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Dark clouds gather over a sunset industry - represented by a Chevron oil tanker. Photo: Jamie Grant via Flickr.
Dark clouds gather over a sunset industry - represented by a Chevron oil tanker. Photo: Jamie Grant via Flickr.
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Fossil fuels the 'new sub-prime crisis'

Nathan Wood

14th July 2014

The UK's conservative Daily Telegraph warns: investors in fossil fuels are 'throwing good money after bad', reports Nathan Wood, as renewable energy takes off leaving a potential $19 trillion of oil assets 'stranded'.

Staggering gains in solar power - and soon battery storage as well - threatens to undercut the oil industry with lightning speed ...

Writing in the conservative UK newspaper the Daily Telegraph, influential columnist Ambrose Evans-Pritchard writes that the "fossil industry is the subprime danger of this cycle".

Oil and gas investment has soared and production has peaked but has yielded very little financial return:

"The cumulative blitz on exploration and production over the past six years has been $5.4 trillion, yet little has come of it. Output from conventional fields peaked in 2005. Not a single large project has come on stream at a break-even cost below $80 a barrel for almost three years."

Mark Lewis of the leading European independent financial service, Kepler Cheuvreux states that "upstream costs in the oil industry have risen threefold since 2000 but output is up just 14%."

Bigger risks, collapsing rewards

But the reality has been masked by big oil companies exploiting their cheap, more easily accessible reserves:

"They are having too look for oil in the deepwater fields off Africa and Brazil, or in the Arctic, where it is much more difficult. The marginal cost for many shale plays is now $85 to $90 a barrel."

Referencing a report by Carbon Tracker, Evans-Pritchard writes:

"Companies are committing $1.1 trillion over the next decade to projects that require prices above $95 to break even ... Some of the Arctic and deepwater projects need $120. Several need $150."

So, he asks, "What happens if oil falls back towards $80 as Libya ends force majeure at its oil hubs and Iran rejoins the world economy?"

He goes on the draw attention to the $40bn deficit within the biggest European oil groups:

"European oil groups (BP, Shell, Total, Statoil and Eni) spent $161bn on operations and dividends last year, but generated $121bn in cash flow ... Oil development is so expensive that many projects do not make sense."

Infact, we may be observing the gestation of another economic bubble, comparing the situation to China's housing boom which "echoes of the Tokyo blow-off in 1989, and is four times more stretched than US subprime in 2006, based on price-to-incomes."

Return on fossil investment is falling

Raising further concern for fossil fuel investors, HIS Global Insight is quoted as saying the average return on oil and gas exploration has fallen to 8.6% "lower than in 2001 when oil was trading at $27 a barrel".

As for the widely hyped 'fracking boom' on both sides of the Atlantic, "A large chunk of US investment is going into shale gas ventures that are either underwater or barely breaking even, victims of their own success in creating a supply glut."

One chief executive stated that the only time his shale company ever saw cash-flow was when he sold it to a "gullible foreigner".

Under the current climate consensus, which aims to limit global warming to 2C, the industry is set to lose $28 trillion of gross revenue and the oil industry alone may end up with $19 trillion of stranded assets.

The world energy landscape will be a radically different place by the early 2020s, writes Evans-Pritchard, based on both the poor performance of the oil industry and the influx of renewables into the USA and Asia:

"Staggering gains in solar power - and soon battery storage as well - threatens to undercut the oil industry with lightning speed ... Photovoltaic energy already competes with oil, diesel and liquefied natural gas in much of Asia without subsidies - it must surely turn into a stampede."

Beyond Petroleum?

Such a case has already encouraged many firms to divest in fossil fuel companies entirely, as major Norwegian pension fund and life insurance firm Storebrand has done, labelling stocks in said companies as "worthless financially".

Ending by taking a swipe, at BPs current model after they regressed Lord Browne's re-branding of BP to 'Beyond Petroleum' as he sought to embrace solar:

"He may have his moment of sweet vindication after all."



Nathan Wood is an Undergraduate at the University of York currently reading Environment, Ecology and Economics, with orientation around corporate social responsibility.

Original article: 'Fossil industry is the subprime danger of this cycle'.



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