Alberta Pouring Billions into Keystone XL an ‘Idiotic Waste’: Financial Analyst

When the U.S. Supreme Court halted construction on the Keystone XL pipeline for environmental reasons this week it wasn’t just a blow to the project’s builder TC Energy. The delay-inducing court decision makes even riskier the $7.5 billion in taxpayer money Alberta Premier Jason Kenney has committed to getting the oilsands pipeline built. Though a government spokesperson was “confident TC Energy will continue to overcome roadblocks and setbacks like they have in the past and successfully complete this project,” an experienced financial analyst who spoke with The Tyee was less optimistic.

Wagering huge sums of public money to expand the oilsands at a moment when the business case for oil could be entering terminal decline “is an absolutely idiotic waste of capital,” said Kingsmill Bond, a London-based energy strategist for the research group Carbon Tracker who’s previously worked as an equity analyst for Deutsche Bank, Sberbank, Citibank and others.

Bond is recent author of the report “Decline and Fall: The Size and Vulnerability of the Fossil Fuel System,” and argues that due to the economic wreckage of coronavirus we may have already passed global peak demand for oil, coal and gas. In an exclusive interview with The Tyee he explains why that is potentially very bad news for oil producers and the governments that support them.

Why should people in Canada take Carbon Tracker seriously?

Bond: We’re finance people more than green people. We’re trying to understand the impact on financial markets of the changing energy mix away from fossil fuels. People should listen to us or at least hear us out because investors across the world for the last 10 years have been losing a lot of money by failing to understand what's going on.

You write in the ‘Decline and Fall’ report that the fossil fuel system is ripe for disruption. Why is that?

There are three main reasons why it's especially vulnerable. The first is that like all incumbents the industry is very low growth. So global fossil fuel demand growth in 2019 for example was less than 1 per cent. Secondly, it’s actually very low return, because you have an enormous and highly capital-intensive system. The return on equity of the oil majors hasn't been above 10 per cent for years. And finally, the industry is extremely complacent. Almost all forecasts within the fossil fuel system are basically saying the same thing, which is that they have nothing to worry about, demand is going to carry on rising to the foreseeable future. Everything's fine.

These vulnerabilities are not new. And yet the industry keeps growing.

You’re right, these vulnerabilities have been there for a long time. And, so the question is more what's crystallizing them now. The main reason is the energy transition, and specifically the collapsing prices of technologies like wind and solar. These technologies have fallen to the kind of price level where they can challenge fossil fuel technologies. And then the second thing is that these new technologies have got big enough to take away all, or a very large chunk of, the growth for fossil fuels. For example, BP’s energy outlook calculates that in 2019 solar and wind were 8 per cent of global electricity supply, but 85 per cent of the growth in electricity supply. What matters to financial markets and investors is not size but growth.

That's a super interesting dynamic because I think a lot of people have this idea that oil is not going to be threatened until all of it is replaced by challengers. Can you explain why a new technology taking growth away is so important?

Financial markets and investors know from experience that losing growth has tended to be very damaging for a sector or for a company. Probably the easiest [way] to explain it is what we can see all around us right now with the oil and gas sector. If an incumbent company or industry is planning for growth, they build for growth. And if that growth doesn't come, they have huge overcapacity. And the consequences of huge overcapacity is obviously falling prices. That’s the reason why we’ve focused so much on the moment of peak demand for fossil fuels.

You’ve argued that peak demand may have already occurred in 2019 due to COVID-19. But that’s not a universal opinion. Can you make the case for why you’re right?

It’s definitely not universal. But it's a pretty simple and intuitive argument. Before COVID these new cleaner technologies were already growing very quickly and they were already starting to take away the growth in demand for fossil fuels. So we were already facing a structural peak at some stage in 2020s, and COVID brings forward the date of that peak. Fossil fuels are likely going to bounce back in 2021, but it’s already a very low-growth industry and it's going to take you at least four years to get back to 2019 levels. And by then, these new energy technologies will be large enough to be taking away all of the incremental demand.

After that, the industry is going to decline because of these new energy technologies and because of increasingly aggressive governmental action globally in order to reduce emissions. One of the consequences is we use much less oil. Nobody knows exactly the future and you could play around with the numbers. But you can see that no matter what, peak demand has got to be pretty close.

The reaction in the oilsands is to see COVID as a freak event and then everything goes back to normal. Is this a legitimate perspective?

I guess history will judge. The point to me is that you have to make some very aggressive assumptions to be able to make the argument that the current slump in oil demand is just temporary. You would have to assume that electric vehicle battery costs don't keep falling. You have to assume that governments across the world don't mean what they say about advancing the energy transition. It's also the counsel of despair. It assumes that humanity is unable to solve problems and we’re condemning ourselves to a hothouse Earth because of climate change.

What do you think about Alberta spending $7.5 billion on Keystone XL?

Let me cut to the chase here. Our view would be that expanding the fossil fuel system at the end of the fossil fuels age is an absolutely idiotic waste of capital. That’s throwing good money after bad and it's like building a canal in 1850 when the railway system is already up and running. It's like connecting a new city to the gas lighting network in 1920 when someone has already invented electricity or it's like trying to prop up Nokia after Steve Jobs has put out the iPhone.

Are we at a similar tipping point with electric vehicles?

If you look for example at the forecasts from organizations like Bloomberg New Energy Finance about the speed of growth of electric vehicles, it’s very clear that the 2020s will have the same dynamic for transportation as we had in the last decade in electricity with renewables. That is to say, enormous amounts of skepticism at the start of the decade, very rapid growth driven by a few innovative countries and then by the end of the decade complete realization by anyone who’s not tone-deaf that the future is different.

I think people will look back to those governments and companies which decided to prop up the old system after the COVID crisis and just wonder, “What were these guys thinking?”