For too long the issue of carbon has been the elephant in the oil and gas room but it has to be one of the mega trends facing the industry. Mega trends are ones that play out over two or three generations and not two or three years and the risk of stranded assets or unburnable carbon definitely fits that bill.
The science that underpins climate change is now well established and the fact that man made emissions of carbon, mainly from fossil fuel burning, are one of the principal causes is becoming increasingly accepted. On this basis there is a finite amount of carbon we can put into the atmosphere without triggering harmful and disruptive climate change. There is of course a lot of carbon embedded in fossil fuel. This means there is growing conflict between maximising the production of energy and minimising climate change. For example, the UKs Energy Reserach Centre says that "a third of oil reserves, half of gas reserves and over 80% of current coal reserves globally should remain in the ground and not be used before 2050 if global warming is to stay below the 2 degreeC target agreed by policy makers". Or to turn it round we can only use two thirds of the oil, half the gas and 20% of the coal we have already found.
If you are not convinced of the importance of this issue let me list for you the leading signals that have been apparent in just the last few months, the canaries in the Coalmine if you like.
1. The G7 group of leaders talked publicly about the end of fossil fuels by the end of this century with an almost carbon free electricity system by 2050.
2. The Saudi oil minister said "one of these days, we are not going to need fossil fuels, I don't know when" but he then added the dates of 2040, 2050 which really surprised people.
3. The IEA, the West's energy club, said "it is clear that the energy sector must play a critical role if efforts to reduce emissions are to succeed"
4. A group of European oil companies have called for a carbon tax.
5. The IMF has proposed the ending of fossil fuel subsidies as a way of reducing demand and risk to the global economy.
6. Medical opinion has come out in favour of reducing fossil fuel use as an improvement in public health as illustrated by an article in the Launcet.
7. Shareholder resolutions have been passed at both BP and Shell calling for more action and disclosure.
8. The fossil fuel divestment campaign is gathering momentum. The pressure is being applied initially to resource owning companies and even when there isn't divestment the question of unusable reserves is already a feature of many investment meetings.
If that isn't enough to get you thinking even the Pope and the Anglican Church weighed into the debate in June. The energy world has, is or will change.
Every energy business needs to address the impact of this. All the recent signals suggest we will not be burning all the reserves of oil, gas and coal we have already found. It may be felt first in the exploration business; why look for more oil when we cannot use all we have found? The second impact could be on high cost production areas as economics rear their head. Thirdly, our use of fossil fuels will become, in effect, rationed by a combination of value to society and the ease of substitution with low or zero carbon alternatives. Finally, it could give opportunities in areas such as carbon capture, improved efficiency in energy usage and the development of alternative sources of energy and feedstock.
We are being given clear notice that today's energy business will die. The issue isn't whether it will take 40 years or 80 years but what are you going to do in the next 40 months or 80 months.
