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May 09, 2014

Carbon Tracker Publishes First in Series on Stranded Assets
    by Robert Kropp

The first of three reports analyzing the investment risks associated with stranded fossil fuel assets coincides with Stanford University's divestment of coal stocks from its $19 billion endowment. -- On Tuesday, Stanford became the first major US university to embrace the principles of the student divestment campaign when it announced it would no longer invest endowment funds in companies whose primary business is coal.

“Stanford has a responsibility as a global citizen to promote sustainability for our planet,” University President John Hennessy stated. “The university's review has concluded that coal is one of the most carbon-intensive methods of energy generation and that other sources can be readily substituted for it. Moving away from coal in the investment context is a small, but constructive, step while work continues, at Stanford and elsewhere, to develop broadly viable sustainable energy solutions for the future.”

Stanford's decision was encouraged by the student-led Fossil Free Stanford organization, and was based on a 1971 Statement on Investment Responsibility which allows for the consideration of corporate practices that “create substantial social injury.” As a result of the decision by its Board of Trustees, the University will divest the coal stocks that its $18.7 billion endowment currently holds.

The Statement also states that the primary investment obligation is maximizing financial returns,and members of the University's Advisory Panel on Investment Responsibility and Licensing would do well—as would every other institutional investor—to consider the implications of a new report from Carbon Tracker Initiative (CTI), entitled Carbon Supply Cost Curves: Evaluating financial risk to oil capital expenditures.

The UK-based CTI was the first organization to report extensively on the investment risks associated with stranded fossil fuel assets. In 2011, Unburnable Carbon estimated that only 20% of the proven reserves on the books of public and private coal, oil, and gas companies can be burned if the increase in global temperatures due to climate change is to stay within the 2°C parameter.

Carbon Supply Cost Curves specifically addresses the risks of investing in oil companies, especially those that engage in controversial operations such as deepwater drilling, hydraulic fracturing, and oil sands development. In the report's foreword, CEO Anthony Hobley wrote, “If demand for oil is not substantially reduced we are clearly heading for a level of warming far in excess of 2°C. Which reveals that there is no free lunch here for investors. Either policy and technological tipping points will reduce demand in line with our analysis or we will face levels of warming described as catastrophic by many.”

The report's exhaustive analysis, which accounts for such factors as demand, the future price of oil, and types of production, reveals that there is approximately $1.1 trillion of capital expenditures at stake for private oil companies over the next decade. Deepwater and Arctic drilling, the report states, “do not make economic sense and confirmation is needed that they will not proceed under the banner of replacing volumes.” Yet, the report finds, “Industry demand projections often assume business as usual, and do not typically allow for significant changes in costs, competition, efficiency or emissions constraints.”

The greatest risks among unconventional oil types are found in the oil sands of Alberta, Canada.

“Who do we want to do what?” CTI asked. “Investors to challenge company development strategies on capital expenditure plans on high cost / high carbon projects. Investors to challenge financial analysts on demand/price scenarios. Financial regulators to start requiring companies to demonstrate how their business model is adapting to a low carbon future.”

Last year, a coalition of 70 institutional investors organized by Ceres and Carbon Tracker wrote to 45 of the largest fossil fuel companies, requesting that the companies report on the exposure to and management of risks associated with stranded assets. A number of shareowner resolutions have been filed this year as well, requesting that companies engaged in fossil fuel extraction report on the risks of stranded assets.

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