In response to concerns raised by Greenpeace, pipeline giant Kinder Morgan has revised the legal document underlying the $1.75 billion share offering that would finance its proposed new tar sands pipeline. Earlier this month, Greenpeace filed a challenge to the document, arguing that Kinder Morgan didn’t fully disclose climate change-related risks.
The revisions the company has made send a clear message to would-be investors: if you put your money into this project, then you are making a bet that only pays off if the world fails to reduce oil consumption in order to avoid the worst impacts of climate change. And given the rapid improvements in renewable energy and electric vehicles, that’s looking like a sucker’s bet.
This share offering faces two kinds of risks related to climate change. First, risks related to changes in our physical world and weather patterns, which could pose engineering problems. For example, Kinder Morgan is now admitting the possibility of increased costs from “storms and rising sea levels (potentially resulting from climate change) impacting the Business’ marine terminals” (see page 28 of the prospectus).
The second type of risks relate more to the existential crisis facing the company, which are revealed in the revised document filed with the securities regulator.
At the core of Greenpeace’s submission to the Alberta Securities Commission was a challenge to Kinder Morgan's strategic silence. The business case the company used to pitch the share offering to investors was based on an assumption that the world wouldn’t take additional policy action on climate change and the oil transported through the pipeline would be needed to meet growing demand. Yet, it didn’t mention that the same experts the company relied upon for that forecast have also said that stronger policies (more in line with achieving the Paris climate agreement goals) and disruptive technology (like electric vehicles powered by renewable energy) would greatly reduce oil demand and hence the profitability of the project.
Kinder Morgan's preliminary prospectus relied upon the IEA's "New Policies" scenario, but ignored the IEA's low-carbon scenarios that would bring us closer to meeting the Paris climate agreement's goal of keeping warming well below 2 degrees Celsius.
Failure to disclose these kinds of climate-related risks could leave Kinder Morgan more vulnerable to a class-action lawsuit by shareholders if the promised oil demand doesn’t materialize. It could even subject to a fraud investigation (like the one currently facing Exxon).
Kinder Morgan's revised prospectus kept its (in our view, overly-bullish) core oil demand forecast, but added the highlighted parts below in the section on risks:
“Changes in the business environment, an increase in production costs, supply disruptions, or higher development costs, could result in a slowing of supply to the pipelines, terminals and other assets of the Business. In addition, changes in the overall demand for hydrocarbons, the regulatory environment or applicable governmental policies (including in relation to climate change or other environmental concerns) may have a negative impact on the supply of crude oil and other products. In recent years, a number of initiatives and regulatory changes relating to reducing GHG emissions have been undertaken by federal, provincial, state and municipal governments and oil and gas industry participants (including, for example, the decarbonization targets set forth in the Paris Agreement). In addition, emerging technologies and public opinion has resulted in an increased demand for energy provided from renewable energy sources rather than fossil fuels. These factors could not only result in increased costs for producers of hydrocarbons but also an overall decrease in the global demand for hydrocarbons. Each of the foregoing could negatively impact the Business directly as well as the customers of the Business that are shipping through its pipelines or using its terminals, which in turn could negatively impact the prospects of new contracts for transportation or terminalling, renewals of existing contracts or the ability of the Business’ customers and shippers to honour their contractual commitments” [emphasis added] (pages 34-35 of the prospectus).
In short, Kinder Morgan is saying: our business plan ignores shifts already taking place in the marketplace and only works if governments don't do what they promised to do in Paris.
Buyer beware.