October 28th, 2020 by Carolyn Fortuna
Financial institutions have begun the long overdue process of restricting oil and gas funding. According to an October, 2020 report generated by the Institute for Energy Economics & Financial Analysis (IEEFA), over 100 and counting globally significant financial institutions have announced their divestment from coal. Additionally, an IEEFA tracker indicates that 50 globally significant financial institutions have introduced policies restricting oil sands and/or oil and gas drilling in the Arctic, including 23 to date this year.
They’re leaving coal, oil, LNG, fossil gas, oil sands, and Arctic drilling.
“Momentum is building against financing oil and gas projects,” explains IEEFA’s Tim Buckley, director of energy finance studies, in an IEEFA press release.
“Over 140 global financial institutions have already restricted thermal coal financing, insurance, and/or investment, and we are now seeing a similar accelerating shift of capital away from oil and gas exploration, starting with high risk oil sands development and drilling in the Arctic. This momentum in fossil fuel divestment globally means we expect a continuation of new announcements from other financial institutions seeking to better manage increasing climate risk.”
What are Stranded Assets — & Why Now?
Banks, insurers, and asset managers are reducing or eliminating their support for fossil fuel projects. That’s because these investments are now likely to become “stranded assets,” a term Carbon Tracker introduced to describe holdings that are no longer able to earn an economic return due to changes associated with the energy transition. Factors that lead to such value change include changes in standing:
- Economic – due to a change in relative costs / price
- Physical – due to distance / flood / drought
- Regulatory – due to a change in policy of legislation
Examples of stranded assets in the oil and gas industry:
- Resources – oil and gas currently in the ground awaiting production, including reserves
- Exploration and development assets, e.g. drilling rigs / seismic vessels
- Production and processing Facilities, e.g. processing terminals
- Distribution infrastructure, e.g. pipelines, tankers
In 2020 alone, there has been a 50% drop in Standard & Poor’s S&P Oil & Gas Exploration & Production Select Industry Index, a tracker measuring the performance of oil and gas exploration plus production companies. Similarly, the weightage of energy stocks has dropped to a mere 2.3% of the benchmark S&P 500 from 16% as recently as 12 years ago.
The IEEFA has identified 50 significant global financial institutions to date with restrictions on financing oil sands and/or Arctic drilling projects, including HSBC, Banco Santander, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Citigroup, Wells Fargo, and Morgan Stanley. Of those, the world’s largest multilateral lender, the European Investment Bank, has the strictest and best policy, announcing in 2019 that it will be out of all oil and gas by the end of next year.
Buckley and co-author Saurabh Trivedi outline in an IEEFA companion briefing note titled “From Zero To 50: Global Finance Is Fleeing Oil and Gas” why global capital is fleeing fossil fuels. They describe how the looming stranded asset risk of oil and gas and high cost of Arctic drilling and oil sands projects have encouraged many globally significant financial institutions to reconsider their investment strategies.
“The ongoing wealth destruction by oil and gas companies evidenced in the equity markets globally, the growing investor pressure to commit to net zero emissions targets, and the scrapping of projects have led financial institutions to formulate policies restricting the financing of new oil/gas exploration,” says Buckley.
Why Oil & Gas Are Becoming Stranded Assets
Investors are increasingly aligning their portfolios with the emission reduction goals of the Paris Agreement. The latest oil and gas exits are representative of the increasingly challenging economics of the fossil fuel sector and the increased investment risks. Tighter regulations on carbon-intensive projects are narrowing margins, so that risks are rising while the promised returns are looking increasingly elusive.
The ongoing wealth asset loss by oil and gas companies emerges in several ways and have led financial institutions to formulate policies restricting the financing of new oil/gas exploration:
- the equity markets globally
- tighter regulations on carbon-intensive projects
- the growing investor pressure to commit to net zero emissions targets
- the oil trade war between Saudi Arabia and Russia at the start of 2020
- the ongoing COVID-19 crisis
- the rejection of formerly promising projects
The Problem with Oil Sands
Significant investors are divesting from oil sands exploration, production, transport, processing, and Arctic oil and gas projects — all over concerns about carbon emissions. Oil sands (sometimes known as tar sands) consist of heavy crude oil mixed with sand, clay, and bitumen and are used to produce gasoline, diesel, jet fuel, and other petroleum-based products.
To extract oil, oil and gas companies burn the fossil fuel “natural” gas to generate enough heat and steam to melt the oil out of the sand. Some 5 barrels of water are needed to produce a single barrel of oil.
Oil sands extraction is among the world’s most carbon intensive large-scale crude oil operations. Carbon emissions are reported to be 31% higher than from conventional oil. The release of methane (from gas) during the oil extraction process generates upstream greenhouse gas emissions, which are worse for the climate than coal in the short term. Arctic drilling to extract “natural” gas and oil is more costly and technologically complicated than drilling for oil on land, and the ability to respond to oil spills is severely limited.
How the Financial Institutions are Reacting to the Likelihood of Stranded Assets
The World Bank, BNP Paribas, Crédit Agricole Group, and AXA were the first major financial institutions to introduce exclusion policies in 2017. A confluence of reputational and climate risk avoidance is driving these companies toward progressive reductions in their fossil-fuel investments.
In the US, 5 financial institutions — Goldman Sachs, JP Morgan Chase, Citigroup, Wells Fargo, and Morgan Stanley – have all released formal exclusion policies against Arctic drilling just within the last 4 months.
“While some policies are stronger than others, these are still important announcements showing the increasing shift away from risky fossil-fuel investment,” says research analyst and briefing note co-author Saurabh Trivedi. “Other global financial institutions such as Robeco, Citigroup, and JPMorgan have weaker policy restrictions, which may allow financial institutions to continue lending to risky sectors in the long run.”
Final Thoughts about Global Financial Institutions & Fossil Fuels
There is no financial rationale for the world’s financial institutions to remain invested in fossil fuel companies developing yet more reserves, even though some of the world’s Big Banks are reluctant to make the break.
It’s important to remember that it was only in March of this year when a report called Banking On Climate Change found that 35 banks had poured a staggering $2.7 trillion into dirty energy projects from 2016 to 2019 – the 4 years following the Paris Agreement. ConocoPhillips and other companies are still investigating ways to cool the Earth underneath their Alaskan and other operations so they can keep on doing business as usual.
And the Trump administration’s plan to open Alaska’s Arctic National Wildlife Refuge to oil drilling continues on, setting the proverbial stage for oil and gas companies to lease land all across the refuge’s 1.56 million-acre coastal plain — pushing for a start date prior to the upcoming November election.
Gas and oil funding exits are good progress toward a zero emissions future, but there is still a lot of work to be done.
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