A significant new report finds major oil companies as well as smaller companies are exposed to the threat of stranded high carbon assets if oil demand falls.
The new research has revealed that about US$1.1tr of planned oil projects are likely to be rendered uneconomic if countries agree to limit their carbon emissions.
The paper, Carbon Supply Cost Curves: Evaluating Financial Risk to Oil Capital Expenditures, just published by the Carbon Tracker Institute (CTI) details how projects are at risk of becoming stranded assets on pure cost terms if demand for oil is reduced.
It says that could happen through policy constraints on carbon emissions, fuel efficiency gains, improvement in clean technology, a slowdown in the Chinese economy, or a combination of these factors.
It concludes that many oil companies, including the oil majors, are gambling up to US$1.1tr through to 2025 on projects that require a future market price of more than $US95 per barrel (bbl) if they are to break even.
The CTI research adds that through to 2050 a fifth of total potential production could come from such projects.
However, many of these face significant technical challenges, such as processing oil sands or drilling in deep water or the Arctic region, are in geopolitically sensitive locations, or face both technical and geopolitical risks.
Despite these well-documented risks, the group found that “capital sanctioned now will deliver production for 2020 and beyond, which could enter a very different market and operating context”.
Previous work by the NGO has already identified that a significant reduction in oil demand will be required to limit the world to two degrees Celsius of global warming.
This is the threshold many scientists agree should not be crossed if the world is to avoid “dangerous” levels of climate change and which forms the basis of the international climate deal countries have committed to finalising next year.
CTI’s paper adds that production requiring a market price above US$75/bbl would take the world beyond the 2.0°C threshold, and identifies that from 2014 to 2050 private oil companies would need to invest US$25.5tr in these projects to unlock their full supply.
With returns falling and costs rising, Bloomberg data has identified capital expenditure by the largest oil companies is now five times the level it was in 2000, yet production has barely increased, the development of these reserves pose a huge risk for shareholders and the environment alike.
“There is no free lunch here for investors,” Anthony Hobley, chief executive of CTI, wrote in a foreword to the report.
“Either policy and technological tipping points will reduce demand in line with our analysis or we will face levels of warming described as catastrophic by many.”
The report urges investors to engage with oil companies to discuss the risks of wasting capital on carbon intensive projects that may not be consistent with the constraints imposed by a global emissions deal.
It also outlines a carbon supply cost curve investors and asset owners can use to differentiate between different oil investments within companies’ portfolios and identify the most “climate exposed” oil.
The study confirms that a number of high-profile companies could be affected by high-risk “climate exposed” projects.
Meanwhile, a large number of smaller independent oil companies have exposed more than half their potential capital expenditure through to 2025 to high-cost projects requiring a US$95/bbl oil price or higher.
British environmental news website BusinessGreen reports the latest report follows moves by BP and ExxonMobil to downplay the risk of the so-called carbon bubble.
BusinessGreen reports this saw them argue that the threat to demand presented by climate regulations and clean technologies has been overstated.
However, pension funds and other institutional investors are increasingly recognising the incoherence of investment strategies that fail to account for climate risk and are starting to question whether energy and mining companies are leaving themselves exposed to a carbon bubble.
This week Stanford University in the United States became the latest high-profile investor to announce it would divest its $18.7bn endowment from coal mining projects.
Stanford said it took the action on the grounds that “coal is one of the most carbon-intensive methods of energy generation and other sources can be readily substituted for it”.
While some within the oil industry may continue to deny the existence of the carbon bubble a growing numbers of investors want them to not just acknowledge it, but begin addressing it.
