What about risks of leaving oil and gas in the ground?

Oct. 2, 2015
When the leader of an important central bank considers it prudent not to develop hydrocarbon resources, the oil and gas industry should pay attention.

When the leader of an important central bank considers it prudent not to develop hydrocarbon resources, the oil and gas industry should pay attention.

In a Sept. 26 speech to Lloyd’s of London, Bank of England Governor Mark Carney warned of financial destabilization and liability crises resulting from “the catastrophic impacts of climate change [which] will be felt beyond the traditional horizons of most actors, imposing a cost on future generations that the current generation has no direct incentive to fix.”

Carney follows the formulaic logic of the Intergovernmental Panel on Climate Change, established by the United Nations to review climate science and recommend precautions against catastrophic warming.

IPCC postulates that a 2°C. increase in global average temperature from preindustrial levels is all the world safely can endure. And it proposes a “carbon budget” to limit the temperature increase accordingly.

The budget amounts to one fifth to one third of global oil, gas, and coal reserves, Carney notes.

“If that estimate is even approximately correct, it would render the vast majority of reserves ‘stranded’—oil, gas, and coal that will be literally unburnable without expensive carbon capture technology, which itself alters fossil fuel economics,” he says.

At least he acknowledges that the considerable cost of not producing oil, gas, and coal counts among “transition risks.”

Two other risks deserve attention.

IPCC might be wrong in its base-case assumptions about temperature sensitivity to carbon dioxide in the atmosphere. Deviation of temperature observations from IPCC model predictions indicates this well might be so. Human influence on the climate might be greatly overstated.

Another risk is the evident susceptibility of political systems to organized fear-mongering. From the beginning, climate-change activists have demanded immediate and urgent sacrifice of real economic values to worst-case possibilities too frequently exaggerated.

They’re prevailing. Oil and gas work now routinely encounters resistance founded in the costly urge to leave hydrocarbons in the ground.

The industry, its customers, and central bankers should worry about what activists will want next.

(From the subscription area of www.ogj.com, posted Oct. 2, 2015; author’s e-mail: [email protected])