Investors must scrutinize the significant risks associated with production of unconventional fossil fuel sources such as oil shale and coal-to-liquids (CTL), according to a report commissioned by Ceres.
Companies are spending hundreds of millions of dollars on testing, preparation and R&D activities for dozens of US projects because of their vast potential, the report states. In the US, oil shale has technologically recoverable reserves of about 800 billion barrels .
But investors must educate themselves about the considerable risks of producing these energy sources, Ceres, a coalition of investors and environment groups, warned.
Oil shale and CTL production are both carbon and water-intensive, which could become a key issue in water-stressed states such as Colorado and Utah. Federal energy and climate legislation collapsed this year, but the high-carbon intensity of these projects still presents a significant long-term risk that companies should be mitigating, said Dan Bakal, director of electric power programmes for Ceres.
“It’s still our belief we are going to have a cost on carbon,” he said. “It’s taking a little longer than we thought, but it’s certainly within the lifetime of these projects.”
This also raises questions about whether these projects can be viable without carbon capture and sequestration technology, which is very expensive and still faces numerous questions about its commercial viability and public financing levels.
“I think we’ll probably look at these with even greater scrutiny,” said Steven Heim, managing director of Boston Common Asset Management.
More than 25 companies are involved in oil shale development, including ExxonMobil, Chevron and Shell, while Shell, Rentech, Baard and DKRW are involved in CTL development, according to the report.
Equity investors should be diligent in ensuring publicly-traded companies, particularly those such as Rentech that have a greater focus on these projects, are mitigating these risks, Bakal said.
Large-scale bonds aren’t being issued yet for these projects, but that could happen in the near future and debt investors need to do their own research and prod analysts to ensure their work takes these risks into account, Bakal added.
“It’s more of a warning about the risks that are involved, but I also think it’s fair to say we would discourage investment in these kinds of investments unless it’s very clear that all of these risks are being addressed,” he said.
By. Gloria Gonzalez
Source: Environmental Finance