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December 09, 2010
Unproven Fuel Extraction Technologies Pose Risks for Investors
    by Robert Kropp

A report from Ceres details the risks to investors of the unproven extraction technologies of oil shale and coal-to-liquid.

In a 2010 proxy season that was notable for unprecedented shareowner support of proposals addressing environmental, social, and corporate governance (ESG) factors, first-time resolutions targeting the development of unconventional fuel sources were especially effective. Resolutions coordinated by Green Century Capital Management targeting such issues as hydraulic fracturing and oil sands development, for instance, received as much as 42% of shareowner votes.

Today, a new report, commissioned by
Ceres and prepared by David Gardiner & Associates, was released, in which the significant environmental and financial risks posed by such unconventional technologies as coal-to-liquid (CTL) and oil shale are detailed.

The report, entitled
Investor Risks from Development of Oil Shale and Coal-to-Liquids, details a number of risks associated with the technologies, neither of which is new, although both are "still in the early stages of development," according to the report.

Oil shale, which is defined by the authors as "essentially immature petroleum," is found at shallow depths, mostly in the western US. It has been estimated that there are 800 billion barrels of technologically recoverable reserves of oil shale, or three times the amount of oil reserves found in Saudi Arabia. At present, more than 25 companies are working to develop oil shale.

The CTL process, according to the report, involves a complicated series of steps that begin with "gasifying the coal at elevated temperatures and pressures to produce syngas and carbon dioxide." At least a dozen CTL projects have been proposed or are under development, the report states.

The risks associated with both technologies include water constraints, especially for oil shale development in water-stressed western states. Current and potential regulatory efforts to mitigate the effects of climate change can also pose serious risks to the technologies, both of which are carbon-intensive. Regulatory pressures may force both technologies to rely on carbon capture and sequestration (CCS), which is itself largely unproven.

Other risks include the price of oil, as the development of both technologies is contingent upon high oil prices. In fact, as the report points out, past efforts to develop the technologies were abandoned when oil prices fell.

Finally, public opposition can pose significant risks as well. Already, protests have been mounted in New York and Ohio against CCS projects in those locations. A
New York Times editorial from earlier this year called for the removal of $2 billion per year for CCS in proposed climate change legislation, calling CCS a "technology whose adoption faces…potentially insurmountable hurdles."

The report recommends that investors engage with companies to further understand the risks that companies are assuming and how they are mitigating those risks; evaluate potential risks from state and municipal bonds in their fixed income portfolios; and advocate for such policies as a national price on carbon and a low-carbon fuel standard.

Mindy Lubber, president of Ceres, stated, "The energy- and water-intensive nature of both coal-to-liquids and oil shale, combined with technological uncertainties and state and federal requirements for low carbon fuels spell diminishing returns for investors."


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