Stranded carbon v US coal exports

WILL coal really fall victim to the latest academic theory about “stranded carbon” or is Hogsback simply a sideline observer at an event that has the hallmarks of being what Granny used to call a storm in a tea-cup?

Noel Dyson

Floated a few years ago, the stranded carbon argument hit the headlines in a big way earlier this year when one of the research schools at Britain’s Oxford University published a paper on the topic, concluding that much of the world’s fossil fuels will remain underground.

The argument from the team at the Smith School of Enterprise and the Environment (and doesn’t the name give the game away) is along the lines that carbon dioxide emissions will become so politically and environmentally unpalatable that mining companies will be forced to abandon two-thirds of their reserves.

As a scare campaign that appeals to the Dark Greens in the world the Smith School findings are about as good as they get as well as being rather cleverly thought out because they go to the hip pocket of investors as well as to the committed anti-mining brigade.

Unfortunately for the stranded carbon crusaders the latest report on their campaign was published the day before an equally interesting story about US coal production that concluded there was a future for American coal: “exports”

Before getting to matter of coal exports a reminder about stranded carbon, which was the focus of a report to clients by the US investment bank, Citigroup.

Elaine Prior, the Sydney-based author of the Citigroup report, did not warn about a looming crisis for coal and other fossil fuels because of the stranded carbon argument but did caution that some investors might soon start to pay more attention to the claims.

“Various anti-fossil fuel campaigns are underway targeting investors,” Prior wrote. “These include the concept that only about one-third of fossil fuel reserves can be burnt if global warming is to be constrained to 2C, leaving reserves as unburnable and assets being stranded with loss of value to companies and their investors.”

Norway is a leader in the debate with pressure building for the country’s huge sovereign wealth fund to cut all fossil fuel exposure – which is an interesting position for one of the world’s largest producers of oil and gas.

Prior reckons most investors will not be swayed by the stranded carbon claims but also warns that the debate has just begun and that the questions will keep on coming.

“Mainstream investors will likely continue to value stocks based on their best assessment of the supply/demand/price outlook for the various fossil fuels, but probably with growing consideration of scenarios that challenge the status quo,” she wrote.

“Changing fundamentals such as pollution reductions efforts in developing countries and technological progress and cost reductions for renewables may increase investor caution about thermal coal in particular.

“Long term investors are likely to increasingly ask investee companies about their assumptions when allocating capital to fossil fuel exploration or new long-life projects.

“Meanwhile, retail demand for superannuation funds that apply some type of exclusion criteria may increase, though dollar numbers will remain small.”

At the risk of upsetting his green readers The Hog would like to add that investors who specify a fund that excludes fossil fuel investments will be the losers, at least for the next few decades, because there really is no replacement in sight for coal, oil, or gas.

That point was driven home the day after Citigroup published its thoughtful paper on stranded carbon when the Wall Street Journal noted US coal exports were expected to pass the 100 million tonne mark for the third successive year thanks to strong international demand and pressure at home from rising gas production.

The US coal export push is focused, so far, on Europe with Britain and the Netherlands topping the customer list. Even Germany, once one of the world’s biggest coal producers, is on the top 10 list of US exports. Asian customers are also buying more US coal though Australian mines have better access to that region thanks to cheaper shipping costs.

Nowhere in the WSJ report on US coal exports does the stranded carbon argument get a mention.

In fact, it is quite the opposite with an analyst at research firm Wood Mackenzie, noting: “There are 2 billion people in Asia who need more power, so eventually more US coal will get into global markets”

Not mentioned by Citigroup or the WSJ is another power supply factor, the prospect of a Russian embargo on gas exports to Europe as the Ukraine situation worsens. This is a fact The Hog reckons might have everyone soon revising their forecasts for coal demand.