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Will Alberta's Oilsands Become 'Stranded Assets'?

In Boston, top sustainable investors describe the industry's final days. Next in the 'Are We Screwed?' series.

By Geoff Dembicki 28 Apr 2014 |

Geoff Dembicki reports on energy and climate change for The Tyee. Find his previous stories here.

Funding for this article was partially provided by the Climate Justice Project of the Canadian Centre for Policy Alternatives, with support from the Fossil Fuel Development Mitigation Fund of Tides Canada Foundation.

[Editor's note: The Tyee's sustainability reporter Geoff Dembicki is on a months-long journalistic quest to answer the big question of his millennial generation: Are We Screwed? Find a complete list of his dispatches as they appear here.]

On first impression, Matt Patsky seems about as average as portfolio managers come: solidly middle-aged, glasses, crisp-collared shirt and the carefully measured speech of someone who deals with a lot of money. Yet when I met earlier this month with Patsky, who is the Boston-based CEO of Trillium Asset Management, I was struck by the framed Mahatma Gandhi quote hanging on his corner office wall. "The Earth has enough for everyone's need," it read, "but not for everyone's greed."

If that's not typical office decor for a finance executive, then neither is Trillium's approach to investing. Founded in 1982, Trillium is America's oldest independent advisory firm "investing in businesses that are trying to have minimal impact on the environment," Patsky said. It operates under the belief markets can and should do more good for society than simply line the pockets of investors, and that there's an inherent financial advantage over time, he said, to not "causing anybody harm."

Such notions have for decades kept "socially responsible investors" like Trillium at odds with the mainstream financial world. Yet recent and unexpected energy market trends now bring both camps closer to consensus on an investment thesis with existential implications for Alberta's oilsands. That is, there may soon come a day when global demand for oil peaks, production starts to decline, and many oil operations, as well as the companies running them, become uneconomic.

"If the price of oil [gets] around $70 a barrel and production is falling a little bit every year," Trillium's Will Lana said via speakerphone from San Francisco, "you're going to find that investing in stocks in the oil and gas sector is not going to be profitable." If and when and that day comes, not all oil operations will be affected equally. "What's at the highest risk," Lana explained, "are the projects in the oilsands. Most of those need prices of $80 per barrel or upwards to be profitable."

'Destroy your career'

The prospect of an unprofitable oil and gas sector would have been unthinkable 30 years ago, when Patsky began working at Lehman Brothers in New York. Even then he stood out from his peers: an idealistic newcomer convinced ecological impacts should guide the investment process. "I remember the associate director of research saying, 'It's really nice that you care about these issues, but if you don't stop it might destroy your career,'" Patsky recalled. "But I didn't let that dissuade me."

Instead he decided to leave Wall Street for "a smaller firm where they would really appreciate what I did," he said. After a brief stint in San Francisco, Patsky ended up at such a firm in Boston. Due in part to the anti-apartheid divestment legacy of nearby Harvard, the city was in the late 1980s becoming the intellectual and financial hub for a new generation of socially conscious investors. "There was just much more of a general understanding here of why this made sense," he said.

As decades passed, and the impacts of climate change came into clearer focus, such investors faced a dilemma: should they divest their portfolios of all fossil company stocks, or use their position as shareholders in those companies to force change from within? Trillium opted for the latter in 2008 when it filed the first ever oilsands shareholder resolution, asking ConocoPhillips to disclose the "environmental damage" associated with its operations in northern Alberta.

Patsky became CEO of Trillum in 2009. Under his leadership, the firm's fossil-free investing option "has been one of our fastest-growing strategies," he said. It contains a certain financial logic. If governments get serious about keeping global warming below a two-degree threshold, then firms like those in the oilsands may be left with vast reserves of unburnable oil -- or "stranded assets." Yet absent strong political action on the climate, Patsky said, investor risk remains "hypothetical."

'A step forward'

In the world of mainstream finance, "hypothetical" might as well be "negligible." And that's likely where risk perceptions of oil and gas stocks would have remained if not for several new and unforeseen energy market trends. To learn more about those trends, I met Ryan Salmon one rainy morning at a coffee shop in downtown Boston. Salmon tracks oil and gas for Ceres, a non-profit formed in the aftermath of Exxon's 1989 Valdez spill that works with large businesses to create a healthier planet.

Salmon and I last crossed paths several years ago in the basement of a South Dakota tribal casino, where I was reporting on indigenous opposition to the Keystone XL pipeline. He was then working for the National Wildlife Federation, and now at Ceres applies his advocacy background to oil and gas finance. Lately he and others in this space have been trying to make sense of research from Bernstein, Citi, Goldman Sachs, HSBC and other influential market trackers predicting rough days ahead for fossil fuels.

"It's a really interesting time," Salmon said. What that research comes down to is this: existing climate efficiency standards, rapidly falling clean energy prices and rising fossil production costs may cause global demand for oil and coal to peak in less than a decade. "Any scenario where demand doesn't continue growing or prices go flat, or maybe even decline," Salmon said, could mean oil firms, especially those developing pricey oilsands operations, face a "shrinking window of opportunity."

I reached out to several Wall Street energy analysts for their opinion on such a prospect, but none were available for an interview. Exxon recently shared its own views, though, after a Ceres-led investor coalition asked 45 fossil firms to disclose the potential financial impacts of climate change. "Highly unlikely," is how Exxon forecasts them. Nonetheless, the fact it responded at all "was a step forward," Salmon said. "I don't see this discussion going away. If anything it's gaining momentum."

Planetary stakes

Whether momentum gains fast enough to avert dangerous levels of global warming is another question. "There's no way to finesse the future," climate author and fossil fuel divestment leader Bill McKibben said during a recent New York energy summit. The Arctic is melting, sea levels are rising and oceans are acidifying. "We're producing the beginning of real chaos," he said. Either the Exxons of the world cease extracting fossil fuels immediately, McKibben warned, "or the planet burns up."

For now there's little indication his warning is being heeded. In 2012 alone, major energy companies allocated $674 billion to finding and developing new fossil fuel reserves, a recent Carbon Tracker report estimated. "If the capital is already sunk," Salmon explained, the immediate profits from pulling oil, gas and coal out of the ground could provide those companies short-term protection from declining prices and demand, "even though in the long term they might be encountering a loss."

Which is why what happens over the next decade could be absolutely crucial to our planet's future. "It's hard not to see a pretty bleak picture," Patsky replied, when I asked him whether in the face of such daunting challenges he ever feels our human species is totally screwed. "I'm 50, and I'm starting to think 'oh my God, I failed,'" he lamented. "I've been working on [sustainable investing] almost 30 years, and I still haven't succeeded in getting everybody to understand how important this is."

Patsky turned to the speakerphone piping in Lana's voice from San Francisco. "Do you have hope?" Patsky asked. Out his 11th-storey office window I saw cars idling below on Boston's narrow streets. "Not to be flippant," Lana said, "but if [oil, gas and coal] stocks do very well over the next 20 years, then I think we are screwed." If, however, today's market trends persist -- if global fossil demand soon peaks, sending the industry into terminal decline, "then yeah," he said, "I can be more optimistic."  [Tyee]

Read more: Energy, Politics, Environment

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