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Citigroup sees $100 trillion of stranded assets if Paris succeeds

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If you hear a lot of noise about climate policies and climate action over the next few months in the lead up to the Paris climate conference, it is because there is a lot at stake. According to Citigroup analysts: $US100 trillion of potential stranded assets in the fossil fuel industry.

A new Citigroup report values the fossil fuel reserves that need to be left in the ground if the world is to meet its targets of trying to limit global warming to 2°C – a target that, according to a new Climate Council report, is actually a lot less “safe” for humankind than the science thought it was just 10 years ago.

Nevertheless, that is the stated target of all governments – including Australia’s – and Paris will endeavour to put in place a mechanism that will allow the world to meet that goal.

But if the world is serious about meeting this target, it needs to respect its “carbon budget” – and that calls for one-third of global oil reserves, one half of global gas reserves, and 80 per cent of global coal reserves to remain in the ground.

This graph sums up the findings of a new analysis published this year in Nature by McGlade and Ekins. The green represents the percentage of the various fossil fuel types that could be extracted under a 2C scenario.

unburnable reserves citi

Translating that into dollar terms, and using metrics of $US70 per barrel of oil, $US6.50/MMBTU of gas (an average weighted price of US, European and Asian prices) and $US70 per tonne of coal, that amounts to a lot of money.

“We estimate that the total value of stranded assets could be over $US100 trillion based on current market prices,” Citigroup notes in the report. And coal bears the brunt, accounting for more than half the value of stranded assets, even in the unlikely event that carbon capture and storage becomes a viable technology.

unburnable assets citi

Citrigroup does note that some of these assets have not, and probably will not, be developed because it is no longer economic to do so in many cases.

“But it is still a vast number, and is more important when considering the growth/capex/returns potential of associated companies, and the impact on the economies, balances of payments etc. of the countries where those assets lie.”

Citi says coal companies are already experiencing some considerable stress as can be seen from the dramatic fall in seaborne thermal coal prices, and the slump in market capitalisation represented in the graph below. Still, Citigroup says, the response of the coal industry “could be best described as optimistic and hopeful.”

citi coal capThe fossil fuel industry is “optimistic that demand will pick up and prices with it, and hopeful that ‘clean coal’ technology will become available and save the day,” Citigroup writes. “On the demand side we think thermal coal is cyclically and structurally challenged and that current market conditions are likely to persist.

“This in our view will force the companies to take dramatic actions; the large diversified mining companies such as Rio Tinto, Anglo American and BHP Billiton have either been exiting thermal coal operations or significantly rationalizing their businesses. The pure play or heavily exposed mining companies appear to want to ride out the storm.”

The one potential ‘game changer’ and blue sky scenario for coal rests in CCS, but Citigroup says the timeframe for commercial success “may be beyond the survival window for a lot of the coal mining companies.” It notes: “The industry is, in our opinion, in a something of an existential race to develop CCS within its survivability timeframe.”

Ironically, Citigroup says, the coal industry may need support or bail outs from governments, though the appetite for rescuing the industry both economically and politically appears limited.

That would be with the exception of Australia, which still seems determined to invest billions to help develop the massive coal resources in the Galilee Basin, and where the Abbott government is talking with the Labor state government in Queensland about funding a rail line for the coal exports.

Citigroup says it is confident of a good outcome in Paris, despite failures in the past, notably in Copenhagen.

“This time it feels different — countries including all the big emitters seem to be coming to the table with positively aligned intentions, against a backdrop of an improving global economy, and with public opinion broadly supportive.

“Paris offers a generational opportunity; one that we believe should be firmly grasped with both hands.”

That means, though, that policymakers and investors and corporates will have to think outside the box to provide the vast amounts of capital required in different.

“There is enormous investor demand for low carbon investment, with investor groups representing tens of trillions of dollars under management committed to investing in a more environmentally friendly manner. The stumbling block to date has been the lack of, and in particular the quality of many of the investment opportunities available. “

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  • mick

    all good news abbott cant bail out coal after letting the car industry die out

    • Pete

      Just watch him!

      • Elisabeth Meehan

        Fossil fuels are already being bailed out to the tune of billions of taxpayer $$$s in Australia.
        Abbott wants to build the rail line to Carmichael mine, even though banks won’t touch it.
        We can see why there has been a multi-billion dollar campaign to deny climate change – stand by for more.
        But Australians ARE waking up to the realities, of climate change, AND stranded assets, and stranded banks.

        Divest now!

        • Concerned

          States build rail lines.And then they make money from them.

        • Reality Bites

          Totally wrong. Fossil fuels are not getting any bailout. The fuel tax credit is a refund of a tax paid by the miners for road users, that they don’t use. Adani terminated the CBA and SCB mandates, not the other way around. CBA and SCB are still funding coal mines. Governments have funded rail lines since it was invented in order to charge fees and make money. The coal royalties alone will be billions, plus taxes and investment into Australia. You are not waking up you are only listening to the propaganda from the anticoal anarchists.

          • Barri Mundee

            Coal is on death row. Sure there will be many appeals but eventually it will die. The signs are there now.

          • dhm60

            Add the IMF to your anti-coal anarchist list. Their latest report on existing fossil fuel company subsidies (a bailout) puts them at A$1,800 for every man woman and child in Australia. ($600 to coal and $1200 to oil. Why?) That’s before the idiot Abbott hands Adani a billion dollar cheque so they can try sell their $62/tonne cleaner coal into the Indian thermal market that is priced at $ 23/tonne and failing. Coal royalties could well be bugger all on that basis. Taxes? You must be joking. Seen Adani’s corporate structure? Heard of transfer pricing?
            My preferred anti-coal anarchists are Platts, India’s Ministry of Power, Wood Mackenzie and the Newcastle fob price for thermal coal. Oh, I occasionally check coal miner’s share prices and the DJ Coal index – for their comedic relief.

  • lin

    This may all be true. However, I suspect the TPP and other similar “trade” agreements will enable the FF corps to sue for compensation for not digging up the stuff that they “own”. One way or another, the richest corporations and the wealthy that own them will find a way of getting their hands into our pockets, and “our” governments will be falling over themselves to make it all legal.

    • Biologyteacher100

      That’s why we need a carbon fee or tax, so that a rapid transition away from fossil fuels is based on market forces. The fees will help pay for the cost of climate chance.

      • lin

        We need to be extremely vigilant that those who have created the problem by their direct actions and also by their funding of manufactured scepticism about the science of climate change do not get to loot the public purse as well.
        Create the problem, delay action till there is a crisis, sell the solution and demand compensation for lost earnings might be a nice business model for the FF corps, but psychopathic behaviour, blackmail and putting the accumulation of wealth over the future of the planet must not be rewarded.

        • Reality Bites

          What so the car drivers, people who installed aircon, meat eaters etc, anybody who creates demand for products that created emissions and the companies that met the demand are also all to blame?! Isn’t it due to the industrial revolution and the creation of a way of life, which you are probably enjoying right at this moment. If Citigroup were right don’t you think that it is not just your targeted cigar chomping FF corporation that will suffer, it will be a global economic catastrophe of epic proportions. Do you really think that the world governments will let that happen?! In the meanwhile India and China are still developing their industrial revolution and will keep pumping out more and more CO2. Truth is that Paris will mostly be a lot of hot air.

          • lin
          • Barri Mundee

            Must be tough for climate change deniers to keep up coming out up nonsense, BS talking points and straw men.

          • Reality Bites

            Yes and you anticoal anarchists keep repeating the same drivel.

          • Barri Mundee

            Right back at you.

          • Peter F

            Did you know that China’s coal use has fallen 6% since its peak. It is installing about 35GW per year of wind and solar and is considering doubling its solar target to 200GW. On the other hand India is planning to install 100 GW of Solar and 60GW of wind in 7 years. Even Adani is planning to install about 5 GW of solar

          • Phil Gorman

            If fear that you are right but the cost of inaction will be orders of magnitude greater in financial terms and incalculable in the terms that matter.

  • Ian

    Hey, you have forgotten something. Coal power plants consume huge amounts of water. The closed loop ones 1 to 3 m3 per MWH just for cooling. Apparently the Victorian coal stations consume about a 1/3 of the amount of water as used by Melbourne. Wind and solar use no water once installed.

    • Concerned

      Water that would not be used otherwise.It is not taking away from supply to Melbourne.

      • Peter F

        Sort of true but it would have been cheaper to pipe water from Gippsland than to build the desal plant.

        In any case there are many places in the north of China, India, Europe and the Midwest of the US where the water is shared. In addition it is not just a question of the quantity of water but the temperature. Over the 2013 and 2014 northern summers plants have had to be throttled back or even closed because either the incoming water was too warm to condense the steam effectively or the outgoing water was dangerous to wildlife

      • Ian

        Closed loop systems evaporate the water in cooling towers, ie it is consumed evaporates and is carried away in the air never to be seen again. As I understand Melbourne’s water supply a significant quantity is drawn from the Murray Darling system. This means less is available to the lakes in South Australia and wetlands along the course of the Murray. Shut down the brown coal generators in Victoria and you suddenly have a huge resource of water which can be used in other ways. That’s my point.

  • john

    Perhaps a look at one of the largest pure coal companies will be of interest.
    Peabody was nearly $75 a share in the last 5 years now below $2 and posting not a very good balance sheet.
    Mainly due to failure to diversify as a company away from one product.
    The outlook for thermal coal is dismal now let alone the future.

  • Reality Bites

    The world annual GDP is estimated to be US$87.25 trillion so these figures are at best rubbery. Only rich western nations, not including Australia have indicated they will phase out FF, all the developing nations including the BRIC’s have no intention of phasing out FF and in fact China and India, 2 of the largest users will actually continue to grow the use of FF until at least 2030. The majority of individuals in here are cheering the imminent death of FF, however that is far from the actual truth and the reports of imminent death are greatly exaggerated.

  • James Hilden-Minton

    What about the trillions of dollars of sun light and wind that go wasted every day for lack of someone to capture it, make a scarce product of it and hold it over the rest of us? Can we really afford to allow all this atmospheric energy to be left in the sky? Everywhere I look I see stranded assets. The wind that blew last night is lost forever. The sun light that fell yesterday will never again touch this earth. One gigawatt per square kilometer is unaccounted for as if it never happened. And we are to shed a tear for every lump of coal or glop of oil that fails to achieve its destiny to be cumbusted for man’s greater glory? We leaves fall, the sun’s energy feeds the earth and every living thing. Some energy belongs in the earth.

    • Carl Raymond S

      Beautifully put.

  • Phil Gorman

    Fifty years ago it was made perfectly clear that greenhouse gasses were a major medium term problem and we needed to do something to reduce their emissions to avoid catastrophic global warming. Nobody with influence in politics or industry took up the challenge, least of all the energy industries.

    The companies that extract, sell and use fossil fuels either made a fundamental miscalculation, or were too greedy, complacent and lazy to bother making any calculation. They clung to the fatal category error that they are in the coal business, oil business or gas business. They failed to realise they are actually in the energy business.

    If they, and our politicians, had grasped this simple idea forty years ago we wouldn’t be in today’s diabolical quandary over greenhouse gas emissions. Now they are fighting a rearguard action to protect their stranded assets. If they and their political minions don’t wise up now we are all stuffed,