Wild weather patterns pose major challenges and risks for industry

Age
Saturday 16/9/2006 Page: 1

As evidence of climate change mounts, wild weather patterns pose major challenges and risks for industry

BEFORE hurricane Rita hit the southern US state of Louisiana last September, adding to the devastation from hurricane Katrina, Rita had crushed Chevron's Typhoon oil platform.

The rig, a few hundred kilometres off the coast in the Gulf of Mexico, was designed to withstand major hurricanes. But hitting the platform head on at category four fury, Rita ripped the asset apart.

As BHP says, there is no incontrovertible proof that this individual storm was a direct result of global warming.

However, a spokeswoman said the storm did "serve to raise awareness within BHP Billiton of weather issues". With a half-stake in Typhoon, the company suffered an insured loss of $63 million.

Just as with many other Australian companies and industries, for BHP, climate change is now considered yet another business risk, albeit a more fraught one than fluctuations in exchange rates.

Australia's largest company now says, when asked about the physical risks of global warming, that "its assets may be affected by the following phenomena: increased maximum and minimum temperatures, rising sea levels, changed rainfall intensity, increased intensity of tropical storms and cyclones, increased drought, decreased water availability and increased costs of water, increased occurrence of flooding, increased spread of disease including malaria.

"Our petroleum assets are particularly concerned about the increased frequency and severity of storm activity."

But BHP also predicts potential benefits for itself, in particular a growing appetite for low-carbon-emitting resources such as gas and uranium, but extra costs for other assets with increased carbon regulation.

These statements make up part of BHP's response to the Carbon Disclosure Project: an annual survey of 500 of the world's largest public companies detailing how they are managing emissions and approaching climate change. It will inform institutional investors wanting to know how they are responding to these risks.

On Monday in New York, former US vice-president Al Gore will release the findings of this year's Carbon Disclosure Project. This comes after his visit to Australia this week to launch his documentary An Inconvenient Truth, which again stirred the doomsayers and naysayers.

But the audience for the CDP is more targeted than for Gore's documentary. CDP, set up in Britain six years ago, represents 211 institutional investors with more than $U531 trillion ($A41.1 trillion) in assets almost 50 times Australia's annual gross domestic product.

A more detailed local version, surveying Australia's 100 largest listed companies and New Zealand's top 50, will be released in mid-October.

Behind the public debate, major businesses are quietly contemplating the costs and opportunities of carbon trading. Others are examining the direct impact of changing weather patterns on their businesses. Some are waiting for greater scientific certainty before they take significant action.

Precautionary action on greenhouse gases is taking place even without a national carbon trading system, although many businesses privately believe some sort of national carbon trade is inevitable.

Meanwhile, a patchwork of state systems may spring up to fill the vacuum. NSW has introduced the first state-based scheme, and other states are considering their options.

The Business Council of Australia (BCA) welcomes such precautionary action.

Policy director Maria Tarrant notes that while the BCA did not take a formal position on the Kyoto Protocol - which mandates carbon cuts business, governments and the community are acting to reduce carbon emissions. Still, she warns that potentially conflicting state systems might add to the risks of energy infrastructure investment.

The council argues it is essential for Australia to take a lead in seeking technological solutions to reducing carbon emissions in partnership with other emitting countries including China, India and the US.

"Yale economist Professor Robert Mendelsohn, as part of a study that assessed the potential economic impacts worldwide, has forecast that a global warming of 2.5 degrees by 2100 would wipe several per cent from Australian GDP. The same study found a small net benefit for the US, where an improvement in agriculture would outweigh harm to other sectors.

"Australia is a large enough country that you will see different things happening in different places," Mendelsohn told The Age. "The northern half of your country will suffer (economic) impacts similar to other tropical countries (damages) whereas the south will probably experience effects more similar to other industrialised temperate countries (very little net impact)."

While Mendelsohn's studies are long-term, the life of a company's assets, its sector and its ability to respond quickly to developments will determine their immediate responses.

Foster's, with its huge climate-sensitive wine business, sees no immediate threat. Hydro Tasmania, with its longlived dams, sees it as a high risk, as does the insurance industry. Australia's highpolluting aluminium business has spent 10 years reducing its emission intensity, and is now joining attempts to introduce cleaner technologies offshore.

In agribusiness, Don MacKay considers himself more an agnostic than a climate sceptic.

As boss of the country's oldest and largest cattle producer, the Australian Agricultural Company, he wants greater scientific certainty around the scale and immediacy of any change before it substantially affects business directions.

"People point to extreme weather events as proof of change," he says. "You hear regularly that this is the driest weather event since 'x'. All that means is there was an event that was drier.

"So while at times I've called myself sceptical, I do think there is indisputable evidence that there are things happening, but I think exactly what that means is completely unknown.

"In some respects it influenced our thinking already. In virtually all cases, the expectation of increasing rainfall in the north and decreasing rainfall in the south seems to be the broad consensus. With that in mind, we have invested and continue to invest in the far north."

But Mr MacKay concedes that AAco has been working on ways to reduce one of the main greenhouse gases emitted in Australia methane from belching (no, not flatulent) cattle, through dietary modifications.

Hydro Tasmania has taken the opposite approach. Climate change was identified as a "high risk" in 2001, prompting the state-owned generation business to commission CSIRO research on its local effects from 2005-2040.

The research underpins Hydro's direction and its $3 billion-worth of dams, hydro-electric generators and wind turbines.

"Hydro Tasmania has completed this work on climate change as we believe it may pose a considerable threat to its fuel source water," says Michael Connarty, manager, energy and market analysis.

"Over the years (we have) seen the changes in places such as southwest Western Australia, where since 1975 the inflow has reduced by over 50 per cent. A similar reduction in in-flows into our storages would result in significant pressure on electricity supply in Tasmania and viability of Hydro Tasmania."

For the aluminium industry, it is not so much rain and drought that affect business; rather, carbon emissions and carbon trading can.

An AMP report in 2004 warned that without offsets, emissions trading schemes could undermine the sector's profitability significantly.

"The magnitude of the increase in smelter cash costs that may arise from the introduction of an Australian ETS casts further doubt over the potential returns of new Australian smelters," the report said.

But Aluminium Council of Australia executive director Ron Knapp says NSW has already proposed a permit allocation to producers to offset additional costs.

Meanwhile, the industry had already taken big steps to reduce emission intensity and was keen to help other countries introduce cleaner techniques.

"We want to work in a global context for clean development and climate, and progress further to reducing our direct emissions," Knapp says.

With the roll-out of new technologies at Australia's six smelters, carbon intensity has been cut 48 per cent in aluminium production and 20 per cent in alumina since 1990.

"If we could replicate the Australian numbers, if we could get global numbers down. there would be a significant further reduction, hence our interest in pursuing that in co-operation with our Chinese colleagues," Knapp says.

And despite the industry's high-polluting nature, the need for more energy efficiency is actually driving demand for the material as higher energy costs increase the pressure for lighterweight cars, trucks and buses. But these aren't the only sectors contemplating greener ways of business.

In beverages, Melbourne brewing giant Foster's has also been considering the issue, but believes none of its operations is located where extreme weather events are common or likely to become so.

As a relatively energy efficient business, it is less vulnerable to carbon costs. But Foster's is involved with the wine industry's studies into the extent of possible changes, and to develop any mitigation strategies in response.

As with MacKay, Foster's believes there is as yet not enough information to quantify the potential impact of challenges to climate change. But still, senior executives are analysing its implications.

Across town at BHP headquarters, the still-recent memory of hurricane Rita has prompted more immediate action.

At its $US1. 1 billion Atlantis petroleum development being built in the Gulf of Mexico,"tension leg" platforms are being designed to withstand the 300 kmh-plus blows of a category 5 hurricane.