Black gold or a stranded asset?
By Michael Gregson
Oil used to be what every Government either treasured or craved: a gusher of revenue, jobs galore and no need to depend on imports. But economists talk of the ‘resource curse’, in which too much of a good thing skews the economy, pushes up costs and crowds out other activity. And now, there’s a new sort of curse from having oil. In the era of the climate emergency, fossil fuel wealth could become a ‘stranded asset’, forced to remain in the ground as the world battles to cut carbon emissions.
That could pose a dilemma for Sri Lanka as it struggles to revive an economy battered by COVID-19. Minister of Energy, Udaya Gammanpila, says there is $267 billion worth of oil and gas hidden below the Mannar Basin. More than enough to pay off the country’s international debts of $47 billion, with plenty left to invest in development – including sustainable energy like solar and wind.
The Minister predicts that the Norochcholai power plant could operate for 120 years only from the gas in the Mannar Basin and the Sapugaskanda oil refinery could operate for 143 years with the oil alone. But if the world is to avoid the worst of climate change, those industrial plants will have to become industrial relics much sooner than that. Sri Lanka’s oil and gas wealth could end up as part of the $22 trillion stranded asset problem that’s been keeping central bankers past and present awake at night. These are assets which, depending on the course of climate policy, could end of up either being valueless, such as oil, which might never be allowed to be extracted, or curtailed, such as the Norochcholai gas power station that might have its energy production life cut short.
About 60 per cent of the current oil and fossil methane gas and 90 per cent of the remaining coal reserves must stay underground by 2050 to avoid the worst consequences of the climate crisis, according to new scientific research. A report from the Swiss Bank UBS is more pessimistic, citing analysts’ belief that as much as 80 per cent of oil and gas reserves might end up stranded. The new study, published in the journal Nature, noted that strict fossil fuel extraction limits are needed to have at least one-in-two chances of limiting global warming to 1.5 °C and preventing extreme consequences of the climate crisis.
The study estimated that oil and gas production must decline worldwide by 3 per cent each year through to 2050, implying that most regions must reach peak production now or during the next decade. Countries that are heavily reliant on oil and gas for State revenues, such as OPEC members Saudi Arabia, Iraq and Kuwait, are thought to be at particularly high risk unless they rapidly diversify their economies. The researchers, led by environmental and energy economist Dan Welsby at University College London, noted the ‘bleak’ forecasts were likely to be somewhat conservative.
The analysis notes that the need to keep global fossil fuel reserves in the ground varies across countries. This is based on the regional differences of limits to fossil fuel extraction and on the carbon intensity and cost of energy resources worldwide. For instance, highly polluting reserves, such as Canada’s tar sands and Venezuelan oil, are left in the ground in this model. 84 per cent of Canada’s oil sand reserves would need to remain unexploited and nearly twothirds of Middle Eastern States’ oil and gas reserves must not be extracted.
Europe would need to leave 72 per cent of its oil reserves and 43 per cent of its gas reserves underground, while Africa would need to walk away from roughly half of its oil and gas reserves, according to the research. The report must also have implications for Sri Lanka, which has yet to start exploiting its oil and gas reserves. Last month, the world’s leading climate scientists delivered their starkest warning yet about the deepening climate emergency.
UN SecretaryGeneral António Guterres described the Intergovernmental Panel on Climate Change’s 9 August report as a “code red for humanity.” He added: “The report must sound a death knell for coal and fossil fuels before they destroy our planet.” But will debt burdened Governments or oil rich countries heed the warning and listen to the advice to keep oil in the ground? The odds aren’t good.