HSBC warns about the increasing threat of stranded assets

By Maura Forrest

April 30, 2015

Banking multinational HSBC is warning investors of the growing risk that their fossil-fuel assets may become stranded.

A new report, titled “Stranded Assets: What Next?,” argues that, “Fossil fuel companies, or some of their assets, may become non-viable or ‘unburnable’” from a combination of climate regulations, falling oil prices, and cheaper renewable technology.

Until recently, climate change policies and pollution controls posed the greatest threat to fossil-fuel production, according to the report. For example, regulations on coal-fired power plants caused a 25 per cent decline in coal-based electricity generation in the U.S. between 2005 and 2012. 

But new pressures on fossil fuels are emerging. At the global level, a binding agreement on climate change from the upcoming talks in Paris could further hamper fossil-fuel development.

In addition, the report says, the recent drop in energy prices is now posing a major threat to fossil fuels. Looking ahead, HSBC predicts that efficiency gains and renewable energy development will further reduce the competitiveness of carbon-based fuels.

“Onshore wind is already competitive with fossil fuels in some regions,” the authors write. “If this trend [of cheaper renewables] continues or were to accelerate dramatically, this would trigger an economically-driven decarbonisation of the power sector.”

The possibility of stranded assets has enormous implications for the Canadian economy.

The report included a summary of several other papers that draw conclusions about which fossil fuel reserves are most likely to be stranded, and the Canadian oil sands appear to be a strong contender.

One paper found that 92 per cent of all potential Canadian oil sands projects “require a market price of USD80/barrel in order to break even.” With current crude oil prices hovering around US$60 per barrel, that means that many new oil sands developments may not be profitable.

Another paper concluded that 75 per cent of Canadian oil must not be burned if we are to limit climate change to a two-degree Celsius global temperature increase. That conclusion supports a 2013 report from the Canadian Centre for Policy Alternatives, which found that 78 per cent of Canada’s proven fossil-fuel reserves would need to stay underground to keep warming to two degrees. If those recommendations are followed, most of Canada’s fossil fuel assets will be stranded.

The HSBC report recommended that investors consider partial or total divestment from fossil fuels to protect themselves from the risk of stranded assets. As a Saudi Arabian oil minister famously said almost three decades ago, “the Stone Age did not end for lack of stone, and the Oil Age will end long before the world runs out of oil.”



Photo Credit: wplynn