Oil companies forced to take carbon bubble seriously

March 21, 2014 Updated: April 23, 2016

Big news from the world’s oil juggernauts about climate change and their bottom lines.

Royal Dutch Shell released its annual and strategic report for 2013 last week, acknowledging the threat that climate concerns pose to its bottom line. In its report to shareholders, the company listed the following subheading under “risk factors”:

“Rising climate change concerns could lead to additional regulatory measures that may result in project delays and higher costs.”

It’s the first time the company has informed its investors of risk associated with its carbon-intensive business model. Over the past year, the risks associated with fossil fuel projects which may become unprofitable have become the subject of more scrutiny by investors and activists alike. It’s thanks to economic research and analysis from the Carbon Tracker Institute into the coming “carbon bubble.” As the theory goes, attempts by governments to limit global warming to the target of two degrees celsius will make anticipated oil and gas projects unprofitable, thereby stranding billions of dollars worth of energy companies’ assets.  

“In the future, in order to help meet the world’s energy demand, we expect our production to rise and more of our production to come from higher energy-itensive sources than present,” read the report. Concern over climate change “is likely to lead to additional regulations designed to reduce greenhouse gas emissions. 

“If we are unable to find economically viable, as well as publicly acceptable, solutions that reduce our CO2 emissions for new and existing projects or products, we may experience additional costs, delayed projects, reduced production and reduced demand for hydrocarbons.”

Shell’s acknowledgement of the risk that carbon-heavy projects pose to investors lends authoritative credence to the carbon bubble argument. Institutional investors like pension funds have requirements not to partake in risky business. Climate campaigners have been urging them to withdraw their financial support for oil and gas companies not just on moral grounds, but that it makes financial sense. 

Their efforts won them an even bigger battle this week. Activist investors Arjuna Capital and As You Sow forced ExxonMobil, the United States’ largest oil company, to agree to assess its exposure to the carbon bubble and report on risks to shareholders. Groups withdrew their shareholder resolution in exchange for the company’s concession.   

It’s a huge victory for a new kind of climate activist who believes people power belongs as much to stockholders as citizens. These two groups have actually managed to get a multinational oil company to report on its own risk exposure to carbon-intensive fuels. One can’t help but hear echoes of famed tactician and organizer Saul Alinsky when he prescribes “[making] the enemy live up to its own book of rules.”

“We’re very gratified that ExxonMobil has agreed to drop their opposition to our proposal and address this very real risk. Shareholder value is at stake if companies are not prepared for a low-carbon scenario,” said Natasha Lamb, director of equity research and shareholder engagement at Arjuna Capital. “More and more unconventional ‘frontier’ assets are being booked on the balance sheet, such as deep-water and tar sands. These reserves are not only the most carbon-intensive, risky, and expensive to extract, but the most vulnerable to devaluation. As investors, we want to ensure our Companies’ capital will yield strong returns, and we are not throwing good money after bad.”

When it releases the report, it may prove to be the biggest ammunition yet in the divestment argument. An internal review of the economics surrounding the carbon bubble could reveal to all the world’s investors how dangerous stocks in fossil fuel companies may be. Even more importantly, it will actually force ExxonMobil to consider its business model in a low-carbon future. It couldn’t possibly reveal to investors the massive risks its current fossil fuel ambitions hold without a credible plan to reduce those risks. Abandoning deep-water and oil sands projects in favour of biofuel, nuclear or carbon capture (all of which hold their own concerns) may yet be in the cards for America’s biggest oil company. Would that ever be a coup.