Timmy elsewhere

The egregious buffoon Richard Murphy also chimes in:

There’s actually a serious point here. These campaigns about divesting from fossil fuel companies because their reserves aren’t going to be worth anything. The proponents of this idea seem to be entirely ignorant of the very basic economics of climate change. Which is, as we all know, really about discount rates.

Think about that for a moment.

What Stern did was draw this out over the climate change question. Entirely correctly, he pointed out that if we use market interest rates to value things over a century or two (and of course market interest rates are simply the aggregate opinion of us all as to that value of stuff in the future rather than the here and now) then the net present value of vast damages in 2150 are spit now. So, we’ll do nothing to avert those vast damages in 2150 which is something the people of 2150 won’t thank us for.

OK.

The book value of reserves and resources which may be exploited in the future we can calculate – just as with the damages from climate change – by applying a discount rate to them. And of course we do apply a discount rate to them: we apply the market interest rate to them. The net present value of a share is the net present value of all future income (ie, dividends) from that share and of course we are discounting that at market interest rates.

D’ye see where this is gannin’ yet? Quite: the net present value of reserves that may or may not be exploited in 50 years’ time is pretty much nothing. Because discounting these large sums at 8 or 10 per cent market interest rates means that the net present value is piss.

They’re idiots.

18 thoughts on “Timmy elsewhere”

  1. I’ve asked Ritchie if he’s prepared to have his power cut off when there’s no wind, of course he’s not. “It’ll take time” he says. Like he says savers should be taxed, apart from him “because he’s 56”.

    I assume, given that he thinks BP, Shell et al, are worthless he’s holding a huge short position in them ready to donate to worthy causes? Just like he’s investing in Green infrastructure? My arse he is.

  2. bloke (not) in spain

    I’m hardly surprised because the people you’re talking about are fundamentally incapable of understanding discount rates.
    “Lend me a tenner & I’ll pay you back a tenner on Friday”
    “No you won’t. You’ll give me eleven quid on Friday”
    “USERER!!!”….”Oh all right. I need the tenner today. Bastard”
    Thus proving today’s tenner is worth eleven quid in Friday’s money.

  3. I get your point and its entirely correct. One thing is bugging me though is if you halved shell’s proven reserves, overnight, how would shareholders react?

  4. One thing is bugging me though is if you halved shell’s proven reserves, overnight, how would shareholders react?

    Badly: reserves replacement is viewed as pretty important by investors in oil companies.

    As is maintaining the dividend. A lot of (most?) investors in major oil company stock are pensioners who are not looking to buy low and sell high, but want cash returns from stable stock. If they stop paying the dividend, or reduce it, the share price will plummet. That is why there is at least one major oil company borrowing money to maintain its dividend payment at the moment.

  5. So Tim. Those reserves do have a value. Discounted to be sure bu not piss. Or am I missing something?

  6. Those reserves do have a value.

    Of course they do. There value would be discounted to some degree to take into account changes in the laws (e.g. taxes), a collapse or law and order in the country (take your pick), the reserves becoming uneconomic (due to changes in technologies making other deposits more economical), etc. plus a whole host of financial ones I don’t know about. But the reserves are worth a shitload, especially if the field is already producing.

    Also bear in mind that the reserves can only be booked on the SEC once an appraisal well has been drilled, from which a decent understanding of composition and flow-rates can be gleaned. So the reserves are real, not pie-in-the-sky.

  7. So we have to square this. The ownership of the molecules is perhaps diddly but demonstrating the long term viability of the business is perhaps where its at.

  8. No, ownership of the reserves is more important: companies like Rosneft are still worth a lot, but trade at a discount due to their poor business model. As John Paul Getty is rumored to have said:

    “The best business in the world is a well-run oil company. The second best business in the world is a badly-run oil company.”

  9. Well we’ve agreed having the reserves is important to the shareholders. We or at least I agree the value of the molecules you will get round to pumping in 50 years is discounted to buggery. You square it then or are you saying Tim W missed the goal from the start?

  10. Having argued with Guardian-readers about this in my time, I can inform you that the Stern Review contains only two words that matter to them: “market failure”. It is absolute proof that markets have completely failed and cannot be trusted for anything at all and we have to throw all established economics out of the window to save the planet. The idea that Stern might have said some other stuff is, to them, silly.

  11. Ok probably i’m sorry if i got this horribly wrong but hey that’s how you learn.
    Shell 2012 reserves oil. 6,000 mill bbl. (rounded)
    Shell (Subs and EAI) 2012 production oil 1.5 mill bb/day= 550 mill bbls a year. Roughly 11 years of production. So… basically everything on the books its all valuable stuff, that will be produced in a decade.

  12. You square it then or are you saying Tim W missed the goal from the start?

    I haven’t the faintest idea!

    So… basically everything on the books its all valuable stuff, that will be produced in a decade.

    Well, 10-20 years, but that sort of range yes. Which is why reserves replacement is seen as important.

  13. The valuation of reserves is based on the estimated profit (excluding amortisation of said reserves) at the time when they will be produced *discounted back to the present day at a tough discount rate*. Said tough discount rate includes a risk factor (‘cos you have a best estimate of reserves not a guarantee) and 10% is popular because it is easy for idiots to follow. The estimated profit includes an assumption that wages will rise faster than prices and – sometimes – that technology that has already been developed will reduce non-wage costs in the future. “Proven” are those with a 90% or greater probability of being developed at the current oil price, “proven and probable” reserves are those with a 50% or greater probability of being developed at the current oil price. Most reserve values quoted by oil companies are “proven” reserves, but some also quote “proven and probable”.
    Enough!
    Murphy wants to discount the valuation of reserves *that are already discounted*.
    So Hallowed Be is right – it’s squared.
    Minor quibble is that some oilfields have a very long life – BP’s original well in Kuwait was still producing until Saddam Hussein’s forces dynamited it when they withdrew from Kuwait in 1991; Prudhoe Bay was discovered 47 years ago, Forties in 1970 and has another decade to go. But most of Shell’s reserves will be produced in the next 11 years.

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