Will Oil Sands Become Stranded Assets?

April 29, 2014

The Tyee:

On first impression, Matt Patsky seems about as average as portfolio managers come: solidly middle-aged, glasses, crisp-collared shirt and the carefully measured speech of someone who deals with a lot of money. Yet when I met earlier this month with Patsky, who is the Boston-based CEO of Trillium Asset Management, I was struck by the framed Mahatma Gandhi quote hanging on his corner office wall. “The Earth has enough for everyone’s need,” it read, “but not for everyone’s greed.”

If that’s not typical office decor for a finance executive, then neither is Trillium’s approach to investing. Founded in 1982, Trillium is America’s oldest independent advisory firm “investing in businesses that are trying to have minimal impact on the environment,” Patsky said. It operates under the belief markets can and should do more good for society than simply line the pockets of investors, and that there’s an inherent financial advantage over time, he said, to not “causing anybody harm.”

The prospect of an unprofitable oil and gas sector would have been unthinkable 30 years ago, when Patsky began working at Lehman Brothers in New York. Even then he stood out from his peers: an idealistic newcomer convinced ecological impacts should guide the investment process. “I remember the associate director of research saying, ‘It’s really nice that you care about these issues, but if you don’t stop it might destroy your career,'” Patsky recalled. “But I didn’t let that dissuade me.”

Instead he decided to leave Wall Street for “a smaller firm where they would really appreciate what I did,” he said. After a brief stint in San Francisco, Patsky ended up at such a firm in Boston. Due in part to the anti-apartheid divestment legacy of nearby Harvard, the city was in the late 1980s becoming the intellectual and financial hub for a new generation of socially conscious investors. “There was just much more of a general understanding here of why this made sense,” he said.

As decades passed, and the impacts of climate change came into clearer focus, such investors faced a dilemma: should they divest their portfolios of all fossil company stocks, or use their position as shareholders in those companies to force change from within? Trillium opted for the latter in 2008 when it filed the first ever oilsands shareholder resolution, asking ConocoPhillipsto disclose the “environmental damage” associated with its operations in northern Alberta.

Patsky became CEO of Trillum in 2009. Under his leadership, the firm’s fossil-free investingoption “has been one of our fastest-growing strategies,” he said. It contains a certain financial logic. If governments get serious about keeping global warming below a two-degree threshold, then firms like those in the oilsands may be left with vast reserves of unburnable oil — or “stranded assets.” Yet absent strong political action on the climate, Patsky said, investor risk remains “hypothetical.”

In the world of mainstream finance, “hypothetical” might as well be “negligible.” And that’s likely where risk perceptions of oil and gas stocks would have remained if not for several new and unforeseen energy market trends. To learn more about those trends, I met Ryan Salmon one rainy morning at a coffee shop in downtown Boston. Salmon tracks oil and gas for Ceres, a non-profit formed in the aftermath of Exxon’s 1989 Valdez spill that works with large businesses to create a healthier planet.

Salmon and I last crossed paths several years ago in the basement of a South Dakota tribal casino, where I was reporting on indigenous opposition to the Keystone XL pipeline. He was then working for the National Wildlife Federation, and now at Ceres applies his advocacy background to oil and gas finance. Lately he and others in this space have been trying to make sense of research from Bernstein, Citi, Goldman Sachs, HSBC and other influential market trackers predicting rough days ahead for fossil fuels.

“It’s a really interesting time,” Salmon said. What that research comes down to is this: existing climate efficiency standards, rapidly falling clean energy prices and rising fossil production costs may cause global demand for oil and coal to peak in less than a decade. “Any scenario where demand doesn’t continue growing or prices go flat, or maybe even decline,” Salmon said, could mean oil firms, especially those developing pricey oilsands operations, face a “shrinking window of opportunity.”

I reached out to several Wall Street energy analysts for their opinion on such a prospect, but none were available for an interview. Exxon recently shared its own views, though, after a Ceres-led investor coalition asked 45 fossil firms to disclose the potential financial impacts of climate change. “Highly unlikely,” is how Exxon forecasts them. Nonetheless, the fact it responded at all “was a step forward,” Salmon said. “I don’t see this discussion going away. If anything it’s gaining momentum.”

24 Responses to “Will Oil Sands Become Stranded Assets?”

  1. Ironic that oil extracted from these sources was one of the first to compete against whale oil for lamps in the mid 19th century. Cheaper sources were made available for lamps when the first oil wells were drilled in PA, and oil sands and shale fell into the background.

    Now we’ve come full circle. Back to shale and oil sands, just like in the old days.

  2. jimbills Says:

    They won’t be ‘stranded assets’ unless the world gives up 2%-5% economic growth per year. We have a bizarre tendency to ignore how embedded fossil fuels are in our economy. They’re in everything. We can’t snap your fingers and ‘presto!’ we’re in the Great Green Utopia.

    It’s silly to pretend that there is such a thing as a “fossil free investing option”. It’s self-deception of a grotesque level. Trillium isn’t even divested from FF companies:

    Click to access Trillium-Fossil-Fuel-Free-Investing.pdf

    And renewables only make up 7% of that portfolio. Even if they were 100% divested, everything else they invest in is completely reliant on FF. This applies especially to the financial sector, which is creaming off the lion’s share of profits from the global economic model.

    I could say I’m not using FF right now, as I’m just sitting down in front of a computer, but I’d be horribly ignorant or a liar. Everything in front of me and in between the digital signal leading from me to you is fossil fuels.

    We can slowly replace a part of FF use and maintain 2%-5% growth if we really apply ourselves and if we spend decades doing so. (That’ll cause a lot of other environmental problems, but that’s another story). During those many decades, we’ll have to get the FF from somewhere. The dirtier sources are not going to be stranded in that scenario. They’re only going to ramp up in importance. In one sentence above it mentions how FF is rising in price (true), but how the more difficult FF sources will become stranded if FF prices drop. That won’t happen with 2-5% yearly growth. They’ll be needed somewhere – demand will remain strong. Additionally, as the conventional FF sources wither away, we will continue to struggle to maintain capacity to meet demand. FF prices aren’t going to drop to the levels necessary to strand the oil/tar sands. If anything, they’ll rise in price, causing the oil/tar sands to ramp up production.

    But, meanwhile, we’ll have some investors pretending they’re clean, when in reality their money is completely reliant on the smooth functioning of the global economic system requiring continued FF use.

    • dumboldguy Says:

      Well said, and it echoes some of Gilding’s thinking in “The Great Disruption” and Ehrenreich’s in “Bright-Sided: How the relentless promotion of positive thinking has undermined America”. I’m working my way through both, and “bizarre tendencies” and “grotesque self-deception” are not alien concepts in either book.

    • Watch how fast tar sands and shale oil at 4 plus a gallon become stranded assets after EVs become abundant. It’s coming. The oil company profits are already straining. Demand does not increase with supply because price has a lower bound. Oil cops are beginning to be squeezed in the middle as demand lags. All the expensive gasoline you want? They have a cornered market in the US transport sector. As EVs compete, the end draws near.


      • andrewfez Says:

        I live in LA (San Fernando Valley) and on a typical drive to work I’ll see 1 Tesla, 2 Volts, countless Priuses, and on occasion a Leaf. I’m surprised at the number of Tesla’s i see around here.

        I was driving back from hiking the other day on a small mountainous road and a Volt was pulled over on the side. The driver was a tall and slender woman of Los Angeles model quality who had gotten out of the car and was teasing her hair (probably to take a picture of herself). It looked like a commercial for Chevy that had come to life.

        • jimbills Says:

          Well, that’s the problem. EVs are essentially a luxury item. Until they drop in price well below gas-powered cars (plus their added gas cost minus the electricity cost for EVs), and until they have better range, they aren’t going to take over the market. They’ll be a status symbol for models and rich, middle-aged guys who want to get with those models.

          I think it’s possible they can become relatively affordable, mostly because I have little doubt we’ll see $5-$10/gallon gas within 10 years. When it does happen, and let’s say an average EV costs within 150% of a current mid-range gas car of today (inflation-adjusted), then yes, U.S. and European consumers will start to buy them in significant numbers. Assuming manufacturers can keep up with demand, and assuming the U.S. grid can keep up with the added electricity demand, we’d be looking at roughly 20 years for a fleet switch, best case.

          But here’s the rub: if we did switch in significant numbers, then oil demand would drop, and oil prices would drop, and the equations for affordability on EVs would equalize. This would almost certainly increase the switchover time to EVs.

          All of this, of course, is assuming the economy doesn’t have any major problems for 3-4 decades, so people can both afford that EV and so that debt systems would remain in place.

          Now, after that, we’ll still have a significant fleet of trucks, farm equipment, and airplanes, too. Most of these will continue to demand oil as we’re switching to EVs on the consumer front.

          Oil demand will also come from the developing world, because the affordability of a used gas car will be lower than an EV now matter how much they or gasoline costs, and most new consumers in developing countries will not qualify for the debt levels or be able to afford that EV ( http://sustainablecitiescollective.com/embarq/135716/developing-countries-junker-graveyards-global-cost-used-cars ). And after that, we’ll still have oil demand for pesticides, pharmaceuticals, plastics, and chemicals.

          As conventional FF declines, that demand will have to be met by dirtier sources. The ONLY three things that prevent that are voluntary declines in economic growth coupled with aggressive replacement on all fronts, mandated stranding, and/or an economic crash. But it’s dreamy dreamland to think that in a stable market and no major economic changes that oil demand will drop any time soon to the levels necessary to strand any oil reserve. It ‘might’ happen in 50 years assuming all of the above assumptions play out in good order – which isn’t likely.

          • andrewfez Says:

            Getting paid to plug your car into the grid to allow it to use your car for storage may help incentivize the EV market in a capitalist manner.

            Alternately, the fee-bate system, where cleaner cars are given a mandated discount, the amount being passed onto the dirtier cars, causing their prices to be raised, i think has been shown to be effective (Europe?).

            Some folks think oil may be operating in a supply constrained manner where the apparent demand (presumed a function of GDP growth) is less than the inherent demand; GDP growth being a function of the amount of cheap oil available. If that’s right, then an alternate energy could carve into oil’s market without causing its price to drop until that discrepancy was alleviated.

            Because the cheap oil is exiting the scene (CAPEX for Exxon, Chevron, etc. is going through the roof with no apparent payoff in production) oil prices cannot drop that much, lest they dip past the point of profitability. If prices dropped below ~$75/barrel that would cause pain in the fracking world. Probably a similar price structure for tar sands exists, otherwise they would have come online decades ago. Tar sands have another problem: they are using so much water that they will soon be reliant on water cleaning technology to continue their operation; such will add cost to their product.

            Because of those things, oil prices are less elastic than one would initially reckon.

            The reason EV prices are so high in the 1st world, it’s because they have to meet safety (perhaps even weight) standards for 70mph driving. We can make cheap, decent range EV’s for the 3rd world which are little more than improved golf carts…

          • andrewfez Says:

            Oh, and i found this a little while ago:

            ‘Mitsubishi’s peculiar looking Mi-EV has struggled to gain traction in the U.S., and as a result, Mitsubishi has continued to cut the price down. At $23,845, it’s now the most affordable electric car on the market before the federal and state credits take effect, essentially bringing the total cost of the car down to $16,300 or so once federal benefits are realized. It can travel about 75 miles on a charge, which isn’t a whole lot by today’s standards but plenty for those who just need to hop around town.’

            Range still isn’t there, but if you had a 2-car family then it’d be ok…


          • No. Oil,prices will not drop significantly when demand drops. We have already had a demand drop. Did prices drop much? No. When supplies come from expensive sources, the low hanging fruit is gone. So when EVs catch on, the end of ICE is near. EV volume is low, but changing fast. Mfrs were worried about who jumped in first being too soon. Now they are worried about too late. Look for all the place mark cars that are ICE conversions to disappear and purpose built EVs to take their place. GM is betting on a Volt. It won’t last long. Battery prices are dropping too fast. Pure EVs will be cheaper.

  3. see http://www.dailyclimate.org/tdc-newsroom/2014/03/whale-oil-myth

    “Whale oil production peaked in 1845 at 17 million gallons selling for $1.50 or more per gallon. It was a boutique market even then; by 1859, when Drake struck oil, whales were scarce, the whaling fleet was in trouble and whale oil sales were at 7 million gallons a year and dropping. Whale oil was on the way out long before kerosene was on the way in”

    “Meanwhile, new products were coming onto the market. One of these, “camphene,” is almost unknown today but was by far the most popular lamp fuel in the 1840s and ’50s. Made of turpentine and alcohol, camphene and similar fuels reached about 100 million gallons per year by 1862.”

    “That year, the oil industry got the first of many helping hands from Uncle Sam. Congress slapped a $2 per gallon tax on alcohol to help fund the Civil War, and that was that: Kerosene, taxed only at 10 cents a gallon, swept camphene off the market and into history books.”

  4. “Will Oil Sands Become Stranded Assets? ”

    Gawd, I hope so.

  5. […] image – climatecrocks Saul Griffith Saul Griffith is an investor and trader in stocks, commodities and forex, writing […]

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