Photo: Barry Caruth, Creative Commons license

Gradual lowering carbon-intensity of crude oil, operations over long time-frame is real goal of new HSBC lending policy

A press release from international banking giant HSBC caused a flutter on Canadian social media late this week as Alberta oil sands and pipeline opponents made political hay with new green lending criteria. Unfortunately, the eco-activists missed the real story, which is that the biggest global economic institutions like HSBC are quietly transforming their business models as an adaptation to the Energy Transition, which is a positive for the Canadian oil and gas industry.

The London-based bank’s Friday release announced “a withdrawal from the coal fired power sector, as part of its efforts to support a transition to a low-carbon economy.”

COSIA

Oil sands mining operation.

Among the energy projects it pledged to no longer finance is Alberta “greenfield” oil sands projects. That is, brand new mines or in situ production that are “geographically separate from existing ones,” according to Sharon Wilks, spokesperson for HSBC Bank Canada.

The prohibition does not apply to extant “brownfield” projects, which is significant because oil prices are not likely to remain high enough for long enough to justify new oil sands plant, says Kevin Birn, director, Oil Sands Dialogue, IHS MarkIt. 

 “Growth in the Canadian oil sands will ultimately be a function of the future price of oil and the challenges that face the industry, but growth will also be different, driven forward through the optimization and expansion of existing facilities because they are lower cost and quicker to oil,” Birn said in an interview.

Meaning HSBC is pledging not to finance oil sands projects that are not likely to be built in the future near to medium-term future.

The bank is also pledging not to finance “new pipelines dedicated to the oil sands sector.” Does that mean HSBC would finance pipelines that carried a mix of petroleum products, including diluted bitumen? Would HSBC finance Kinder Morgan’s highly controversial 590,000 b/d Trans Mountain Expansion?

Wilks says she can’t comment on existing projects. But she hastens to add that HSBC, which has a current portfolio of $6.1 billion in the Canadian energy sector, has no plans to abandon the Alberta-based oil and gas sector.

“We’ve been a really long time supporter of the energy sector here in Canada and we will be with them for a long time to come,” she said in an interview. “We’re also a leading bank to the energy services sector.”

The significance of HSBC’s new policy is that it wants to encourage those producers and service companies to begin transitioning to the low-carbon economy of the future.

Asked if HSBC is encouraged by new emissions-reducing policies in Alberta, Wilks responds that, “like the Canadian government, we are trying to support the aims of the Paris agreement. And that’s our goal as well, to ensure that we keep global warming under the 2-degree increase and so we are definitely looking at support our customers both in the energy sector and more broadly to bring down their emissions.”

Lower emissions, transition from high to low carbon-intensity crude oil, and clean up related environmental problems, like mine tailings.

“Mining customers must be assessed for progress in: permanent land/wetland reclamation; tailings pond reclamation; and the water intensity of production,” the policy document says. “In situ” customers must be assessed for trends in the steam-to-oil ratio.”

It’s the trend toward lower carbon-intensity that is key, says Wilks: “This is a gradual process. This is not going to happen overnight, like every energy revolution before it. We haven’t set a specific time-frame, but we do expect to see it decline over time.”

HSBC isn’t the only global institution planning for the Energy Transition and modifying its business model for a low-carbon future.

In the past week or two, super-major oil and gas giants Royal Dutch Shell, Total SA, and BP have all released updated energy transition strategies that are more aggressive than the previous ones.

Shell said it plans “to reduce the Net Carbon Footprint of its energy products in step with society’s progress,” which will require “net zero additional CO2 equivalent emissions from the energy system, of approximately half by 2050.” The company says it intends to meet that goal and “plans to reduce its Net Carbon Footprint by around 20% by 2035 as an interim measure.”

Most of the huge, global oil companies are doing something similar, even climate change villain ExxonMobil.

Why?

Energy Transition expert Jessica Jewell explains: “With respect to the importance of major oil companies, the reason we haven’t seen them a play a bigger role till now is most likely because the required capacities weren’t close enough to their core competencies. But now with some mega renewables projects (like Statoil’s offshore wind farm) which do require their expertise, we will see them playing more of a role.”

This is the global context for the changes to HSBC’s energy financing criteria.

As Wilks made very clear during her interview with Energi News, the bank hopes to have a long and profitable relationship with the oil and gas management teams in downtown Calgary towers.

But that relationship depends upon customers committing to lowering the carbon-intensity of their operations and their products and services.

This is the response to industry’s complaint about seemingly onerous climate policies, like carbon taxes. Without them, access to capital from a growing number of financial institutions will cost more and be harder to come by.

Therefore, the correct way to view HSBC’s announcement is not as punitive for Canada’s oil and gas industry, but as part of a global and long-term trend that industry must adapt to.

The good news? Thanks to far-sighted leadership in many of Canada’s big energy companies, and innovative policy in Alberta, industry is getting the message.