Climate Blues

Still catching up on last week's news, there's another aspect of the recent Gulf Coast deep water oil discovery that's worth considering. This story in the Financial Times (subscription may be required for full access) caught my eye, with its reference to equity analyst concerns about the risk of climate change brewing up more hurricanes that could impede the development of this new oilfield. If anyone is wondering how, in spite of the official US position on the Kyoto Protocol, global warming could become an important issue for US corporations today, this is a prime example.

Last week Chevron and its project partners Devon and Statoil announced a very significant discovery in the deep waters of the Gulf Coast, as I mentioned in yesterday's posting. Initial indications are that the Gulf of Mexico's "Lower Tertiary" layer, to which the Jack field belongs, could yield from 3-15 billion barrels of oil. This is what a "gusher" looks like in the 21st century oil world. In spite of Jack's great potential, though, two factors have put a bit of a damper on the market's enthusiasm about this news:

• Although the 2006 hurricane season has yet to cause serious disruptions in Gulf Coast oil and gas activities, we're coming off two consecutive years in which storms disrupted both current production and new construction activity, leaving a backlog of damaged infrastructure and delayed projects, along with inflated drilling and construction costs.
• At the same time, climate scientists have suggested that global warming will result in more frequent severe hurricanes, if not more hurricanes in general. This has been picked up in the media and is well on its way to becoming conventional wisdom.

Thus, we have a major hydrocarbon discovery, the value of which both our recent experience and our view of the future biases us to discount. In other words, analysts will update their financial models of the companies involved to reflect the Jack discovery, and the ultimate booked reserves and cash flow it should create, but they are likely to apply higher risk factors on the pace of project development and peak annual production than they might otherwise have done. This could cost Chevron and its partners hundreds of millions in market capitalization, even if they never experience the NPV-eroding delays that the market fears.

So while films and TV specials focus on the kind of climate risks that concern us as individuals and voters, businesses are contending with an entirely new layer of risks, arising not just from the physical challenges of operating in a warmer, more turbulent world, but also reflecing investors' current assessments of the expected financial consequences of those changes.