Oil Industry Misleading Shareholders on Future Fossil Fuel Demand, Report Says
Greenpeace’s Charlie Kronick says companies are providing investors with flawed assessments about the development of green technologies and possibly of government intervention in climate change – Two-Part Interview
KIM BROWN: Welcome to The Real News Network in Baltimore. I’m Kim Brown.
Donald Trump on Tuesday, signed an order to undo Obama era climate change regulations that his administration says is hobbling oil drillers and coal miners; a move environmentalists have called reckless, and have vowed to take to court. But what if the cutting of regulations in the interests of fossil fuel companies is not only catastrophic for the environment, but also bad business? And is big oil misleading their shareholders, as well as the public at large on future profits and returns?
Our next guest makes that exact case. He’s one of the researchers on a recent study titled, “Forecasting Failure: Why Investors should Treat Oil Company Energy Forecasts with Caution,” which was recently published by Greenpeace, and Oil Change International.
Joining us today from London, England to discuss the report we are speaking with Charlie Kronick. Charlie is the senior program advisor for Greenpeace in the UK. He’s also the global lead on finance, and the oil industry investments.
For the last decade, he has focused on energy and climate change-related issues, and on the risks to capital markets, from investment in high carbon infrastructure.
Charlie, welcome to The Real News, we’re really glad that you can join us here today.
CHARLIE KRONICK: Thank you very much. God, hearing that description I feel tired already.
KIM BROWN: So, there’s a lot to unpack here from the study, and we’re going to put a link under the interview for people to take a look at it for themselves, Charlie.
But, let’s explore some key points, and put some of this into context with other issues going on today. So, Donald Trump is proposing to roll back regulations that are meant to protect Americans’ air and water quality; along with his very fossil fuel friendly cabinet, not least of whom is the former CEO of Exxon Mobil Corporation, Rex Tillerson, now our Secretary of State.
So, what Exxon knew about their product of fossil fuels’ effect on climate change, and when they knew it, is being investigated by the Attorney Generals of New York State, and Massachusetts. And last week, a New York Supreme Court Judge ruled that March 31st, which is Friday, Exxon must turn over recently revealed secret emails discussing the issue of climate change, which Tillerson had sent to company executives, using the alias of Wayne Tracker.
So, let’s get into some background here from your report. So, talk to us about Exxon Mobil, and how the issues of climate change plays out in their investor reports, and how they analyzed the future for their product.
CHARLIE KRONICK: Well, you’ve got to realize that these oil industry forecasts are — they’re not unique to Exxon. BP and Shell do the same thing; but what they do, is they seek to really, for all kinds of different audiences, normalize what their view of the future is going to be like.
So, it’ll be for a business audience; it’ll be for a political audience. They’ve obviously got a shortcut now that, you know, the former CEO of Exxon is now the Secretary of State. But there was always a very, very strong and direct link between the U.S. oil industry and the U.S. government. I don’t think that comes as a surprise to anyone.
But underlying these forecasts are some really, you know, fundamentally flawed assumptions. The first thing is that the oil industry for reasons that become clear the more we talk about it, assume that the future will be like the past. There has always been an increase in demand for oil. The price of oil will always go up, which means that more difficult and risky projects will always be profitable into the future. So, that’s assumption number one.
Number two; they are selectively skeptical about technology. So, they will be absolutely amazingly optimistic about frankly, fairly outlandish propositions for the future of fossil fuels, whether it’s the tar sands of Canada, or even more unlikely things like Kerogen, which is more of a solid oil, which you have to heat up and melt to get out of the ground. Whereas they’re very skeptical about things like wind and solar power, which have dramatically reduced their costs and improved their penetration, in just the last few years.
And finally, they choose again in these forecasts, to ignore that when governments make decisions, as we’ve seen from President Trump this week, it can be a driver of change. So, those underlying assumptions can really skew the results of the forecasts that they make.
KIM BROWN: So, your report looked at a number of large oil companies, including Exxon Mobil, Shell and BP, and their in-house energy forecasts used to justify investments and multi-decade high-cost projects, from the Arctic to the tar sands. So, talk about what was revealed in their own forecasting track records, such as predictions on the dropping costs of solar and wind — renewable sources of technology.
CHARLIE KRONICK: Well, it’s quite remarkable. I mean, BP is probably the best example of this. Every year, starting back in 2011, BP projected that the growth of solar and renewables in general, would be basically linear. It wouldn’t grow particularly fast, and there would be no big changes, in the rate at which that technology has grown.
And every year, not only have they underestimated the growth quite dramatically, and this is shown pretty clearly in the report, but what’s amazing is they always assume that whatever the growth was the year before, it then levels out and continues to then grow at that slow rate. And the thing that we know absolutely about new technologies is that they follow what’s called, you know, in the business — the ‘S’ curve.
So, there is initially slow growth, then sometimes really dramatic, almost geometric growth, which is what we’re getting in solar particularly, but wind as well; and eventually some years, or even decades down the line, they flatten out. BP has always assumed it never even got into the rapid growth stage, and they just sort of slowly but surely jacked their assessment up a small amount each year.
It fundamentally misses the point about how new technologies can grow and therefore, they do not then model any of their future investments, which they’re talking about $250 billion over the next five years, against changes that they simply don’t expect.
KIM BROWN: Charlie, your report also outlines how oil companies underestimate the rise of popularity of electric vehicles. So, did they demonstrate a real bias there — say, versus the car manufacturing industry? I’m put into the mindset actually of the documentary, “Who Killed the Electric Car?” when I ask you this question.
CHARLIE KRONICK: Well, it’s a really important question to ask and do they project a bias? I mean, it’s very hard to… I never want to attribute motives to why people do things. You have to look at what they’ve done. I think the challenge that the oil industry has, when looking at the impact of electric cars on their future, is that the car industry can pivot. The car industry currently makes, you know, vehicles that are powered by diesel, or gasoline. But they’re all rapidly, for a whole range of reasons, moving towards much, much higher percentages of electric vehicles in their fleet. They can change their product.
The oil industry has two products basically, oil and gas, and the associated petrochemical projects. It’s very much more difficult for them to pivot. So, if you want to justify to your shareholders, and your investors, you know, these really high-cost, long-life projects, and you don’t have another product to sell in the future, you sort of are almost obliged to forget that there might be another pathway.
Now, that’s good if you want the future to be like the past, and that’s in your interest. But if you’re trying to build a robust case, particularly investors who are invested all the way across the economy, it’s a serious problem.
KIM BROWN: We’re speaking with Charlie Kronick. He’s a senior program advisor for Greenpeace, in the UK. And we’ve been discussing his report titled, “Forecasting Failure: Why Investors should Treat Oil Company Forecasts with Caution,” stick around for part two of our conversation right here on The Real News Network.
KIM BROWN: Welcome back to part two of our conversation with Charlie Kronick.
He is the Senior Program Advisor for Green Peace in the U.K. We’ve been discussing his recent report titled, “Forecasting Failure; Why Investors Should Treat Oil Company Energy Forecasts with Caution,” it was recently published by Green Peace, and Oil Change International. So, Charlie’s still on the line joining us from the U.K.
So, Charlie what were some of the assumptions that they were making in their forecast, the oil companies, that is, that you found problematic from both shareholder, and climate change perspectives?
CHARLIE KRONICK: Well, I think it’s worth taking a look at why they publish these forecasts. So, a big part of what the oil industry does is, they need, not surprisingly, to justify their very capital intensive projects to their shareholders, and they have to convince their shareholders that those projects are going to be profitable into the future.
But that’s not the only reason that they do it. These forecasts really do serve as anchor points, and it’s interesting, the first Exxon forecasts in the early 2000s, came out of their Public Affairs Department. It was very clearly a communications exercise. And these things are directed, not just at investors, but they’re directed at policy makers and politicians, but also to university graduates, academics and commentators. They are intended, in part, to create a vision of what is going to be normal going into the future. Not just months or years, but even decades. So, that’s why these assumptions are so important.
Because, even if you didn’t care about climate change, which clearly, working for Green Peace I do, even if you cared about the future of your investments, you should be concerned, not that these forecasts are right, or even that they’re wrong, but they might leave out really, really important changes.
So, one really interesting assumption that the industry has made, is that for example, electric vehicles will have a very small affect on the demand for oil going forward into the future. That they might penetrate only five or 6% of the market over decades, but they’re way, way below some of the other commentators, whether it’s Blumberg, or Citibank, or University College, in London. There are a range of commentators who have very, very different views, who say that it could make a dramatic impact on the demand for oil, as the supply glut that caused the oil price crash just a couple of years ago.
Now, the oil companies just assume that those guys are wrong. But what if, on the other hand, the oil company’s wrong, and there’s a tremendous impact on their investments? They’ve spent a lot of time and money convincing, not just their investors, but policy makers, that the future’s going to be the way the past was. And there’s a very, very strong likelihood that that’s not going to be the case.
KIM BROWN: So, the report’s forecasting failure why investors should treat oil company energy forecasts, with caution. It outlines not only how shareholders are being misled about the future of fossil fuels being a good business venture, but also the consequences of these in-house forecasts for action on climate change. So, discuss that for us.
CHARLIE KRONICK: One of the really interesting things is that the Paris Agreement in 2015, which was the big moment in global climate politics, set out a really, really ambitious program for reducing carbon emissions. Which would, in turn, keep global average temperature increases well below two degrees, and even as low as one and a half degrees above the sort of, previous levels before climate change started to kick in.
Now what’s really interesting, we’re already at 1.1 degree, so we’re a long way down the road. We really, really have to have dramatic decreases in the way we use fossil fuels, if we’re going to have a hope of staying under those two, or even 1.5% limits.
Now, if you compare the range of models that the world’s scientific community has put together for that reduction, we really, really, have to dramatically reduce up to 60 to 80% of all fossil fuels need to be reduced, by the middle of this century, by 2050. And then down to virtually nothing by 2100, that’s to have a chance to stay within those limits.
If you look then, at the oil company forecast, for the same periods of time, they’re nowhere near that, and fossil fuels, particularly oil and gas consumption, stay virtually flat going out for two or three decades. There is just this huge gap between what we need to do, to avoid the worst impacts of climate change, and what the oil industry projects will be their future.
So, we’re left with this really quite odd situation, where if the future works out well for the oil companies, it pretty much works out catastrophically for everybody else. If you flip that around, and you look at it in such a way as, we respond to climate change in a way that actually gets close to avoiding the worst impacts, it leaves the oil companies in a very, very bad position.
KIM BROWN: So, you also looked at how the Paris Agreement, in some cases, altered in-house forecasts. So, talk about that as well.
CHARLIE KRONICK: Well, that’s the trouble, they don’t alter in-house forecasts. If we were to meet the ambitions of the Paris Agreement, fossil fuels, particularly oil and gas, would drop dramatically just in the next few decades. And if you look at, whether it’s Exxon, BP, or Shell, their view is that fossil fuels will still continue to provide between 70 to 80% of our energy needs by the middle of the century. There’s just a massive gap between those two futures.
And this is really important, when these forecasts are used by politicians, and by the industry, to justify what the future is going to look like. There is just a yawning chasm, between what we need to do to protect the climate, and what we need to do to protect oil company profits.
KIM BROWN: So, how do these big oil giants’ forecasts line up with the UN Intergovernmental Panel, on climate change goals, to keep global temperature rise below 2 degrees Celsius?
CHARLIE KRONICK: They’re just miles apart. The UNFCCC looks at the whole range of scientific assessments out there, and tries to draw a composite picture. The oil industry takes their own views, and if I could show you the graph, I would. But basically, imagine a huge white space on a blank piece of paper between what the oil industry says is going to happen, and what the science community says is necessary. It’s just a massive difference.
Now, I think it’s really important to remember when we’re talking about forecast scenarios, is that when we are talking about the future, it’s very, very difficult to say, “My prediction’s going to be right, and his prediction’s going to be wrong. Or, her prediction’s going to be right, and my prediction’s going to be wrong.” But what’s really important is that anybody can be wrong.
And what the oil industry is doing, is telling not just their investors, but also the public and politicians, is “Trust us, we’re going to be right.” When all the evidence of their past prediction give us quite a lot of reason to be skeptical about their track record in the past.
KIM BROWN: So, Charlie, finally, has the horse left the barn, in terms of flourishing renewable energy, and whether or not the fossil fuel companies are simply delaying the inevitable, which, of course, could have great worldwide impacts?
CHARLIE KRONICK: Well, I think the jury’s still out. I mean, there is no question that the renewable energy revolution is well on the way. The costs are coming down so dramatically at the utility level, you know, where you get your electricity when you plug into a wall socket, renewables are already competitive with any new form of generation. They’re cheaper than anything else that’s out there, and the rapid change is in vehicles mean that the gasoline engine, at least in urban transportation, could very rapidly become a thing of the past.
Will that be enough to stop the worst impacts of climate change? That depends a whole lot more on people like President Trump, and Secretary of State Tillerson, who seem determined, in spite of what is now an overwhelming global scientific and political consensus, to remain stuck somewhere in the middle of the last century.
So, the technology’s there to solve the problem about climate change. The biggest challenge we face now is the politics. And the oil companies aren’t doing anything right now to help improve that situation.
KIM BROWN: The name of the study is titled, “Forecasting Failure: Why Investors Should Treat Oil Company Energy Forecast with Caution,” it was recently published by Green Peace, and Oil Change International.
We’ve been discussing this with Charlie Kronick, who is the Senior Program Advisor for Green Peace in the U.K. He’s also the global lead on Finance and Oil Industry Investment.
Charlie, we certainly appreciate you taking some time to speak with us about this. We hope to have you on again as this issue, I’m sure; we’re certainly not done with it, not at this point in time anyway.
CHARLIE KRONICK: That’s for sure. Thank you very much for having me. I really appreciate it.
KIM BROWN: Thank you and we appreciate you guys watching and supporting The Real New Network.