12 November 2020
Cooper Energy, a rapidly-growing gas and oil producer focused on the south east Australian market, today faced a shareholder resolution calling on the company to wind up its fossil fuel production in a manner consistent with the Paris climate goals.
This ground-breaking proposal, the first of its kind put to an oil and gas producer, was supported by 7.4% of Cooper’s shareholders at the company’s annual general meeting today, eclipsing the 4% support for a similar resolution at Whitehaven Coal’s AGM last month.
Speaking after the AGM, Market Forces Asset Management Campaigner Will van de Pol said:
“The considerable investor support for this ground-breaking shareholder resolution demonstrates the growing recognition that the pathway to a net-zero economy is not paved with more fossil fuels.”
“However, the majority of big investors that voted against this resolution, including many of Australia’s largest super funds, have failed to back up their rhetoric with action to manage down their exposure to financial climate-related risks.”
“Cooper Energy’s oil and gas expansion plans put the company, its shareholders’ capital, and its workforce on a collision course with the clear climate science telling us oil and gas production must decline if we are to meet the Paris climate goals.”
“Cooper Energy’s $100 million in FY20 asset write offs is just a fraction of the value destruction at risk under an energy transition scenario consistent with the Paris climate goals.”
“All fossil fuel producers must take today’s vote as a warning, and act swiftly to protect investors from abrupt and drastic value destruction, and support workers through an orderly phase down of their fossil fuel operations.”
In response to shareholder questioning today, company chair John Conde AO was categorical in his confirmation that Cooper’s institutional investors, including many of Australia’s super funds, had not asked the company to set targets to align its downstream emissions (scope 3) and capital expenditure plans with the Paris climate goals.
So when our big super funds tell us they engage with companies to manage climate change risk, what exactly have they been doing?
Cooper’s collision course with climate science
Cooper has massively increased its production capacity through acquisitions and development in recent years, and plans to continue on this path with a “5 year development program that can lift gas production more than 10 times FY19 levels, excluding exploration.”
These plans contradict the clear climate science telling us:
“The time to begin planning for a wind-down of gas production is, as with other fossil fuels, already upon us” – SEI, IISD, ODI, Climate Analytics, CICERO, and UNEP
Carbon emissions embedded in existing and under-construction fossil fuel projects is more than double the IPCC’s 1.5°C carbon budget, demonstrating there is no room for new or expansionary supply projects.
IPCC modelling of a 1.5°C scenario without significant overshoot or carbon capture and storage uptake shows gas use for primary energy falling globally by 25% by 2030 and 74% by 2050 (from a 2010 baseline), and oil’s role in primary energy falling 37% and 87% over the same timeframes.
Recognising the necessary declines in gas and oil use required to under a 1.5°C-aligned energy transition, today’s shareholder resolution sought to protect shareholder capital from being wasted on projects that would be left stranded by markets rapidly shifting away from fossil fuels.
Cooper and its large investors’ refusal to support this resolutions leaves the company exposed to potential significant value destruction, and fails to take into account support for workers through an orderly phase down of operations.
Low demand = low prices = asset writeoffs
2020 has provided an example of the value at risk in a low fossil fuel demand scenario. With demand drastically reduced due to the impacts of COVID-19, Cooper’s decision to cut its long term gas price forecast by US$1 per gigajoule, and oil by US$7 per barrel in its FY2020 financial statements saw the company write down the value of its assets by over $100 million, amounting to around 10% of the company’s gross fixed assets.
Cooper’s impairment sensitivity analysis suggests a further $62.6 million (around 6% of gross fixed assets) would be written off for every dollar drop in the long term gas price.
At today’s AGM, the company was asked how much more value would be written off if Cooper adopted the oil and gas prices forecast under the International Energy Agency’s Sustainable Development Scenario, which are significantly lower than those used in the FY2020 financial statements.
The company wasn’t able to provide a direct answer, but Managing Director David Maxwell stated the company’s belief that long-term commodity prices would return to pre-2020 levels. Again, those prices are much higher than those forecast under Paris-aligned scenarios, demonstrating the company’s expectations are out of line with global climate commitments.
Cooper would be wise to heed the demands of the investor groups representing over US$100 trillion in assets under management calling for companies to adopt Paris-aligned assumptions in financial reporting.
Climate action threatens demand
Shareholders at today’s AGM wanted to know which sectors or types of customers Cooper expects to rely on for increasing demand to meet its increasing production plans in a scenario in which overall demand declines, due to carbon constraints in line with a 1.5°C warming limit.
Company chair John Conde AO stated Cooper’s business case is based on the company’s perception that new gas sources will be required to replace existing, depleting reserves, based on forecasting by the Australian Energy Market Operator (AEMO). Mr Conde suggested demand would be driven by all gas segments – residential, commercial and industrial.
However, ClimateWorks’ Decarbonisation Futures work shows gas use in Australian residential and commercial buildings falling to effectively zero by 2035, and industrial gas use also dropping significantly in a 1.5°C scenario.
Cooper clearly thinks companies paying to offset their operational emissions is a good idea, having done this for its own 10,000 tonnes of scope 1 and 2 emissions in FY2020.
But what would be the costs for Cooper’s customers if those customers decided to offset the half a million tonnes of CO2-equivalent generated when they use our products, and how would this offsetting cost impact demand for our products?
Mr Conde wasn’t able to provide guidance on how broad carbon offsetting costs might impact demand for Cooper’s fossil fuel products.
Regulatory shifts to decarbonise our energy system also threaten Cooper’s demand expectations, with key states moving ahead with climate policies. Victoria will soon announce significant short- and medium-term emission reduction targets. Meanwhile, NSW’s new energy infrastructure roadmap focuses on replacing retiring coal power with renewable generation and storage capacity.
These policies mean gas power generation is expected to play an even smaller role in the energy mix than it does today, contradicting Cooper’s and the Australian gas industry’s claims that gas’ role in the transition from coal to renewable energy generation in eastern Australia is likely to generate increased demand.