Oil warning after Paris climate deal

The UK’s climate change envoy warned yesterday that the oil industry’s future looks more uncertain following the unprecedented deal in Paris last month, in which most of the world agreed to adopt plans to decarbonise their economies.

Sir David King, the UK’s permanent representative on climate change and a former government chief scientific officer, is one of the more influential proselytisers for decarbonising.

He was the driving force behind the establishment of a US$20 billion fund by 20 rich countries at the Paris summit aimed at accelerating investment in transformative energy technologies.

Speaking in Abu Dhabi ahead of the World Future Energy Summit, Mr King echoed the Bank of England chief Mark Carney and others in warning that the energy industry is likely to be underestimating how quickly the demise of fossil fuels could come about, thus leaving many of the world’s largest companies with “stranded assets”, and oil-dependent economies with vast unrealisable wealth.

“It is highly likely that everyone is underestimating the rate of change into the low-carbon world,” said Mr King. “We know that the rate of change can surprise everybody and once the technology is there and it is economically easy to get it into the marketplace – that is it is cheap – it just runs. It is like the speed of uptake of the mobile phone in Africa, which was because it was so transformational.”

There have been signs that large institutional investors around the world are beginning to recognise that the end of the fossil fuel world is nigh, with a number announcing plans to divest from fossil fuel-related investments.

Having started as a trickle a little over a year ago, investors such as German insurance group Allianz, France’s Axa, the California Public Employees Retirement System (Calpers), the Rockefeller fund and others have brought to $3.2 trillion the amount of investment funds to announce fossil fuel divestment.

“We are in the middle of an amazing industrial revolution … moving from fossil fuels to renewables,” said Jochen Wermuth, the founding partner of Wermuth Asset Management.

“Oil for transportation is now seriously challenged [and] when the free market decides to go for solar it will break like a dam,” said Mr Wermuth.

The oil market now appears to be in “structural rather than cyclical” downturn, with the 70 per cent decline in oil prices in the last 18 months marking a new era, said Samer Kamal, managing director of Tactical Connections, which is advising Wermuth on private equity partnerships in the region.

Meanwhile, there have been “inflection points” in the renewables market, particularly the record low 5.84 cents per kilowatt hour tender price for solar power that was achieved in Dubai in December 2014, which made it competitive with natural gas without subsidy. While some argued at the time that there was an element of gimmick in that price, it was later surpassed by SunEdison in March with a 4 cents/kWh price for Austin Energy.

There are plentiful signs of advances in the economics of the new energy technologies, Mr Wermuth said, pointing to The Mobility House, a German battery technology company that allows owners to feed electricity back into the grid when not using the car, making the battery pay back its own cost in two years and sharply reducing the overall cost of an electric vehicle.

Similarly, Mr King points to Varialift, a British company that manages Airbus-sized airships that use a combination of helium and solar technologies to transport 1,500-tonne loads at a tiny fraction of the running cost of traditional airplane freight.

Transformation to a fossil fuel-free world has long been accepted, but there is growing recognition that the quickening pace of transformation poses a threat to the energy industry and to oil-dependent economies.

“I cannot say how long it will take to replace Germany’s 40 million cars [with electric-powered ones] but it is doable over the coming decades,” said Mr Wermuth. “And I am certain we will no longer have fossil fuel cars at some point in the future.”

For oil-dependent countries it means moving quickly to take advantage of that transformation, Mr King argues. “It’s the same advice I give to energy companies,” he says. “Investing solely in oil, there is no future in that. You have an abundance of sunlight and an abundance of land to farm that sunlight. and there are not many countries with that combination. Farming solar energy from this region is just one idea to deal with the transformation.”


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