Oil companies risk future performance

Oil companies risk financial damage by pushing ahead with the exploration of unconventional oils despite potentially disastrous environmental consequences.

Worries over reserves and the high oil price have led to massive development of unconventional oils such as the Canadian oil sands, with Shell, BP and ExxonMobil all investing significantly. Oil sands are up to three times more carbon intensive to extract than normal oil and create dangerous legacy issues for the local environment.

The Co-operative Asset Management is concerned that companies involved are failing to properly account for future legislation over carbon emissions, spiralling operational costs and of cleaning up the local environment. It believes companies could be risking both financial and reputational damage in the long term.

The Co-operative Asset Management has an interest in protecting long term shareholder value by ensuring companies in which it invests fully address their risks and opportunities. It will now alert other investors to the risks of expansion in unconventional oils projects and engage with companies involved to seek forward-looking approaches that take account of the issues.

Ian Jones, Head of Responsible Investment says: "As investors, we understand the challenges global energy companies face in terms of geo-political pressures, scarcity and resource nationalism. However, the days when oil companies can escape payment for carbon emissions are increasingly numbered.

"Existing and impending regulations are placing a price on greenhouse gas emissions and this will hit unconventionals hard due to their carbon intensity. Companies point to technological solutions such as carbon capture and storage, but this is years from being available on a commercial scale. In the meantime, companies may continue to attract high levels of public criticism.

"From a regulatory perspective, there are parallels with the rush into biofuels. Early movers in first generation biofuel technology were not sufficiently mindful of emerging political and consumer anxiety over the social and environmental impacts of biofuel production. As a result, they were not ready when national targets were scaled back by EU regulators, thereby shrinking demand for their products.

The warning comes as a new report from parent company - The Co-operative Financial Services (CFS) - and WWF-UK concludes that the implications of fully exploiting unconventional fossil fuels could act as a tipping point for disastrous climate change.