'Carbon Bubble' in world stock markets say UK MP's

[RaenorShine]

Just seen this article on BBC News.

http://www.bbc.co.uk/news/science-environment-26455763

The world's financial markets could be creating a "carbon bubble" by over valuing the fossil fuel assets of large companies say MPs.

The problem is that when if we actually start to take mitigation seriously at some point we are going to have to leave known carbon deposits in the ground.  Oil, Gas and Coal companies currently count their discoveries as assets which they can exploit for profit at a later date.  If they can't be exploited due to environmental legislation, they become worthless as assets, and the companies have to write off hefty losses on their assets, which could then cause the company to go bancrupt if they have borrowed against that asset.

I'd say that the bubble would already be here if we were serious about mitigation, but the fact that they are discussing a future bubble shows that we are not yet there despite the increasing greenwashing.

[Buddy]

ABSOLUTELY agree.  There will come a time in the future where it will pop.

You already have a push towards "activists" pushing for various pension plans to DIVEST their equity interests in fossil fuel companies.  That drum beat will only grow louder YEAR BY YEAR.

It looks like the only large fossil fuel company that "gets it".....is Total (large French oil company).  Total is 50% owner of Sun Power (solar cell company).  Total is also the first company to announce that they would NOT drill in the Arctic.

In addition to the bubble in fossil fuel companies that will pop.....is also the bubble of ELECTRIC UTILITY companies which will pop in the future.

One interesting thing to watch.....will be the investment bank's like Goldman Sachs, Morgan Stanly, etc.......because just like the housing debacle of the decade of 2000 - 2009........the investment banks will be at the center of it.  I expect the banks (in the future) to come out publicly to "promote the value" of fossil fuel companies...........while at the same time "shorting" them.

[idunno]

A live blog from the Guardian on this subject...

http://www.theguardian.com/environment/2014/mar/06/could-fossil-fuels-melt-the-global-economy-carbon-bubble

[Buddy]

The funny thing about alternative energy......is that it is THEE PERFECT CONSERVATIVE INVESTMENT.

1)  Conserves the physical environment
2)  Conserves air quality
3)  Conserves health (people are LITERALLY moving out of China because of poor air quality)
4)  Conserves cash as fossil fuels diminish and cost more and more with each passing year.
5)  Conservative because you install it and then let it work for you for 25 years, instead of having to constantly drill baby, drill...

And yet.....who opposes alternative energy at every turn.....THE CONSERVATIVES.

As an Independent.....I have to laugh (sometimes uncontrollably:).

[Neven]

I've seen this argument before, made by Bill McKibben. It sounds very reasonable, but I don't understand the details. How exactly does it work with assets? FF companies have a certain amount of Gigatons in their mines. What is it exactly that they do with it bookkeeping-wise, that leads to huge losses when not dug out?

[Buddy]

Neven:

The issue of what the FF companies do from a "bookkeeping sense" is separate from whether or not "alternative energy" is "conservative".   I haven't read much of Bill McKibben's stuff.....but it doesn't surprise me that he or others take that view.  What is "now conservative" has really been bastardized from the money that fossil fuel company's are doing to try and save the golden goose they have been milking for decades.

The issue of what the FF companies do with "the value of the stuff in the ground".....is likely dependent on a few things.  I don't have the background in "natural resource accounting".....BUT....most of the big FF companies have gotten big through acquisition of smaller FF companies.  A big part of the purchase price of a smaller company.....is obviously the "value of the stuff in the ground".   When a company makes an acquisition.....they "apportion" the purchase price among all the assets that were purchased (equipment, buildings, leases,.....and "goodwill").  There is likely a large chunk of "goodwill" on the books of the large FF companies (goodwill is an "asset" on the balance sheet).  Goodwill is really the excess of the purchase price LESS the fair market value of all the other assets".   That "excess" is put on the balance sheet as the asset called "Goodwill".

The "short story".....is that the FF companies will have to "write off" the DIMINISHED VALUE of the goodwill on their balance sheet.  For instance......when Microsoft purchased aQuantive and that purchase didn't work out as planned.....Microsoft had to write off 6.2 billion dollars.

Again...I am NOT an "oil and gas and coal" expert......but suffice it to say there would be huge write-offs.  In fact....as that day approaches.....I believe you will see the investment banks shorting the energy companies (in addition to electric utilities).....at the same time the investment banks are "promoting" the FF companies to the general public (think housing disaster of 2006 - 2009).

If you want to see a fossil fuel company that is actually looking to the future.....look at a company like Total (they bought

[CraigsIsland]

I've seen this argument before, made by Bill McKibben. It sounds very reasonable, but I don't understand the details. How exactly does it work with assets? FF companies have a certain amount of Gigatons in their mines. What is it exactly that they do with it bookkeeping-wise, that leads to huge losses when not dug out?

Pray that when the company finds out the legislation or market forces them to shut down that they diversified their asset portfolio enough to survive the loss. Business don't last forever and the ones that stick around adapt to changing criterions. Of which some can be influenced by lawmakers or civilians. Divesting and encouraging companies to diversify away from carbon is what people should be clamoring for irregardless of ongoing "events". 400ppm? Bring it down to where we're not loading the dice and get civilization in balance with Earth. Society should not lose either way.

[Buddy]

Neven:

Sorry....I "cut myself off".

What I was saying at the bottom of my last post, was that Total bought 50% of Sunpower which is an American solar company.  Also, when Shell was having all their problems with trying to drill in the Arctic.....Total came out publicly and said THAT TOTAL WOULD NEVER DRILL IN THE ARCTIC.  EVER.

Total "gets it".  They see how this is going to play out.  So Total is turning itself into an energy company, and I would expect them to sell off fossil fuel assets over time.....before you know what hits the fan and those assets are worthless.

And what happens if two things I think WILL HAPPEN....actually happen:

1)  El Nino in 2014 - 2015 which pushes temps up again....

2)  Arctic is MOSTLY MELTED OUT by September 2016 (except for a narrow 1,200 mile swath stretching  from along the Canadian Archipelago to northeast Greenland).

The movement to alternative energy is inevitable.....and it is picking up steam.  The US installed MORE SOLAR IN THE LAST 18 MONTHS.....then we did in the 10 years prior to that.

[RaenorShine]

Neven,

As I understand, accounting for assets within a business is a grey area called 'fair value' which is generally what you could sell in an orderly fashion, this is in between a fire sale price and the future profit it could generate. 

Companies manage their assets and should assign a realistic fair value on a asset.  This is exactly the hole banks fell into during the financial crisis when they bundled up loans into assets and assigned a 'fair value' to them of far higher than their actual value.

The oil companies count future drilling rights as assets on their balance sheets.  The problem is that to hit any of our existing targets the majority of assets are going to be left in the ground.

So if ABC Oil company has tar sands which it has discovered and/or bought a licence to exploit it can book the asset at 'fair value' which assumes they are to be fully exploited in the future.  If a new law makes exploiting this illegal, and the fair value of these becomes zero so ABC Oil company now has to declare a 100% loss on these assets.  If the remaining assets the company has exceeds their debt the company is insolvent and will go bust.

The problem with this is of course that at some point we need to mitigate for climate change, but this has not been reflected in the valuations of oil companies worldwide.  80% of known reserves (which are on the oil companies and government books) need to be left in the ground to hit the targets set under Kyoto, and the oil companies are still exploring for more. To make things worse, as oil increases in value due to Peak Oil the assets increase in value, and we get an even bigger bubble.

When the s*** finally starts hitting the fan mitigation is going to become more of a priority, laws will be passed and the oil companies assets will become worthless.  As with the financial crash of '08 when assets become worthless bad things happen.

See http://www.carbontracker.org/carbonbubble for more info.

[ccgwebmaster]

When the s*** finally starts hitting the fan mitigation is going to become more of a priority, laws will be passed and the oil companies assets will become worthless.  As with the financial crash of '08 when assets become worthless bad things happen.

Why are we so sure that the oil assets will become worthless? Do we really think laws will be passed preventing their use during a time of chaos when we need all the energy we can get at the cheapest prices possible? Fossil energy is a real physical asset - unlike fictional collateralised debt obligations.

[RaenorShine]

ccg,

I'm not all that sure that they would at least to make a large difference in the near future.  The problem is that its a global problem, and I cant see Canada, Russia etc. changing any time soon.

I'm explaining what the bubble is, not saying that I can see it occurring.

There are numerous other current bubbles that are likely to go pop in the future due to the climate (insurance, agricultural land values etc).

The one thing about the Carbon Bubble is that if it does go it means we have a far greater chance of a habitable planet.  If every insurance company goes bankrupt it does not change anything other than that people cant rebuild after the next climate disaster which will be incoming.

One thing is for certain its going to be a bumpy ride.

[crandles]

Book-keeping wise, the first thing that happens is companies spend money researching the best locations and then drilling those locations and assessing how much oil and gas might be recoverable from each well. Such expenditure is either a past cost or is treated as creating an asset. If the company only drills once then if it doesn't discover oil or gas then it is a past cost, but if it does find oil or gas it is an asset (that is likely to be worth more than the cost).

However, a large company with many drill sites probably doesn't treat them one by one instead it probably doesn't write off any costs as cost but keeps all the costs as an asset unless it thinks that these costs cannot be recovered in selling the oil and gas the successful sites will produce.

The US makes more use of fair values and it is possible that they are allowed or even required to revalue the drill site assets, which may well lead to a value higher than the costs incurred. UK allows revaluing, but once you start you have to continue regularly revaluing.

There is also disclosure of reserves and stock markets might value those reserves at a higher amount than included in the accounts - I would suggest that is highly likely if the drill sites have not been revalued. A price bubble is more likely to start here in the stock market value but this can feed though into the accounts if the drill sites are revalued to fair value which is likely to be determined at least in part by looking at stock market values.


I doubt that
"The oil companies count future drilling rights as assets on their balance sheets."
is true except to the extent that the companies have paid to buy those future drilling rights. I would think that you need data on oil/gas pressure before any such prospective oil or gas can be formally assessed as required to be counted as reserves.

[RaenorShine]

Crandles,

Thanks for the clarification.

As you suggest the stock market does create a larger bubble in the share price as a companies stock is as much to do with what it can earn in the future as what it is physically worth now.

[Buddy]

Here are a couple answers to some questions or issues people raised above, or seem a little confused about:

1)  The "value" of any oil in the ground is NOT included as an asset on the balance sheet of an oil company.  It's "value" is reported in footnote form with the financial statements and is "measureable".  The cost of equipment and other costs to GET READY TO REMOVE OIL (drilling rigs, labor in setting up drilling rigs...etc) IS an asset on the books (which is depreciated as an expense over time as the oil is removed).

2)  The primary "write-off" that would happen in a world where the price of oil peaked....and is going down AND expected to go down SIGNIFICANTLY AND NOT RECOVER.....is GOODWILL.  Again....as I stated above....Goodwill is the cost of what a company purchased ANOTHER COMPANY FOR, OVER AND ABOVE THE COSTS ASSOCIATED WITH "HARD ASSETS".  In other words.....when an oil company makes a purchase, they are purchasing expected future production AT AN ESTIMATED PRICE FOR THE PRODUCT.  In the oil and gas industry.....if the price were expected to drop and NOT RECOVER because of a KNOWN move to alternative energy......then the amount of "Goodwill" on the balance sheet of a company would need to be reduced/written off. 

THAT....is decades in the future.  How many decades......is speculation right now.  Is it 30 years....or 60 years.  I have NO IDEA.  But it isn't a matter of IF it will happen....it is a matter of WHEN it will happen......and HOW FAST it will happen.

What I do have a "high confidence level" in is this:  The movement TOWARDS that end will continue to pick up speed as events continue to play out. 

If you're at the top of a hill......and you get out and put the car in neutral and take off the brake......and then push the car slowly just to get it rolling.....you know that eventually the car will careen off the road and wreck.  You don't know exactly when....and you don't know which side of the street it end up on.......and you don't know how bad the damage will be.  But you KNOW it will wreck (those pesky laws of physics:).  THAT....is where we are now.  How hard we continue to push the car (through fossil fuels) is up to us (AND THOSE WE ELECT TO POLITICAL OFFICE).

[Buddy]

Regarding the "carbon bubble"....here's an EXCELLENT read that just came out:

http://www.smartplanet.com/blog/the-take/the-energy-transition-tipping-point-is-here/

Enjoy....