Climate Change

Published on August 26th, 2015 | by Giles Parkinson

12

Citigroup Predicts $100 Trillion In Stranded Assets If Paris Summit Succeeds

August 26th, 2015 by  


Originally published on RenewEconomy.

If you hear a lot of noise about climate policies and climate action over the next few months in the lead up to the Paris climate conference, it is because there is a lot at stake. According to Citigroup analysts: $US100 trillion of potential stranded assets in the fossil fuel industry.

A new Citigroup report values the fossil fuel reserves that need to be left in the ground if the world is to meet its targets of trying to limit global warming to 2°C – a target that, according to a new Climate Council report, is actually a lot less “safe” for humankind than the science thought it was just 10 years ago.

Nevertheless, that is the stated target of all governments – including Australia’s – and Paris will endeavour to put in place a mechanism that will allow the world to meet that goal.

But if the world is serious about meeting this target, it needs to respect its “carbon budget” – and that calls for one-third of global oil reserves, one half of global gas reserves, and 80 per cent of global coal reserves to remain in the ground.

This graph sums up the findings of a new analysis published this year in Nature by McGlade and Ekins. The green represents the percentage of the various fossil fuel types that could be extracted under a 2C scenario.

unburnable-reserves-citiTranslating that into dollar terms, and using metrics of $US70 per barrel of oil, $US6.50/MMBTU of gas (an average weighted price of US, European and Asian prices) and $US70 per tonne of coal, that amounts to a lot of money.

“We estimate that the total value of stranded assets could be over $US100 trillion based on current market prices,” Citigroup notes in the report. And coal bears the brunt, accounting for more than half the value of stranded assets, even in the unlikely event that carbon capture and storage becomes a viable technology.

unburnable-assets-citiCitrigroup does note that some of these assets have not, and probably will not, be developed because it is no longer economic to do so in many cases.

“But it is still a vast number, and is more important when considering the growth/capex/returns potential of associated companies, and the impact on the economies, balances of payments etc. of the countries where those assets lie.”

Citi says coal companies are already experiencing some considerable stress as can be seen from the dramatic fall in seaborne thermal coal prices, and the slump in market capitalisation represented in the graph below. Still, Citigroup says, the response of the coal industry “could be best described as optimistic and hopeful.”

citi-coal-capThe fossil fuel industry is “optimistic that demand will pick up and prices with it, and hopeful that ‘clean coal’ technology will become available and save the day,” Citigroup writes. “On the demand side we think thermal coal is cyclically and structurally challenged and that current market conditions are likely to persist.

“This in our view will force the companies to take dramatic actions; the large diversified mining companies such as Rio Tinto, Anglo American and BHP Billiton have either been exiting thermal coal operations or significantly rationalizing their businesses. The pure play or heavily exposed mining companies appear to want to ride out the storm.”

The one potential ‘game changer’ and blue sky scenario for coal rests in CCS, but Citigroup says the timeframe for commercial success “may be beyond the survival window for a lot of the coal mining companies.” It notes: “The industry is, in our opinion, in a something of an existential race to develop CCS within its survivability timeframe.”

Ironically, Citigroup says, the coal industry may need support or bail outs from governments, though the appetite for rescuing the industry both economically and politically appears limited.

That would be with the exception of Australia, which still seems determined to invest billions to help develop the massive coal resources in the Galilee Basin, and where the Abbott government is talking with the Labor state government in Queensland about funding a rail line for the coal exports.

Citigroup says it is confident of a good outcome in Paris, despite failures in the past, notably in Copenhagen.

“This time it feels different — countries including all the big emitters seem to be coming to the table with positively aligned intentions, against a backdrop of an improving global economy, and with public opinion broadly supportive.

“Paris offers a generational opportunity; one that we believe should be firmly grasped with both hands.”

That means, though, that policymakers and investors and corporates will have to think outside the box to provide the vast amounts of capital required in different.

“There is enormous investor demand for low carbon investment, with investor groups representing tens of trillions of dollars under management committed to investing in a more environmentally friendly manner. The stumbling block to date has been the lack of, and in particular the quality of many of the investment opportunities available. “

Reprinted with permission.






Complete our 2017 CleanTechnica Reader Survey — have your opinions, preferences, and deepest wishes heard.

Check out our 93-page EV report, based on over 2,000 surveys collected from EV drivers in 49 of 50 US states, 26 European countries, and 9 Canadian provinces.

Tags: , ,


About the Author

is the founding editor of RenewEconomy.com.au, an Australian-based website that provides news and analysis on cleantech, carbon, and climate issues. Giles is based in Sydney and is watching the (slow, but quickening) transformation of Australia's energy grid with great interest.



  • Bob Fearn

    How can anyone in their right mind call something that could destroy the only planet we have, an “asset”.
    Citigroup is completely out of touch with reality!!

  • JIMMYLIMO

    This is really sick reasoning. They say the “value” is $100 trillion… That’s if we pumped every last drop of oil, and dug every last piece of coal on earth, regardless of how high the cost to obtain and process. What they DON”T figure in is the COST to human life from climate change and respiratory disease if we continue on our disastrous course with fossil fuels… Weigh that against the ever decreasing cost to harvest the wind and sun… Sounds like Citibank is just a pimp for Big Oil and Dirty Coal !

    • Matt

      That or it is their quite way of saying divest from any pure coal play company like yesterday. Notice that even with CCS >80% of know coal reserves need to stay in the ground. These are really stranded assets, these are reserves. The stranded assets are all the industrial plants build to extract/refine/transport/use FF that all close years/decades early: thermal plants, LNG port, those massive coal extraction machines. Even for the NG “bridge” a hard look would say don’t build any more thermal plants at least in US/EU (I don’t know enough to make statement about else where).

      After publishing a study like this, doesn’t Citigroup get into “risk zone” if they don’t recommend divestment. Recommending an investment you know is bad, can have impact on you. Even if they are hard to enforce in a court of law.

  • JamesWimberley

    The well-known Australian economist John Quiggin (an Antipodean version of Paul Krugman) thinks the Galilee Basin coal mines are zombies. The key Indian promoter Adani has closed down its engineering planning team, stranding its Korean partner Posco, which has in turn decided to refocus on its core steel business. Of course the Australian government could probably rescue the project with a huge and insane subsidy, but the market has given the thumbs down.

    • Ronald Brakels

      I think Galilee Basin Coal is dead. The futures market says its dead. Adani clearly thinks it’s dead. Eighty cent a watt solar in India says it’s dead. The Queensland state goverment doesn’t currently come out and admit it’s dead, firstly because if they admit the obvious the Coal-ition will immediately blame them for the failure of the project for having an inadequate triumph of the will, and secondly plenty of politicians in the state government still want a huge new coal basin to be opened, they’re just not quite stupid enough to pay for it and are willing to let the market decide. And the market has decided. In real terms the value of coal is expected to drop by about 16% over the next 5 years. Actually, future prices are probably even lower now, given that all is not well in world finance land. No one is going to invest in a new Australian coal basin at this time, and they’re certainly not going to in the future.

  • Jason hm

    That’s assuming technology will not devalue fossil fuel. It’s not much of an asset if no longer economically viable to extract distribute refine then distribute again.

    • Omega Centauri

      In terms of the economic shock of devaluation of the assets it doesn’t matter whether it is market forces or govertnmental action which strands the assets. They still need to be written off, and equity markets will be impacted.

  • Marion Meads

    So if you have gold in a mountain and you did not mine for it, the gold is a stranded asset? What kind of logic is this? Let us suppose, the gold is $100Trillion, and if you mine for it, it costs you $90Trillion. Is the stranded asset still worth $100Trillion or $10Trillion? Let us say you did mine for it, and it destroys $500Trillion worth of atmosphere, land, and sea damages, is the stranded asset still worth $100Trillion?

    • sault

      The problem arises in that a lot of fossil fuel companies’ valuation is based on their reserves numbers. For example, Exxon is not just it’s refineries, drilling rigs, office buildings, patents, etc. It is also the oil left in the reserves it is currently extracting and its potential future extractions. So in the only terms the polluters care about, having to leave fossil fuels in the ground is like taking money out of their huge pockets. Expect them to put up a big fight to keep that from happening, just like they’re doing now but to fight even dirtier (LOL).

      Agreed that environmental destruction and the effects of pollution are completely left out of these calculations. If this were the case, tobacco and fossil fuel companies would have a negative valuation or way closer to zero than they are now.

      • NRG4All

        And on top of that, we taxpayers allow the fossil fuel companies tax advantages with the depletion allowance that helps to shelter their incredible profits.

    • Michael G

      I completely agree, but none of this makes any economic sense. It is all about perception and political posturing.

      Politicians are followers, not leaders. Some “Kyoto agreement” participants ignored the agreements (I’m looking at you, Canada) and did whatever gave their political parties short term gains. The US was widely criticized for not signing Kyoto treaties but those who did sign didn’t do anything different.

      Get 50%+1 of voters in every country to put “stop global warming” as their #1 issue and you have your solution. All the political agreements in the world won’t matter until that happens.

      • Martin

        Well if the voter are not able to get behind “stop global warming” maybe court action in every country will have to do that job, has been done in a number of cases and guess what they won! :))

Back to Top ↑