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Fossil fuel exploration: what does the World Bank announcement mean?

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Last week, the World Bank Group announced it will no longer invest in upstream oil and gas after 2019. The announcement was one of the key asks from the Big Shift Global coalition of civil society organisations. France has also just passed a new law which bans licences for oil and gas exploration.

In October, reports by Oil Change International and E3G both raised the issue of continued public funding for oil and gas exploration, and the need to an immediate end to exploration finance to align with global climate goals. What does the World Bank’s new statement mean for climate change, and for other banks and financial institutions?

What are other development bank policies on exploration?

The African Development Bank and Asian Development Bank already have exclusions in place for oil and gas exploration (see table below). In fact, the Asian Development Bank’s policy excluding fossil fuel exploration dates back to 2009, ten years before the World Bank’s new policy will enter into force.

Interestingly, these existing exclusions on fossil fuel exploration were not linked to climate change, but were established for other reasons, such as the risks involved.

Fossil fuel exploration is an expensive, high-risk operation. The risks of exploration include doubts over the amount of reserves that exist, the risk of cost overruns and delays, risks of water contamination, and a long history of industrial accidents, explosions, leaks and spillages such as BP’s Deepwater Horizon oil spill in 2010. According to Barclays Bank, the risks also include bribery and corruption in developing economies with weak governance structures.

Even aside from the scientific evidence about climate change impacts, investing in fossil fuel exploration is not a sensible use of scarce public finance. The Asian Development Bank (ADB)’s policy from 2009 states: “as oil is an internationally traded commodity with established private sector involvement, ADB will not, in general, fund oil field development projects”. Existing private investment in these activities helps explain why there is little justification for public finance.

The European Investment Bank (EIB), European Bank of Reconstruction and Development (EBRD) and Inter-American Development Bank are now falling behind - with no exclusions in place. With EIB and EBRD set to review their energy policies this year, these banks must step up their game. There is little case for any more public funding toward activities which pose such fundamental financial, economic, social and governance risks.

Sources: AFDB Energy Sector Policy (2012); ASDB Energy Policy (2009); EBRD Energy Sector Strategy (2013); EIB Energy Lending Criteria (2013); IADB website, GP-96-1 (1985); World Bank Group statement and Q&A (2017)

Upstream oil and gas: Calls for divestment

Going a step beyond the policies of the other development banks, the World Bank’s exclusion on ‘upstream activities’ oil and gas covers drilling and operating wells, as well as exploration.

While the World Bank announcement is a welcome step, it does not end all fossil finance. It merely excludes the most risky activities. World Bank Group said it will continue to support “midstream and downstream natural gas investments for transport and distribution to consumers and for power generation”.

The World Bank Group consists of five institutions, and among them, the International Finance Corporation (IFC) may be affected the most. The World Bank Group invested over $1 billion per year in oil and gas exploration and production over 2014-16. The private sector arm, IFC, accounted for 40% of the group’s exploration finance over this period. Recent data also shows MIGA has the dirtiest energy financing in its portfolio, with little finance towards clean energy, but there are signs of improvement.

Before this, the World Bank already had restrictions in place on coal, excluding financing for coal projects except in rare cases. As for coal, however, the Bank says there are a few ‘exceptional circumstances’ where it might still invest in upstream gas.

Upstream oil and gas is also a target for calls for divestment from fossil fuels by companies and financial institutions. For example, last week, insurance giant AXA announced an end to insurance for tar sands.

Beyond the financial risks, there are material risks to life on earth with continued investment in exploration. Exploration of fossil fuels is completely out of line with globally agreed climate goals. The world already has enough existing discovered fossil fuels to take us far beyond the globally agreed limit of 2 degrees of global warming.

According to some estimates, without mitigation, the planet could warm by a huge 10 degrees if all fossil fuels are burned. This would be enough to leave some regions uninhabitable and could even cause mass extinction.

As the United Nations Secretary General highlighted at the One Planet Summit, “we are investing in our own doom”. Even putting the economic case aside, financial institutions have an obligation to maintain a liveable planet for future generations.

This article was originally published on Huffington Post.