Amid crashing oil prices and a divestment movement from fossil fuels, one of the most important banks in the world, HSBC, advised its clients to exercise caution when considering investing in fossil fuel assets. This was communicated through a private report, called ‘Stranded assets: what next?’, picked up by Newsweek. Inside, analysts warn that fossil fuel companies might become economically non-viable in the future, considering tightening emission regulations throughout the world. Considering HSBC’s portfolio, we can only take this as a sign that the fossil fuel industry is growing increasingly vulnerable, while renewables are shifting gears and growing at a fast pace driven by technological advances.
Growing out of fossil fuels
The report cites such factors that might devaluate fossil fuel investment like so-called ‘disruptive’ technologies that provide cheaper clean energy (wind and solar in particular, but also better energy storage), the EU’s decoupling of economic growth from fossil fuels or the impending Paris talk at the end of this year when an international agreement that regulates fossil emissions around the world will likely happen.
“The speed of the collapse in energy prices over the past three quarters has taken the fossil fuel industry by surprise, in our view,” reads the report. “As rigs are dismantled, capex is cut and operating assets quickly become unprofitable, stranding risks have become much more urgent for investors to address, including shorter term investors.”
HSBC analysts advise three possible course of action, depending on the investor’s profile, in light of these facts: divest completely from fossil fuels; just cut out oil and coal portfolios which are most vulnerable; continue to remain an engaged investor in fossil fuel. In the latter scenario, however, the HSBC report warns that such investors “may one day be seen to be late movers, on ‘the wrong side of history’”. In other words, it seems like this is a good time to bail out of fossil fuels while the going is still good, for pure economic reasons if not out of concern for a better world for our children.
Divestment from fossil fuel, as an activist movement, has taken steam lately. Örebro in Sweden, Boxtel in the Netherlands and Seattle in the USA are all part of a growing push for cities to pull their money out of fossil fuel, along with many campuses in the UK and US. The Guardian Media Group vowed to divest its £800 million fund as well. Of course, the financial effects are still minute, as far as divestment from fossil goes, but we’re seeing a growing trend for sure.
How do oil companies think of all this? Well, Exxon at least doesn’t seem to worry. Even though oil prices plummeted, in 2014 Exxon made $32.5 billion compared with $32.6 billion a year earlier.
“Our analysis and those of independent agencies confirms our long-standing view that all viable energy sources will be essential to meet increasing demand growth that accompanies expanding economies and rising living standards,” William Colton, ExxonMobil’s vice president of corporate strategic planning, said in a March 2014 statement.
Colton has reasons to be confident, and personally I have no doubt that all the big players in the oil & gas industry have a lot of business model mitigation scenarios for a carbon constrained market. It’s interesting to see there’s a shift in thinking, at least signs of it, in the market. Exxon might be fine with it, but others have genuine reasons to be concerned.