The Shakedown of the Century?

Oil rig spudding a new well near Vermilion, Alberta.                                                                                                  Photo by Greg Locke © 2007.


Will trade deals let energy companies shake us down for $55 trillion?



Published December 13, 2013 

“Nice little planet ya’ll have here. Ya wouldn’t want anything to happen to it.”

I found myself imagining the dialogue, in a Jersey Mob-meets-Houston drawl, as I considered two apparently incompatible facts recently.

The first came from a major investment firm, Barclays Capital. It calculates that the world’s oil companies spent $687 billion in 2013 looking for and defining new oil reserves. Next year, Barclay’s estimates, they will spend $723 billion looking for more oil.

The other fact I needed to look up again after I read the first one. But it’s this: fossil fuel companies already own four times more oil, gas and coal than we can safely burn.

So why are they hunting even more?

Let me unpack that last statement of fact a little. It is based on necessarily approximate knowledge about how much of each of the major fossil fuels remains, on a heavy-handed equivalency among many different grades of coal and gas and crude oil, and — despite much scientific effort — what amounts still to only a rough guess about how much hotter our world will get for each additional ton of carbon in the atmosphere. Lastly, it is based on the arbitrary consensus of researchers and policy-makers that, considering how much disruption under one Celsius degree of average warming has already caused to familiar climate patterns, we should really try to hold eventual total warming to less than two degrees Celsius.

Allowing for that, the best minds working on the subject have calculated that to have a reasonable chance (defined as four out of five, or only a bit worse than playing Russian roulette with a six-gun) of keeping our planet within the benign climate range to which our economy, our society and all earth’s living species have adapted, we can release into the atmosphere around another 725 Gigatons (billion metric tons) of CO2.

But here’s the thing: the world’s fossil fuel companies already have on hand (in the form of known and developable reserves), enough coal, oil and gas to release something like 2,860 Gigatons of CO2.

Now, for simplicity I’ve rounded off some figures and turned the ranges provided in the original research into averages. I’ve also overlooked the fact that plenty of other activities (landfills, farming) also create greenhouse gasses, and so to keep below that 2o C threshold, only part of that carbon ‘budget’ can be allocated to burning more fossil fuels. But the fundamental point is unassailable: fossil fuel companies already possess at least several times more carbon in their reserves than the climate can absorb without alterations (rising seas, collapsing harvests) that will be catastrophic to humanity.

Which leaves the question: If the fossil fuel companies can’t burn the oil (or coal and gas) they have now, why are they about to spend three-quarters of a trillion dollars, nearly one per cent of the world’s total economic activity, to find even more oil?

Three possibilities come to mind:

  1. Resource companies don’t believe in science. A few Biblical fabulists may populate the industry’s hundreds of thousands of employees, but the activity of finding oil and gas is based on the same science that climatologists use, and whatever else corporate CFOs and CEOs may doubt, they believe in numbers. So I think we have to rule this one out.
  2. Resource companies are playing a game of chicken with humanity, eager to mint as much money as possible before desperate last-minute policy changes stop them. This one’s a little sociopathic, but sadly, certainly plausible.
  3. Resource companies have excellent attorneys who know their trade law, and believe they can force humanity to buy them off before the planet burns up.

Say again that last one?

Here’s the context: most of the world’s hydrocarbon exploration is conducted by companies headquartered in member states of the World Trade Organization, on the territory of other WTO members, or by firms from, and on the territory of, countries that have signed investment treaties with each other. A feature of WTO commitments, and the great majority of investment treaties, is that governments may not expropriate the assets of foreign investors without compensating those investors for their loss.

Now put yourself in the ergonomic leather office chair belonging to the CEO of Exxon or Shell or Statoil, and imagine that you have just received notice from the world’s governments that 80 per cent of the reserves shown on your balance sheet will have to stay in the ground.

What would you do? Exactly. You’d demand to be compensated for all that oil and gas and coal you’ve been spending a fortune (perfectly legally) to find, and now aren’t going to be allowed to dig up and sell.

A little Googling and some back-of-the-napkin arithmetic suggest the scale of the public’s liability if fossil fuel companies demand compensation under existing trade laws for reserves that should be locked in the ground if we want to preserve a survivable climate.

Based on the latest available world reserve estimates for oil, coal and gas; on the forecast that 80 per cent of each might be ‘stranded’ in the ground (‘expropriated’ in the eyes of trade lawyers); and on current prices for each of roughly $100 (U.S.)  per barrel of oil, $50 per ton of coal, and $10 per 1,000 cu. ft. of natural gas, here is what fossil fuel companies might view as compensable losses:

For locked-in oil: $12 trillion. For unburnable coal: $38 trillion. And for stranded natural gas: $5 trillion. In all: $55 trillion. Or a sum equivalent to about 60 per cent of the entire world economy. And as international trade law stands, defendant governments would have very few defences against claims that the ‘seized’ assets must be paid for.

Suddenly the rush to add even more barrels of oil, tons of coal and cubic feet of gas to unusable company inventories, at the cost of hundreds of billions of dollars, makes much more sense. Thanks to the ‘no-expropriation-without-compensation’ rule ubiquitous in trade agreements, companies can look forward to a healthy return on those discoveries even if they stay buried.

There is one way countries might inoculate themselves from such extortion—or at least cap its cost. They could issue formal advisories that additional fossil fuel discoveries made after a certain date will not be eligible for compensation in the event they are stranded by climate regulations. But no government on earth seems ready to go there, at least not yet.

Instead, we’re eventually more likely to hear some politer version of, “Yeah, nice little planet alright. If you want it to stay that way, you better come up with $55 trillion.”

Copyright © 2013 Chris Wood


References and further reading:
Unburnable Carbon 2013: Wasted capital and stranded assets. Carbon Tracker Initiative and Grantham Research Institute of the London School of Economics.
World Energy Outlook 2011 and 2013. International Energy Agency.
Global Oil and Gas Reserves Study 2013. EYGM Ltd (Ernst and Young).