Report guardian (UK): Smart businesses will act now to reduce their environmental impact

Butternut (s. 23.7) The ER proposal states that individuals would register their activities affecting Butternut with MNR at least 30 days prior to removal of any retainable Butternut tree. However, rather than registering ahead of time, individuals must submit a Butternut Health Assessor's report to the appropriate MNR District Manager at least 30 days before completing the registration and the start of the proposed activity that will impact Butternut."

Improving the speed and predictability of Endangered Species Act permits has reportedly been a major request of the business community. Now that they are getting some of that, will enforcement be beefed up to ensure that the new system works?

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The Financial Post: Oil giants could feel major pain should world get serious about reducing global temperatures

http://business.financialpost.com/2013/06/21/oil-climate-change-producers/

A global economy that stubbornly refuses to wean itself off low interest rates. Central banks that seem hell bent on destroying confidence in money with Hail Mary quantitative easing programs. Made-in-Europe bank bail-ins, which have depositors around the world worried about insured savings. And let's not forget Kim Jong-un, Asia's Supreme warmonger, who seems determined to launch a new Korean conflict. Investors have an impressive list of reasons to wonder if the bull in equities that pushed the S & P 500 to a record high this year will keep running, especially since nobody knows if it was motivated by genuine optimism, trading computers or simply the wishful thinking of investors with a serious lack of attractive places to park their money.

How Suncor climbed atop the list of Canada's biggest companies²

After one year at the oil giant's helm, CEO Steve Williams has begun to stake out his own turf and says the company is no longer interested in growth for growth's sake. Read more³.

Canadians, of course, never got to fully ride the bull, thanks to weakness in commodities. But there are reasons to be optimistic about domestic energy plays if global enthusiasm for stocks holds. The discount on Canadian oil, which can cost the economy tens of billions of dollars annually, contracted to less than US$15 in April from more than US$40 last year. Furthermore, polling data suggests about 74% of Americans and 68% of Canadians support the Keystone XL pipeline, which is why the smart money is currently betting Washington will give a green light to the controversial project. Uncle Sam isn't exactly holding his breath for more Canadian oil; and it will take more than just a few pipelines to the Gulf Coast to totally reverse the price discounts for Canadian crude. Alberta must get its oil to other markets. But that is the plan, according to Alberta Energy Minister Ken Hughes, who insists a market diversification strategy will eventually ensure the province's crude reaches customers willing to pay top dollar for it.

For long-term thinkers, now could be a great time to load up on beat-up western Canadian energy plays, right? Not so fast, partner. Before placing any bets, please be advised that being the world's only major oil-producing jurisdiction without direct access to an ocean may actually be the least of Alberta's energy-related problems. Remember peak oil? Well, that's so yesterday.

The hot topic du jour, at least amongst those willing to discuss it, is peak demand. Indeed, the scarcity of oil pales in comparison to the problems that could arise if the human race actually consumes the fossil fuel reserves that back the market capitalizations of listed energy companies. That's why bank analysts and credit rating experts are now starting to join early proponents of the so-called carbon bubble theory, warning that energy sector valuations ignore the world's climate change target and could be decimated if the international community puts its money where its mouth is and collectively moves to protect Mother Earth by attacking demand for oil, coal and gas.

According to journalist Mark Lynas, author of Six Degrees: Our Future on a Hotter Planet, a respected summary of possible global warming outcomes based on climate science, a worldwide temperature increase of just one degree Celsius could see the western United States once again "plagued by perennial drought," devastating agriculture and driving out humans on a larger scale than during the Dust Bowl exodus in the 1930s. On the other side of the Atlantic, a resurgent African monsoon could drive rainfall back into the Sahara while Mount Kilimanjaro eventually becomes snow free. Melting in the Alps could remove the "glue" that holds the region's peaks together, generating giant landslides.

Nevertheless, with political realism being the dominant attendee at the Copenhagen climate conference in 2009, the official international line in the sand became two degrees, which could completely melt the Greenland ice sheet and eventually raise sea levels by seven metres, not to mention inflict Middle East-style temperatures on Europe, where the current summer range in temperature was enough to cause 30,000 heatstroke deaths in 2003. "Two degrees of warming," Lynas noted in a 2007 newspaper column, "will be survivable for most humans," but "a third of all species alive today may be driven to extinction as climate change wipes out their habitat."

As things stand, the two-degree target is highly unrealistic, especially with weak economic growth and reports of an unexpected pause in global warming undermining government resolve. According to a study by PricewaterhouseCoopers, the world's average rate of decarbonization has been just 0.8% since 2000. Even if that rate doubled, notes the consultancy's climate change expert Leo Johnson, a six-degree increase by the end of the century is conceivable. To stabilize atmospheric carbon dioxide concentrations at 450 ppm, which would deliver a 50% chance of limiting global warming to two degrees, there needs to be a six-fold improvement in our rate of decarbonization from now until 2050. But as Johnson points out, "the policy context for carbon capture and storage (CCS) and nuclear, critical technologies for low carbon energy generation, remains uncertain" while "support for renewable energy technologies is being scaled back" and improvements in carbon intensity have stalled in emerging markets, "where the E7 is now emitting more than the G7."

From a strictly investing standpoint, it doesn't actually matter if the two-degree target is a pipe dream. It doesn't even matter if global-warming skeptics are proven correct and no action whatsoever is needed on the climate change front. The financial risk in question revolves around just how hard the world will try to reduce the use of fossil fuels, because the current agreed-upon plan of action could trigger a staggering collapse in the value of oil, gas and coal assets. Indeed, if the international community gets serious about its stated temperature goal, about two-thirds of existing energy sector reserves, which currently support about US$4 trillion in share value and back more than US$1 trillion in debt, are actually superfluous to the world's needs, according to Unburnable Carbon 2013: Wasted Capital and Stranded Assets, a recent study by Lord Nicholas Stern, a London School of Economics professor, and climate think-tank Carbon Tracker.

Instead of accepting that the world has more than enough fossil fuel reserves for its own good, the Stern report notes the top 200 energy companies spent US$674 billion, or about 1% of global GDP, to increase supplies last year. And if the trend continues, an additional US$6 trillion will be spent developing further energy assets over the next decade. "Pretending business models reliant on more carbon emissions fit with increasing carbon constraints is the equivalent of the emperor's new clothes," stated James Leaton, Carbon Tracker's research director, who insists financial market regulators need to start looking at the systemic risks posed by global plans to implement climate change policy. Stern added: "Smart investors can see that investing in companies that rely solely or heavily on constantly replenishing reserves of fossil fuels is becoming a very risky decision."

The carbon bubble is front page news in the United Kingdom, where a Guardianheadline recently warned that the global economy faces another major financial crisis because of the apparent disconnect between stated international intentions on climate policy and the current market value of fossil fuel companies. The newspaper interviewed billionaire investor Jeremy Grantham, who stated his Boston-based money manager, GMO, was considering pulling out of investments in coal and unconventional oil operations in Canada. Carbon bubble theorists insist climate change public policy will eliminate the business case for oil sands production along with the Keystone pipeline. According to a 2010 MIT study, annual Canadian bitumen production will increase more than six-fold by 2050 (from 2005 levels) without significant government action on global warming. But with caps on CO2 emissions implemented worldwide, MIT concludes "Canadian bitumen production becomes essentially non-viable even with CCS technology."

Paul Spedding, co-head of energy sector research at HSBC in London, issued the first bank report on the carbon bubble in January. Oil & Carbon Revisited: Value at Risk from ‘Unburnable' Reserves concludes the potential value at risk for oil and gas majors such as BP, Shell and Statoil equals 40-60% of market caps when you combine the potential negative impact of stranded assets and the related impact of downward pressure on prices for fossil fuels. It is "highly unlikely that the market is pricing in the risk of a loss of value from this issue," Spedding writes. He advises energy sector investors to focus on low-cost companies, or companies with a gas bias, because "capital-intensive, high-cost projects, such as heavy oil and oil sands, are most at risk."

Investors are increasingly concerned about longer-term systemic issues such as climate change and aging populations

In March, Standard & Poor's Rating Services published What A Carbon-Constrained Future Could Mean For Oil Companies' Creditworthiness, which outlined the risk facing three oil sands operations, Cenovus Energy Inc., Canadian Oil Sands Ltd. and Canadian Natural Resources Ltd. The study is one of a series looking at how to integrate environmental risk into corporate credit analysis. "As much as we would like to say that we are thought leaders, and we are in many respects, it has become apparent to us over the past few years that investors are increasingly concerned about longer-term systemic issues such as climate change and aging populations," says co-author Michael Wilkins. The S & P study assumed – and it's a big assumption – that public policy steps are taken to limit global warming to the two-degree target and then examined the possible impact on company cash flows and ability to exploit reserves "because limiting emissions translates into a peak demand situation." The intent was to focus on companies most at risk, which led to the Canadian oil sands. "The bottom line on all this," Wilkins says, is that if serious efforts are taken to meet the international target, lower oil demand could lead to dramatically lower prices. As a result, the Canadian companies studied, which have $13.6 billion in bonds outstanding (with more than 50% maturing after 2020), could face either negative outlook revisions or credit-rating downgrades over the next five years, which could lead to higher financing costs as well as dividend cuts and project cancellations. According to Wilkins, the impact on diversified majors such as BP and Shell would be more muted in the short term, but pressure on them would grow after 2017.

In its stress test, S & P assumed Brent crude prices dropped to US$65 per barrel as a result of worldwide restraints on carbon, while the HSBC study envisioned oil prices falling to US$50. Some may view US$50 as unrealistic, but the bank points out that a fall of three million barrels per day in demand in 2009 caused Brent oil prices to fall to US$40. Michelle Dathorne, S & P's oil sector specialist in Toronto, says the rating agency was comfortable with the less severe price assumptions in its carbon bubble report, but she admits most oil sands operations would be rendered unsustainable at crude prices around US$50.

Not surprisingly, the Canadian Centre for Policy Alternatives has raised the alarm, warning pension funds that it estimates at least 78% of Canada's proven oil, bitumen, gas, and coal reserves, and 89% of proven-plus-probable reserves, would need to remain underground to avoid catastrophic climate change. But Canadian energy sector officials don't seem prepared to even entertain the possibility that oil demand will dramatically drop as a result of steps to control climate change, at least not publicly.

Cenovus spokesperson Brett Harris said he couldn't comment on any study that claims his company's creditors and shareholders face significant risks from international climate change objectives. "What I can say is that as the world's population continues to grow and emerging nations begin to enjoy the kind of prosperity and lifestyle we enjoy in the West, we believe there will continue to be strong and growing demand for energy," he says. "We also believe that fossil fuels will continue to play the largest role in fulfilling that energy demand for decades to come."
No other company approached for this story was willing to comment on the carbon bubble. Husky Energy spokesperson Kim Guttormson said: "I'm sorry, but we don't have anyone available to speak to you about that." Management at Canadian Natural Resources issued a standard "no comment." Siren Fisekci, head of investor relations at Canadian Oil Sands, bluntly declared, "We would not be interested in commenting on these reports." She suggested the Canadian Association of Petroleum Producers (CAPP) was a better place to seek comment. Suncor spokesperson Erin Rees also deflected questions to the oil sector association, which, in turn, insisted requests for opinion on the carbon bubble should be directed at analysts and risk experts. "This is not our expertise," said CAPP spokesperson Markus Ermisch, who offered a counter argument, noting "the IEA predicts significant demand growth over the next few decades, and our own forecasts show that Canadian crude oil production will double."

But the IEA argued in its 2012 World Energy Outlook that "no more than one-third of proven reserves of fossil fuels can be consumed prior to 2050 if the world is to achieve the 2°C goal, unless carbon capture and storage (CCS) technology is widely deployed." As HSBC pointed out, the IEA actually projects demand for oil and coal declining from 2020 onward if the world attempts to meet existing climate change objectives. Under the IEA's low carbon assumptions, coal and oil consumption would drop from 2010 levels by 30% and 12%, respectively, by 2035. Tzeporah Berman, an eco-activist and author of This Crazy Time: Living Our Environmental Challenge, thinks the Canadian energy sector has its head stuck in the oil sands. "We are moving to a low-carbon economy by design or default," she says, adding "the type of unfettered growth anticipated by the oil industry and our federal government only makes economic sense in a world that has utterly failed to act to curb global warming." In other words, she says, Canada is banking its economic future "on a world view that has us headed toward a dangerous scenario of global warming."

I'd be a big buyer if oil got crushed on environmental concerns. That is just wild speculation on my part

Energy sector risk posed by climate change policy, however, is barely on the radar of mainstream economists or Bay Street's stock market crowd. One of Toronto's top hedge fund managers says very few institutional investors talk about a carbon bubble risk. "I don't know any," he says, adding "my thoughts are until you see a breakthrough new technology that poses a credible alternative to oil, we will have continuing demand offset by depleting supply. I'd be a big buyer if oil got crushed on environmental concerns. That is just wild speculation on my part."

Toronto money manager Greg Newman, though, agreed to look at the issue and offer an opinion. "I do not believe the carbon bubble will plunge the world into another financial crisis," says the director of wealth management at ScotiaMcLeod's Newman Group. "And I do not believe that oil companies need to fear dramatically lower valuations at present due to future regulations."

As far as Newman is concerned, carbon bubble theory ignores the positive impact of creative destruction. "Energy companies," he says, "will have to respond to future changes and challenges to thrive or survive. Technologies will emerge that will become game changers. Many present energy companies will adapt and many will fade away. This is progress. But is it reasonable to assume that the world will collectively enact regulations that in effect reduce the demand for oil to such an extent that it should be now reflected in oil stock prices? I think not."

From a logistical and infrastructure perspective, the wealth manager simply can't imagine significant changes in how the world fuels itself in the near future. "Assuming cleaner and equally abundant alternatives were available," he says, the related subsidies and infrastructure costs make large-scale deployment unrealistic, "particularly at such a fragile time." Furthermore, Newman says anyone who follows politics, especially in the U.S., which he notes can't even enact common sense gun reforms widely supported by voters, can see it is unlikely that governments will somehow collectively implement carbon regulations so contrary to the way consumers and businesses currently operate. "Investors try to assess oil company valuations with logic and pragmatism," he says. "My view is that they are doing an efficient job of this at present by not assessing any extreme impact from future regulatory changes."

When all is said and done, energy sector investors appear to have two options. If they believe world leaders have what it takes to get serious about stated climate change commitments, then it makes sense to follow Grantham's lead and move to limit exposure to the market. If, on the other hand, they are confident that unproven CCS technologies or perhaps something new will allow the citizens of Earth to have their fossil fuels and safely consume them, too, they can hope for the best on the pipeline front and bet on Canadian oil. Unfortunately, if technology fails to save the day and government action on climate change never materializes, then any wealth generated by Canadian crude may not be appreciated by future generations. After all, according to Lynas' book, if the world temperature increases by six degrees, then civilization as we know it will probably disappear along with much of the human race.