IPAA-Response July2017 PDF
IPAA-Response July2017 PDF
IPAA-Response July2017 PDF
Debunking the
Independent Petroleum
Association of America’s
Pension Divestment Report
Fossil Fuel Divestment and Public Pension Funds - Compass Lexecon
July 2017
Who is the IPAA?
The IPAA is an industry trade group consisting of oil and gas producers
responsible for producing 54% of oil and 85% of natural gas in the United States.
Sponsors of the IPAA include1: Chevron, ExxonMobil, and Shell among others.
In its report, IPAA makes the following The modeling in the report lacks credibility: no one
claims about pension fund divestment: was considering divesting fossil fuel stocks in 1966
so modeling based on that assumption is faulty. On
1. Divestment would cost pension funds trillions a methodological level, the report is wrong about
of dollars, an outcome that likely would at least about one fund, the New York Teachers
significantly harm returns for pensioners. Retirement System. It assumes the NYTRS invested
in equities for the past fifty years. Prior to 1990
2. Given the unique role of the energy sector in the fund never invested in equities. With such a
the economy, investors who chose to remove fundamental, material fact about one of the funds
traditional energy from their investments being wrong, the whole study is suspect.
reduce the diversification of their portfolios —
Tom Sanzillo,
and thereby suffer reduced returns and Director of Finance,
greater risk. Institute for Energy Economics and Financial Analysis,
3. These costs are further compounded Former Deputy New York State Comptroller
when considering the additional costs of
transactional fees, commissions, and compliance costs that are unavoidable
when divesting.
4. Divestment may seem noble, but it has real financial implications for pension funds, many of which
are already struggling to provide reliable investment returns to beneficiaries.
BP and Royal Dutch Shell have unsustainable Past returns are not necessarily indicators
dividends. These companies are liquidating of future performance:
themselves rather than facing up to the need for a
dividend cut. The only thing that can save them fromMost of future oil production currently owned by
the oil majors requires oil to be at approximately
that eventuality is a return to sustainably higher oil
prices -– something that I think is very unlikely to$55 a barrel for projects to break even. The price
happen.
—
of oil has averaged $50 in most recent years and
Neil Woodford, is currently hovering around $45 (June 28, 2017
Head of investment, Texas Intermediate Crude)2. A significant portion
Woodford Investment Management Ltd. of the valuation of oil companies is based on
future extraction and production of resources
that are currently unaccessed in places like the Gulf of Mexico or Canadian tar sands. Much of the
‘cheap and easy to produce’, high margin oil has already been extracted or is currently in production,
leaving companies with higher cost, lower margin future projects. Therefore, the future of the oil sector
is a future of low or negative margins. Currently, analysts are warning oil and gas companies as the
companies try to maintain dividends by increased borrowing and selling off assets, an approach that is
unsustainable and is increasing the risk to investors.3
1
International Petroleum Association of America. Website. 2017.
2
Gloystein, Henning. “Oil prices drop as rising us fuel stocks revive glut concerns.” CNBC. June 27, 2017.
3
Katakey, Rahkeem “Big Oil Vows to Keep Dividends Up as Prices Falter.” Reuters, March 29, 2017.
July 2017
The current state of the coal industry and its recent, quick, and terminal decline
provide insight to the possible future for oil.
• Over 50 U.S.-based coal companies went bankrupt between 2012 and 2016, destroying billions in
equity and bond values.
• Even after some of the coal companies have exited bankruptcy and restructured, the outlook for
the industry remains bleak. Coal once claimed 50% of United States electricity generation; today
its market share is only 30%, and that share is likely to keep shrinking. Coal production dropped
by a record amount in 2016, driven largely by an increase in natural gas and renewable energy
production.4
• In the 1980’s, seven of the top ten companies in the Standard and Poor’s 500 Index were oil
companies. Today only one oil company, ExxonMobil, is in the top ten, but it has lagged the Standard
and Poor’s 500 since July 2013.
• ExxonMobil recently wrote off 3.6 billion barrels of oil sands investment in Canada. This step
effectively reduced ExxonMobil’s global reserve portfolio by 19%. ExxonMobil’s recent reserve
updates were taken only after considerable prodding by the press, state Attorneys General, the
United States Securities and Exchange Commission and industry-wide write downs in the oil sands.
• The oil and gas industry’s $2.3 trillion of upstream projects – roughly one-third of business as usual
projects to 2025 – are inconsistent with global commitments to limit climate change to a maximum
2˚C and rapid advances in clean technologies.5 For example, ExxonMobil risks wasting up to 50% of
spending on potential high-cost projects that are surplus to supply needs if it pursues business as
usual policies while Shell, Chevron, Total and Eni have 30% to 40% at risk.
• The outlook for the oil industry is negative, as persistently low prices curtail growth for this mature/
declining industry.
4
Katakey, Rakteem. “World Coal Production Just Had Its Biggest Drop on Record.” Bloomberg News. June 13, 2017.
5
CarbonTracker Initiative. “2 Degrees of Separation – Transition Risk for Oil and Gas in a Low Carbon World.” June 2017.
July 2017
Moody’s Investor Service recently noted, “With the Paris Agreement in effect as of 4 November 2016, the global oil and gas
industry faces significant risks from the effort to curb greenhouse gas emissions. The most immediate effects will come from
stricter environmental policy and regulation, and reduced demand for fossil fuels—particularly oil—although estimates of
timing and degree vary widely. Understanding and assessing these risks will require transparent and extensive disclosure by oil
and gas companies regarding the comprehensive nature of their asset bases and their strategy and governance in addressing
carbon transition risk (CTR). The industry is also exposed to technological advances in other sectors that could hasten demand
destruction for oil and natural gas. Direct financial impacts will emerge over time as commodity prices become pressured in a
falling demand environment and projects with high development costs become stranded.”
Moody’s Investor Service, “Oil and Gas Industry Faces Significant Credit Risks from Carbon Transition”. April 26, 2017.6
6
“Environmental Risks: Oil and Gas Industry Faces Significant Credit Risks from Carbon Transition.”; Moody’s Investor Service. April
26, 2017.
7
Press Association. “Electric cars and cheap solar 'could halt fossil fuel growth by 2020.” The Guardian. February 2, 2017.
8
Mason, Josephine. “China to boost non-fossil fuel use to 20 percent by 2030: state planner.” Reuters. April 25, 2017.
9
Lambert, Fred. “China is pushing for aggressive new ZEV mandate: 8% of new cars to be electric by 2018, 12% by 2020.” Electrik.
October 31, 2016.
10
“Non-fossil fuels will form over half of India’s energy capacity in 10 years, says govt.” Hindustan Times. April 19, 2017.
11
Mahapatra, Saurabh. “India Added Twice As Much Renewables Capacity As Coal Capacity In 2016-17.” CleanTechnica. May 1, 2017.
12
“India aims to become 100% e-vehicle nation by 2030: Piyush Goya.l” Economic Times. March 26, 2016.
13
Safi, Michael. “Indian solar power prices hit record low, undercutting fossil fuels.” The Guardian. May 10, 2017.
14
Tripathy, D. and Varadhan, S. “Global pension funds warm to India’;s solar power ambitions.” Reuters. April 30, 2017.
July 2017
and Ontario Teacher’s Pension Plan (OTPP) are looking for entry points, while Dutch fund manager
APG, Canada’s Brookfield Asset Management, the private equity arms of Goldman Sachs, JPMorgan
and Morgan Stanley, and European utilities EDF, Engie and Enel have already started investing in
India’s renewable energy sector.
McKinsey & Company projected that there would be 900,000 mobile subscribers in the US by 2000
-- there were 109 million. “In 1980, McKinsey & Company was commissioned by AT&T (whose Bell Labs
had invented cellular telephony) to forecast cell phone penetration in the U.S. by 2000. The consultant’s
prediction, 900,000 subscribers, was less than 1% of the actual figure, 109 Million. Based on this
legendary mistake, AT&T decided there was not much future to these toys. A decade later, to rejoin the
cellular market, AT&T had to acquire McCaw Cellular for $12.6 Billion. By 2011, the number of subscribers
worldwide had surpassed 5 Billion and cellular communication had become an unprecedented
technological revolution.”15
15
Lozano, Angel. “McKinsey & Company projected that there would be 900,000 mobile subscribers in the US by 2000.” Department
of Information and Communication Technologies. Universitat Pompeu Fabra.
16
“Oil and Gas Industry Faces Significant Credit Risks from Carbon Transition.” Moody’s Investor Service. April 26, 2017.
July 2017
“Divestment is no longer just an ethical stance or a financial position – it now may be a legal responsibility.
Pension funds, among the most risk-averse actors in the financial marketplace, must take the lead on
protecting their beneficiaries from the financial risks posed by climate change, effects which will be
concentrated most heavily in carbon intensive activities.”
—
Mercer and the Center for International Environmental Law17
Tom Sanzillo
Director of Finance,
Institute for Energy Economics and Financial Analysis,
Former Deputy New York State Comptroller
Returns for fossil fuels were large for most of the last fifty years. This is no longer the case. Since
2013 most fossil fuel stocks have lagged the S&P 500 and they are expected to do so for the next five
years. Prior to that fossil fuel stocks began to lose relative position in the market in the early 1990’s.
Fossil fuel stocks went from dominating the market to leading it to now lagging the market overall.
Further, the report does not consider that there now are products on the market that are fossil free
and meet investment targets at fees that are competitive for institutional investors, facilitating fossil
free investing.
Leslie Samuelrich
President,
Green Century Capital Management
There are potential financial benefits to moving away from investments in coal, oil and gas. The IPAA
report is best understood in context. The report is funded by the very industry that it addresses
so is inherently biased. The industry likely had to do its own report because they could not find any
credible report that shows the divesting over the long-term will reduce the endowment. In fact,
every few months there is a study published that contradicts the IPAA conclusions.
17
Center for International Environmental Law. “Trillion Dollar Transformation: Climate Risk Must Inform Pension Investment
Decisions.” December 19, 2016.
18
Chief Investment Officer. “Pensions, CIOs Rebuke Fossil Fuel Divestment Report.” June 9, 2017
July 2017
Divesting from fossil fuels may benefit investors in both the long and short term and is financially
responsible:
• According to global index provider MSCI, the energy sector has consistently been among the most
volatile sectors in the global economy since 2005.19
• Coal, oil, and gas companies are valued partially based on the reserves they hold being brought to
market in the future. Given the recent United Nations Climate Talks and resulting Paris Agreement,
which will require countries to report on national inventories of emissions by source,and as
appropriate, removals, these reserves may become devalued or “stranded assets” as we transition
toward a low-carbon global economy.
• Capital at fossil fuel companies can be wasted on high cost projects such as off shore or Arctic
drilling instead of returning to shareholders as dividends.20 For example, in 2013 the top 200fossil
fuel companies, by reserves, spent $674 billion in capital expenditures and paid only $126 billion in
dividends to their shareholders.21
• All of Green Century’s mutual funds are fully divested from coal, oil and gas companies, going
beyond the global divestment campaign ask of avoiding the 200 companies with the highest
levels of carbon reserves.22
19
MSCI. “Responding to the Call for Fossil Fuel Free Portfolios.” December 2013.
20
CarbonTracker Initiative. “Capex Tracker. A lead indicator of global warming.” February 25, 2015.
21
CarbonTracker Initiative. “Unburnable Carbon 2013: Wasted capital and stranded assets.” 2013.
22
Top 200 Fossil Fuel Companies. Fossil Free.
July 2017
July 2017