Only substitution for oil is electric vehicles. How real is the threat to Alberta-based companies?
Climate change has become a “material risk” for publicly traded oil and gas companies, which must disclose to in vestors those trends or developments that could potentially damage the value of the investors’ share holdings. To date, climate change risk is mostly interpreted as greenhouse gas emissions and government policies to reduce them. But as regulators review climate change risk disclosure policies, a new – and potentially more serious – risk has appeared on Alberta oil producers’ radar: the spread of electric vehicles and the possibility of falling oil demand within a few decades.
Stanford University lecturer Tony Seba argues that autonomous EVs combined with the “Transportation as a Service” business model – think giant taxi or ride-sharing companies, consumers no longer own vehicles – will reduce global oil demand from 100 million b/d to 44 million b/d by 2030, effectively putting out of business the high cost producers like Alberta oil sands giants Cenovus and Suncor.
Seba is probably mostly wrong (read my columns here and here and here) about the TaaS timeline and the depth of the impact the new business model might have on transportation, but what if he’s not? My experts say Seba’s math is sound, which makes his doomsday scenario plausible if not probable.
Or, what if he’s only out by a decade or two and the oil industry lies in ruins by 2040 or 2050 instead?
That sounds like a very serious material risk for Calgary-based oil companies. Based on some recent conversations with those executives, many scoff at the thought of a world without oil – or even one that uses a lot less petroleum.
Securities regulators and investor watchdogs may change that attitude in coming months.
Alberta Securities Commission reviewing climate-based material risks
The Canadian Securities Administrators announced in March a project to “review the disclosure of risks and financial impacts associated with climate change,” and other environmental matters.
“In light of the increasing prominence of the topic and demand from investors for improved climate-related disclosure, we believe it is appropriate to review the state of such disclosure in Canada,” Hilary McMeekin, communications manager for the Alberta Securities Commission, said in an email.
The Commission will be examining sample disclosures prepared by a sample of large TSX-listed reporting issuers, seeking feedback via an anonymous online survey, and conducting focus groups with reporting issuers, investors, experts, and advisors.
McMeekin says the Commission will publish a progress report after the process is completed at the end of summer.
Carbon Tracker study of energy companies and climate-based material risk
A study by financial think-tank Carbon Tracker says one-third of the $4.8 trillion in global oil and gas spending planned to 2035 is unnecessary if the industry is going to achieve emission reduction targets tied to the Paris Climate Accord – and that Canadian oil and gas companies are some of the most vulnerable to changing policies and technology.
“We’ve had a sort of ongoing discussion with investors, and there’s a growing desire to understand who the winners and losers might be in the energy transition,” said James Leaton, research director at Carbon Tracker, as reported by Reuters.
According to the study, between 50 and 60 per cent of capital expenditures proposed by Imperial Oil, Encana Corp., and Vermilion Energy are not justifiable. Suncor, Canada’s largest oil and gas company, and Husky Energy were considered to fall within the 40 and 50 per cent of spending that would be at risk.
In the Reuters story, Husky pointed out that the industry is innovating and developing new technology to reduce greenhouse gas emissions.
“Cenovus recognizes that shareholders and other stakeholders benefit from understanding its strategy with respect to long-term corporate resilience in a low-carbon future,” said Cenovus in a recent financial report, noting it has already taken steps to combat climate change by reducing its per-barrel emissions in the oilsands by a third since 2004 and setting a similar target for total production by 2026, among other measures.
As I wrote in a June 13 column, de-carbonized oil sands crude could be a net carbon benefit if it displaces more carbon-intense crudes from Nigeria and Venezuela, for instance.
Alberta oil sands producers believe they can use new technology to reduce the carbon-intensity of their heavy crude oil to that of the average US crude oil – five to 10 on the California Air Resources Board index, compared to the current low-20s to low-30s.
Conclusion – Canadian oil/gas firms grappling with GHG emission threats, but not EVs
So far, so good for reducing material risk from GHG emission reduction policies.
But what about the threat from electric vehicles? That doesn’t yet appear to have popped up on the radar of Canadian companies.
In it’s latest climate report, Suncor – considered the Canadian leader in climate risk disclosure – only notes that, “Break through battery technology development supports growth in electric vehicles,” but there is no analysis of when that might occur or what the impact might be on the company’s operations.
This is not surprising. Under the “replacement model,” EVs will take decades before affecting oil consumption. Seba’s study was only released in May and the “TaaS model” is just beginning to attract attention from investors.
But given their potential to disrupt oil markets, EVs will likely receive more attention under the increasingly stringent climate change risk disclosure rules that appear to be coming from regulators.
I’ll be reporting on this issue in the coming months, exploring the risks posed by the electrification of transportation for Canadian oil producers and trying to quantify them. While the potential impact appears to be decades away, the pressing question is, how many decades?
The answer could be fewer decades than we think and investors will be anxiously waiting to see how Alberta’s oil firms will respond.