Terry Macalister17 September 2008
Shell and BP have been warned by investors that their involvement in unconventional energy production such as Canada's oil sands could turn out to be the industry's equivalent of the sub-prime lending that poisoned the banking sector and triggered the current financial crisis.
The criticism came as a report was released yesterday warning of the potential financial risks of tar sands, and members of the UK Social Investment Forum met in London to consider a Co-op Investments campaign on halting oil industry involvement in the carbon-intensive oil projects.
The report, BP and Shell, Rising Risks in Tar Sands Investment, co-authored by Greenpeace and fellow campaign group Platform, argues that oil majors are trying to make up a shortfall in conventional reserves by an irresponsible dash to extract oil from bitumen and other sources.
Mark Hoskin, senior partner at the ethical investment advisers Holden & Partners, expressed concern about the increasing focus on tar sands at a time when oil companies are being shut out of traditional drilling areas such as Russia and Venezuela.
"The recent banking crisis has shown how the financial markets can totally misjudge both the risks and values inherent in company balance sheets," he said. "Oil companies depend on oil reserves for their market values. BP and Shell are two of our most trusted UK stocks, but it is a shocking fact that 30% of Shell's oil reserves are in tar sands.
"This report unveils how dangerous this approach is. There is a good chance that tar sands could be to the oil industry what sub-prime lending was to the banking sector."
The report lists trends moving against investment in this area, not least the decline in the price of oil at a time when the cost of developing tar sand schemes is rising, something highlighted recently by the boss of French oil group Total.
The price of crude has plunged on world markets, with Brent blend briefly yesterday below $90 a barrel, down from nearly $150 in July, as traders fear that ructions on Wall Street following the collapse of Lehman Brothers will spread into the mainstream economy and drag down oil demand.
The report by the environmental campaigners also claims that low-carbon fuel standards under consideration by US presidential candidate Barack Obama and already implemented in California threaten to shut down sections of the American market to products derived from tar sands.
John Sauven, executive director of Greenpeace, said his organisation had always known that tar sands were a risk to the climate "but now it's becoming clear that they're a risk to the bottom line as well". Platform called on BP and Shell to rethink their entire energy strategy.
The criticism came as 20 members of the UK Social Investment Forum, a group of ethical investors, attended the Co-op Investments-backed meeting. The Co-op has called for a halt to new licensing of tar sands projects which, it believes, will tip the world into an irreversible process of global warming.
Paul Monaghan, head of social goals and sustainability at the Co-op, said the group was drawing increasing support and talks were planned with a wider group of investors. He expressed concern that BP and Shell had declined to attend yesterday and hoped they would be at future meetings.
Greenpeace and Platform say in their report that other risks to tar sands developments come from elections being held in Canada that could affect the regulatory climate, given that the opposition Liberal party is a strong supporter of a carbon tax. The NGOs also point to an "unrealistic" reliance on untested carbon capture and storage technology, which has been highlighted by Shell as a means for reducing CO2 emissions.
The Canadian tar sands are estimated to contain as much as 180bn barrels of oil but the environmental groups warn that extracting bitumen and upgrading it to synthetic crude oil is three to five times more greenhouse gas intensive than conventional oil extraction.
Upgrading a single barrel of tar sand bitumen for use in a conventional refinery also requires 14 cubic metres of natural gas, leading to huge demand for gas and supply infrastructure in remote regions of Canada. Enormous amounts of water are also needed in the process.
Shell argues that growing world demand for energy leaves society with little choice other than to exploit new forms of oil such as tar sands.
BP, which insists it is still committed to the greener agenda set under former chief executive Lord Browne, said unconventional sources had the advantage of being located in politically stable countries such as Canada and it remained confident of the economics even at an oil price of $90 a barrel.
The company, now led by Tony Hayward, believes it can reduce its overall carbon footprint by keeping away from surface mining and being careful about the way it brings oil out of the ground. It insists it factored in the future costs of carbon in its tar sands projects.Carbon count
The campaign against tar sands began in summer after joint research by Co-op Investments and the WWF concluded that unconventional fuels could tip the world into unstoppable climate change. More than $125bn (£70bn) is to be spent by 2015 on such extraction schemes, which are highly carbon, energy and water intensive.
Environmental campaigners including Greenpeace director John Sauven, pictured right, say tar sands can be five times as carbon-heavy as normal oil extraction but Shell, BP and others in the field say they can dramatically reduce their impact through careful production methods and by using innovative technology for carbon capture and storage (CCS).
NGOs dispute these arguments and are particularly sceptical about the CCS argument, given that some experts believe it may still prove too expensive and operationally difficult for large-scale mining
Shell led the charge into tar sands, which was deemed too costly by BP's former chief executive Lord Browne. New boss Tony Hayward thinks otherwise at a time when his company desperately needs to replenish reserves and resource nationalism
is threatening traditional sources. The Co-op claimed after yesterday's meeting that an increasing number of oil firm investors were waking up to the risks of tar sands.
