discovery in current onshore Kurdistan oil exploration project.”

And so it goes on and on.

And to crown my paranoia about never reaching Peak Oil (which has been forecast to be occurring around now) and thus never reigning in the carbon problem, I read George Monbiot recent article False Summit (meaning oil summit or ‘peak’).  The great eco campaigner. 

His first sentence is “We were wrong about peak oil: there’s enough in the ground to deep-fry the planet.”  And ends with “But right now I’m not sure how I can look my children in the eyes.”

In between those two emotionally charged sentences, is a great article, and as usual well researched.  Citing various article, he asserts that the recent sustained high price of oil has triggered to new oil resource boom.  That indeed, it is not so much how much oil, but at what price. With US$2.6 trillion spent over this three year period in exploration etc (end 2012).  Some of it extracted using fracking, the environmentally fraught polluter.

Yeah gads!!

So back on the research car and this was found.  Published in 2006, so it overlooks the recent massive investment in oil production and discoveries;  by the way, all of which are found and delivered from very difficult methods / places (fracking, deep sea). These five key points are believed at that time to be irrefutable and the basis of Peak Oil. 

1. The biggest oilfields in the world were discovered more than half a century ago, either side of the Second World War.

2. The peak of oil discovery was as long ago as 1965.

3. There were a few more big discovery years in the 1970s, but there have been none since then.

4. The last year in which we discovered more oil than we consumed was a quarter of a century ago.

5. Since then there has been an overall decline.

So anything written since then to confirm this thesis?  Well in May this year, there is a long post on oil and the industry on scepticblog.org by a reasonably senior academic geologist.  It is extremely lengthy, however sufficiently erudite and simplistic (for this oil idiot) for it to be recommended to all.  These are just a few extracts of interest: 

Academic geologists are nearly 50% women now, and they are distributed across all age classes. Oil geologists, by contrast, are nearly all old white guys in their 60s or older, with a lot of young men (and a few women) just recently hired in the business. The entire generation that would now be in their 40s and 50s is missing because of the attrition during the oil busts of the late 80s-90s. [I just thought this was interesting].

As the Time magazine article pointed out, now they’re spending most of their time and money on increasingly risky and expensive operations like fracking, pumping water in old fields to push out the last drops of oil, or mining oil sands with all their environmental costs. The biggest push is in offshore oil platforms—and the 2010 Gulf oil disaster (along with previous oil disasters on platforms around the world) shows just how risky it is to drill so far offshore.

So what about the world discovery rate? That answer has been known for a long time. World discovery rate peaked in 1965, and has been steeply declining ever since, even though more and more exploration is conducted in the farthest reaches of the globe in the past 47 years. The “peak oil” effect has probably already occurred, and we are likely on the slow downward decline in discoveries of cheap, easy-to-pump oil.

……in recent years most of the estimates place the total volume of ultimately recoverable oil in the range of 1.8 to 2.6 trillion barrels, with most estimates around 2.0 trillion barrels.

The booming economies of China and India, along with some other developing nations, are greatly exceeding any increased production due to new discoveries. The numbers are truly staggering. From only 50,000 barrels/day in 1980, world consumption is now almost 100,000 barrels/day. As oil executive Peter Tertzakian pointed out in his book title, we’re nearing the once-unimaginable consumption rate of a thousand barrels a second! Even as the U.S. finds more oil in unconventional places, we cannot keep our domestic prices down because demand outside the U.S. is driving the world price upwards.

So by my calc that is ~55,000 years of oil supply at today's consumption levels if we use the 2 trillion estimate with current consumption at 100k barrels per day.  At that level we are toast!! Something doesn't seem to be adding up here.  Then we look at the next argument, of 1,000 per second.  That equals about 86 million barrels per day; being 60,000 per minute;  3.6 million barrels per hour; etc.   So I think he meant 1,000,000 not 100,000.  Which brings the ~55,000 back to ~55 years of supply at today's consumption level.  Phew!!

There is also the fact that the peak of discovery of major oil fields occurred 47 years ago, and there have been no giant oil fields found in a long time, and most of the world’s older oil fields are nearing their ends.

An acre of corn consumes 80 gallons of oil in the form of pesticides, fertilizers, and fuel for the tractors.  Without [oil], our food supply would collapse, and the world would be looking at a global famine. The end of cheap oil will force everyone to re-examine agricultural practices, since you can’t make most pesticides or fertilizers out of coal. 

And thus cannot replace lost oil with biofuel. 

So rug rats.  There are your choices:  eaten by giant carbonised insects or die of starvation.  Blame the old white guys in the oil industry. 

However, I believe that we can confirm that peak oil has definately come and gone.  So that is hopeful.  Right?

Directors and Officers and Peak Oil

Lack of transparent disclosure has been an aggravation since my days as an international equity analyst.  In my experience, there is only one solution to this aggravation:  research. (Occasionally a sharp stick poked at the company directors worked.) The following was prompted by attendance at the ASrIA conference in Hong Kong in September 2011. The challenge to learn as much about the environmental sector in one week for three reasons: (1) How quickly may a director and officer become “reasonably” informed? (2) Do directors and officers need to know about it to survive? (3) If so, what should they be disclosing to shareholders and how?  This is what I learnt….. The series runs sequentially over various subjects. 

 ________________________________________________________________________________

Peak Oil

The debate is still raging on Peak Oil.  Wikipedia reports (with sources) that the “optimistic estimations of peak production forecast the global decline will begin by 2020 or later, and assume major investments in alternatives will occur before a crisis, without requiring major changes in the lifestyle of heavily oil-consuming nations. Pessimistic predictions of future oil production operate on the thesis that either the peak has already occurred, that oil production is on the cusp of the peak, or that it will occur shortly. The International Energy Agency (IEA) says production of conventional crude oil peaked in 2006.”

However Wikipedia goes on to say “Thriving economies such as China and India are quickly becoming large oil consumers. China has seen oil consumption grow by 8% yearly since 2002, doubling from 1996-2006.” In many reports this effect is called the motorisation of the economy.

To use Wikipedia as a source may be fudging it for sound analysis, but the point being made is that this information is ubiquitous, so that there cannot be any rationale for Directors and Officers to avoid this knowledge.

So in summary, peak oil was last decade or this decade.  That is, in the “now”.

Arguments against Peak Oil

There are arguments that could be made against any concern; that is, for the status quo in Directors and Officers strategic plans.  First, that oil may be replaced with renewable energy.  However the conversion of farmland to producing alternative biofuels has an increasingly material effect on food production.  And there are already 1 billion people going hungry (see later).  Food Security is a key global thematic.

Or new sources could be found, such as the “vast tracks of the US are rich in oil, gas and liquids” (1) and new drilling occurring in the Arctic. In the former, fracking, the highly contentious method of extraction, is causing widespread ecological damage, uses chemicals and also substantial amounts of water. Its extraction and use puts more carbon into the environment than coal. There are objections with the former new source from the populace due to ecological disasters.  And with the latter it is just a matter of time. 

Another new source is oil sands.  However, even at its most bullish the oil sands industry is only likely to reach in 2015, 3 million b/day, about 5% of current oil production[.  Already there is a proposed EU directive to ban imports of this energy, and also shale gas[vi].  Combined biofuels, oil sands, shale, and deep sea drilling will not replace the present oil deficits[vii] let alone future ones.

If the risky externalities were priced into these new fuel production methods and locations, then the price would become prohibitive. (See later on pricing externalities).  There is one example, to give just some understanding of cost, and that is the BP (and others) oil spill in the Gulf of Mexico.  To date it is greater than US$41 billion and rising, or more than one third of its market cap, plus another nearly US$400 million in lost oil.  And this does not include the cost to the environment that occurred, nor the opportunity cost to BP (and others) of its initial investment.

Further, there will be substantial new demand for these new reserves whatever their cost.  The growth mentioned before in China and India will occur as their motor vehicle industries explode (if nothing else).  In 1990 China produced few cars[viii].  In 2009 it surpassed the USA as the largest car market, with 13 million sold.  By 2020 it is expected to be 330 million cars in China mainland.  By 2050 the number of cars globally is expected to double from the level today of 820 million[ix]. 

From the same source, if China’s per capita oil consumption rose to the level of South Korea’s, its share of the world’s current oil consumption would rise to 70% from its present 10%.  If you limit its consumption to equal the USA today, say, oil output would have to rise 13% per annum over the next decade – not the 1% growth rate average since 1975.  That is, limit its consumption and the numbers still do not add up.

Strategies Peak Oil

The point is that Peak Oil is with us now, whether you are a director of a bank issuing credit cards [plastic is made from oil waste], or shipping your goods from one place to another, or using large computer facilities, or a large service industry whose staff must travel, the inputs that contribute to your business turnover are disappearing, or at the very least, will materially increase in cost in the near term. Within your current strategic forecast period.

What happens to your profits if the price of oil doubles?  On which part of the business does it impact?  Is it material?  Staff travel for example, even to and from work, could they require an increase in salary? If you don’t measure it you can’t manage it.

How much?  Don’t know?  As a Director or Officer, you will have to do the numbers. 

This is how the Swire Group reads the future:

In a world where negative fallout from man's activities is beginning to threaten the long-term viability of our species, the public rightly demands more accountability and more evidence of good governance in the way large corporations conduct their businesses. Any responsible, proactive company must therefore make these issues central to their business planning. Not to do so would be to abrogate both their commercial and their ethical responsibilities to their stakeholders - including their customers, shareholders and the wider community.[x]

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(1) Financial Times 6 October 2011, New Wells to Draw On, Ed Crooks page 11

[v] http://seekingalpha.com/article/21999-crude-oil-is-on-the-rebound-maximize-your-returns-with-these-etfs

[vi] http://www.guardian.co.uk/environment/2011/oct/04/oil-sands-imports-eu-ban

[vii] Peak Oil and the Second Great Depression (2010-2030), Kenneth D Worth, 2010 http://peakoilportfolio.com/home

[viii] US Department of Energy estimates, see following reference for secondary source.

[ix] Consumptionomics; Chandran Nair, 2011, John Wiley & Sons, page 49.  An excellent and well researched read by way of an introduction to the changes occurring in Asia.

[x] Swire Group is global diversified group listed on the Hong Kong stock exchange (amongst others). Sustainable Development Statement at http://www.swire.com/eng/sd/overview.htm