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BP: Too Big to Fail?

BP issued its Energy Outlook for 2030, and the coverage and commentary it generated suggests it's an authoritative voice on medium-term energy trends, and as such will have some influence on policy and investment decisions. Leaving aside that one of the world's major fossil fuel incumbents cannot realistically be an impartial arbiter, there was something to like whether your view leans toward the inevitability of renewable energy or necessity of fossil fuels.

To the former, the share of non-fossil fuels will more than treble, providing 18 percent of energy supply globally from its current 5 percent. For the carbonista, there’s pleasure in reading that primary energy use is set to grow by 40 percent and that fossil fuels will continue to play the dominant role in energy supply. One of its key conclusions, however, ought to make no one happy: surging demand coupled with entrenched reliance on carbon-based energy means that global CO2 emissions will rise to levels "well above" what science says is needed to avoid runaway climate change.

Governments globally have affirmed the scientific consensus on anthropogenic carbon emissions and climate change risks, and committed to a two degree maximum temperature rise. Many in the business community show similar concern, and, while uneven, significant societal shifts toward that view are also apparent. This should not be mistaken for serious action by all the aforementioned, because it is woefully inadequate. What’s so striking about the BP report, however, is the complacency which greets these linked conclusions on energy demand and carbon emissions. BP and its industry brethren are some of the wealthiest, globally diffuse, politically connected and expertly managed corporations on the planet. And yet, they seemingly have no internal or imposed obligation to be part of the solution to a threat laid bare by BP in black and white. The disconnect is stunning. It’s as if we went to the doctor and were told we have a slow-developing but potentially terminal disease, but the doctor declined to prescribe anything that might arrest it and we didn’t even bother to ask.

Also last week, the Chairman of the Bank of England (the equivalent of the U.S. Federal Reserve) received an open letter from 20 financial, academic and NGO sector leaders warning of an U.K. "asset-bubble" in carbon-intensive firms. The letter notes that some of the highest rated individual equities and/or funds are skewed toward corporations highly vested in fossil fuel reserves, extraction and delivery. These are precisely the types of investment options that long-termers, like pension funds, seek as safe havens for steady appreciation. Yet again, if governmental pledges of a two degree maximum are taken as real, these firms must be overvalued because they cannot utilize anywhere near their asset base. A similar report last year issued by the Carbon Tracker Initiative noted that the top 100 listed coal and 100 oil and gas companies can only emit 20 percent of their stated reserves if emissions are kept under the two degree threshold.

The world saw what happened when the financial industry ignored sound fiduciary practices and engaged in incomprehensibly risky activities. Governments, faced with a stricken but vital commercial sector and vested and powerful incumbents that were too big to fail, had no choice but to step into the breach and save the firms from themselves. Is a similar rescue in the cards for the energy sector? At risk are the fortunes of massive corporates and myriad investors — including governments themselves.

The energy industry is structured for the long-term: huge capital investments in long-life assets that have a sense of permanence and financial predictability. But at some future point, the political and societal will for massive cuts in carbon emissions will align with the accepted science and fossil-based energy will be an anachronism — though one littered with leveraged firms and stranded assets.  Cost trends might force the issue anyway: the price of renewable power is falling year on year due to innovation and scale while carbon energy marches inexorably upwards. Fracking may have pushed back the trajectory on natural gas prices, but the inevitable regulation of the environmental and societal externalities suggest the interruption will be fleeting. As Fatih Birol, Chief Economist at the International Energy Agency has stated, these effects can be managed, but production costs will rise. Throw in OECD pledges to cut the massive market-distorting subsidies to the fossil fuel industry — globally in excess of $400 billion in 2010, larger by a factor of six than for the far less mature renewables sector — and the cost curves can only widen.

Long-gone are the days when BP was "Beyond Petroleum" as their advertising campaign of years ago wanted us to believe. The industry seems more intent on shrugging its collective shoulders to the conundrum of too much carbon to burn. Perhaps they’ve been too busy studying the banks to be serious about charting a new course. Taxpayers, beware.

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