By Robert Lukefahr & Tim Donahue, Booz Allen Hamilton
The news was both stark and shocking: The sudden collapse of a huge shelf of Antarctic ice into the sea, described by scientists as “staggering,” re-ignited fears of global warming and its knock-on effects. Many skeptics rolled their eyes, reciting the mantra that global warming is an un-proven theory. Yet for management teams and the economy at large, it doesn’t matter which side of this debate is ultimately proven right. Just as a single event on September 11th instantly and irrevocably altered the public’s perception about the nature of terrorism, a single event like the ice sheet collapse can drive a significant majority to believe global warming is a dangerous reality. An economic shock would follow fast behind.
Is the collapse of the Larsen B ice shelf this type of opinion-changing event? Probably not. Scientists are uncertain whether the changes in the West Antarctic ice sheet are due to greenhouse gasses. Moreover, the specific ice sheet that collapsed (the area of Rhode Island, and more than 650 feet thick) will not raise sea levels since it was already a floating ice sheet.
But, one can imagine any number of possible catastrophic headlines that popular opinion would link to global warming. A total loss of the West Antarctic ice sheet, for example, would raise sea levels by close to 20 feet, flooding coastal cities like Miami. A multi-year drought in the central plains could force the U.S. to import food. A skin cancer epidemic could affect 40 to 50 percent of ageing Baby Boomers. These kinds of developments, and others like them, would have a decisive impact on public opinion.
Embedded within most corporate and government planning about global warming is the assumption that opinions will change over time and that we will all have time to react and adjust. Not true. Global warming is one of those era-defining issues for which perception is reality. And if that perception shifts-and it could shift quickly-the economic impact on energy companies will be swift and lasting.
A page from history
Take some examples from the not-too-distant past: The Arab oil embargo of 1973 and subsequent oil price shock created long lines at gas stations and led to conservation efforts that stunted demand for years. Three Mile Island (TMI), which had the nation on edge for weeks in 1979, effectively ended nuclear energy’s trajectory as a dominant power generation form. It did not matter that scientific opinion indicated that the TMI release had minimal environmental impact, that no long-term damage was done, and that the U.S. nuclear industry had a better public safety record than any other sector of the energy business. Perceptions are reality. After TMI, nuclear was perceived unsafe.
When it comes to global warming, energy companies are the most vulnerable from such shocks. Today, energy companies represent about 10 percent of the total New York Stock Exchange value. They are a $1.5 trillion a year industry that touches almost every corner of the economy. The industry is also the chief source of anthropogenic (human-caused) greenhouse gasses-over 75 percent of such emissions are in the form of CO2 from fossil fuel (oil, gas and coal) combustion.
In a world where global warming is a clear and present danger, the public will no longer accept the unconstrained consumption of these resources. How significant would the impact be? Consider that a 30 percent drop in oil demand would likely make development of reserves outside the Middle East (i.e., practically all the reserves held by investor-owned companies) uneconomic.
The value of coal and coal-fired electricity generators would drop even more abruptly. When the public decides to reduce greenhouse gasses, research done at Booz Allen shows that the most meaningful cost-effective targets will be coal-fired generators.
Ironically, many utilities had, until recently, been building a portfolio of renewable energy options to serve as a hedge against an environmental discontinuity. But in the wake of the Enron meltdown, most of the assets have been sold or are on the block in an attempt to shore-up the balance sheet.
While most energy companies will be the big losers, there are also a few companies that stand to profit. Obvious candidates are wind power companies like NEG Micon and fuel cell companies like Ballard Power Systems. Other, less obvious winners include companies like Foresight Weather, a privately held start-up that has developed a highly accurate proprietary weather forecasting model which it runs on a suite of supercomputers. Companies that provide significant efficiency improvements that can reduce greenhouse gasses and lower costs will be in high demand.
There are also a few traditional energy companies that stand to benefit. Oil and gas giants Shell and BP, for example, have long been leaders in cleaner fuels and cleaner energy. Shell has aggressively been investing in new hydrogen-based energy technologies. BP is the largest manufacturer of solar power equipment in the world. More importantly, however, BP’s portfolio is heavily weighted towards natural gas, which is becoming the fuel of choice based on advances in power generation economics and regulatory requirements for air pollution. Among fossil fuels, natural gas also has the lowest greenhouse gas content. If and when the public perception changes on global warming, the shift to natural gas will accelerate.
What to do
Both CEOs and governments have a critical role to play in planning for the global warming scenario. For energy CEOs, it is imperative to develop a strategic response for a low-emissions marketplace: Assemble a set of environmentally friendly strategic energy investments, develop a strategic recovery plan based on the “worst” happening, and balance your existing portfolio between unfriendly fuels (like coal or oil) and “bridge” fuels like natural gas. At the same time, governments are long overdue on providing a robust regulatory framework in which the economy can operate should a dramatic reduction in greenhouse gases be demanded by the public. For example, today there is no consistent definition or measurement system for carbon credits and clean electricity certificates.
The dramatic satellite photos of the Larsen B shelf disappearing into the sea should remind executives that an economic shock due to global warming is not fantasy. Whether or not they personally believe in global warming, it’s time that CEOs begin planning as if they do.
Lukefahr is a vice president, Booz Allen Hamilton global energy practice in Houston. He can be reached at email@example.com.
Donohue is a principal in Booz Allen’s Hamilton Houston office. He focuses on strategy and operational improvement for global energy companies. He can be reached at firstname.lastname@example.org.