You Can’t Hide from Peak Oil in Big Oil

Last week, Russian Natural Resources Minister Yuri Trutnev signed an order to cancel part of Shell’s Sakhalin-2 license on environmental grounds.  Russia is also pressuring Exxon about cost overruns in a related project.  A triumph for environmentalists over Big Oil?  Hardly.

shell.jpgMost analysts agree that this is an attempt by the Russian government to renegotiate an oil and gas deal struck when prices were low.  Thinking back on what Russia did to Yukos, and Chavez forcing foreign oil firms to renegotiate contracts in Venezuela, the trend is clear:  Countries rich in fossil fuels are increasingly re-writing the rules to their liking, with little regard to the desires of foreign capital.

Given that 90% of the world’s oil and gas is controlled by state owned firms, private companies have little bargaining power, yet desperately need access to new reserves. 

Big Oil needs Russia more than Russia needs big oil: they’re going to have to settle for a much smaller take than they negotiated 10 years ago.  As oil prices rise in response to the peaking of world oil output, realpolitik will continue to trump contracts.  Western, publicly held oil firms will be the losers, as will their investors.

How can we invest to protect ourselves from rising energy prices, if Big Oil is at the mercy of every oil-rich dictator around the world?   I see two choices: fossil fuel reserves in western countries: coal mining companies and tar sands, or renewable energy sources.

Tar sands and coal both have the problem of causing high greenhouse gas emissions.  The process of extracting oil from tar sands releases 80kg of greenhouse gasses per barrel of oil extracted (and that is before the oil is used.)  The extraction of tar sands has caused Canada’s greenhouse gas emissions to increase 24% since 1990, despite the fact that they are obligated under the Kyoto protocol to reduce emissions by 6%. 

Coal is also carbon intense.  So while both coal and tar sands are relatively safe from political risk due to opportunistic regimes, both are likely to become relatively less economic in the face of possible restrictions on greenhouse gas emissions. 

Oil Shale is a boondoggle, and requires even more energy to extract than tar sands. 

This brings us back to investing in renewable energy and energy efficiency companies, both of which will benefit from rising energy prices and restrictions on greenhouse gas emissions.  The problem here is that many of them are start-ups with little or no revenues, let alone earnings.  Right now, I like energy efficiency best, since many renewable technologies have been the subject of a feeding frenzy over the last year.  Although things have calmed down over the last couple months, energy efficiency is still more economic than most renewables, and subject to a lot less hype.

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