Former Vice President Al Gore thinks energy investors stand to lose $7 trillion when the carbon assets that are littering the balance sheets of multinational energy companies become worthless. He gets this number from a report by the Carbon Tracker Initiative, which suggests that the balance sheets of fossil fuel companies are littered with "unburnable" carbon.
This unburnable carbon is the oil, gas, and coal that is still in the earth that, if extracted and burned, would push the globe over the edge in terms of climate change. Because this is an edge we can't cross, it would suggest that the companies owning the assets are all but doomed.
This is why the former Vice President has continued to push against fossil fuels, and recently launched a new climate change awareness campaign as part of The Climate Reality Project. The new campaign, which is called "Why? Why Not?" is targeting youth and encouraging them to step forward as advocates for the climate change movement. The goal is to let their voices be heard at the U.N. Climate Summit later this year. It's all part of his campaign to warn the world that we can't keep burning carbon.
Gore, however, isn't just warning the world of the dangers of climate change. He's warning investors of the ominous future of their energy holdings. In an interview last year he noted that the carbon assets sitting on the balance sheets of multinational energy companies will one day go up in smoke, saying:
The valuation of companies and their assets is now based on the assumption that all of those carbon assets will be sold and burned. They are not going to be burned. They cannot be burned and will not be burned. No more than one-third can ever possibly be burned without destroying the future.
In essence, the former Vice President is suggesting that as much as two-thirds of the value of companies like ExxonMobil Corporation (NYSE:XOM), Royal Dutch Shell plc (NYSE:RDS-A)(NYSE:RDS-B), ConocoPhillips (NYSE:COP), Total SA (NYSE:TOT) and BP pcl (NYSE:BP) are based on these soon-to-be worthless carbon assets. The suggestion implies that these companies and those investing in them are in big trouble.
A look at Gore's biggest losers
The reason these companies in particular are doomed is because all five have exposure to the Canadian oil sands as well as deepwater oil projects. The oil sands is an area that the Carbon Tracker Initiative has called special attention to. A recent study it conducted suggested that these investments are a big waste of investors' capital, as the study suggested that oil needed to be north of $150 per barrel in order for the projects to be profitable.
That study specifically noted that ConocoPhillips in particular was vulnerable because it's an investor in two of the most expensive projects on the list. The independent oil and gas giant owns 50% of Foster Creek, which the Carbon Tracker study suggests needs oil above $159 per barrel in order to make money. Further, ConocoPhillips owns half of Surmont, with Total owning the other half, which needs oil above $156 to make money. Not only that, but ConocoPhillips also drills for oil in the deepwater off the coast of Africa, which needs oil prices north of $115 to make money according to the Carbon Tracker Initiative's study.
Royal Dutch Shell is another company with a doomed oil sands project, according to the Carbon Tracker Initiative. Its Carmon Creek project needs oil prices to hit $157 per barrel in order to be profitable. On top of that, Royal Dutch Shell is seeking to drill for oil in the Arctic, which has already wasted $5 billion of investors' capital and would waste more money if drilling restarted.
Likewise, ExxonMobil has pricey oil sands projects that will likely hurt the company according to the Carbon Tracker Initiative. ExxonMobil has invested in the Aspen and Kearl projects, which need oil prices of $147 and $134, respectively, to make money. Meanwhile, it, along with BP, has loads of deepwater projects in Africa and Brazil, which according to the Carbon Tracker Initiative's study, needs oil prices over $127 to be profitable.
What's an investor to do?
The issue here is who to believe. Gore and the Carbon Tracker Initiative have an agenda: They want to get the world off of carbon. Among the tactics used are warnings to investors that their investments could one day be worthless if the carbon assets that form the basis of those investments stay in the earth.
However, each one of the five "doomed" companies would say otherwise. ConocoPhillips, for example, expects to pull a billion dollars in cash flow per year out of its oil sands assets starting in 2017 when the second phase of Surmont is complete. That cash flow is expected to continue at that level for the next two decades. Likewise, each of the other supposedly doomed companies is solidly profitable today and expects to continue to be profitable in the future thanks to these investments. So, unless an investor really thinks that the carbon assets backing their investments won't be burned, then it's safe to say these companies might not be in as much trouble as Al Gore would hope.