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Oil majors risk trillions in stranded projects in 2⁰C world

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Cleantechnica

Five of the world’s six largest listed oil companies, including ExxonMobil and Shell, run the risk of wasting more than 30% of potential investment on high-cost upstream projects that are unnecessary and potentially harmful if we are to ensure the world does not warm beyond 2⁰ Celsius above pre-industrial levels.

This is one of the key findings from a new report published this week by Carbon Tracker and the Principles for Responsible Investment (PRI) and institutional investors.

The new report, 2 Degrees of Separation, is the first report to rank 69 oil and gas companies’ exposure to climate risk — company-by-company, evaluating where potential shareholder spending would be most exposed to the low-carbon transition.

Overall, the report found that $2.3 trillion worth of projects — or around a third of business-as-usual investments through to 2025 — run inconsistent to the goals and objectives of limiting global warming to a maximum of 2⁰C, not to mention is contrary to the rapid advances already seen and expected to continue in clean energy technologies, and decreasing energy demand.

2 degree celcius scenario graph

Of course, the issues at play are not restricted solely to environmental, socially-conscious investing. The report finds — in a serious case of Occam’s razor — that “companies are likely to perform better by aligning with a 2⁰C world because lower cost projects have higher margins.”

Specifically, the average oil price would have to be around $100 a barrel over the long term for it to be profitable (though not socially or environmentally conscious) for companies to pursue the projects listed above, beyond the 2⁰C limit.

Needless to say, for anyone paying even the slightest bit of attention over the last few years, it will be clear that it has been years since barrels of oil went for $100 — current figures are down closer to $40 per barrel.

Oil and gas supply has long been outpacing demand, meaning that only the projects with the lowest cost are likely to go ahead. Projects that rely on high oil prices run a much higher risk of failing to deliver returns to shareholders — not to mention be permanently damaging to the environment. According to the report, these projects include:

  • 33% of all spending on oil projects including oil sands and deepwater — a total $1.6 trillion
  • 60% of spending on gas projects in North America — a total $0.4 trillion
  • 37% of spending on gas projects in Europe — a total $0.1 trillion
  • 40% of spending on Liquefied Natural Gas projects — a total $0.2 trillion

Somewhat unsurprisingly, given what we know, ExxonMobil is the most exposed company to the energy transition, with 40% to 50% of capex allocated to uneconomically viable projects. Shell, Chevron, Total, and Eni all have average exposure between 30% to 40%, while BP runs a risk somewhat between 20% to 30%.

“This report is a real game-changer for the future of corporate-investor engagement,” said Nathan Fabian, director of policy & research at PRI.

“Investors in oil and gas companies have been in the dark about their exposure to climate risk, but they will now be able to confront companies with precise information and ask hard questions about how they intend to deal with potentially stranded assets.”

“Investors are through an unprecedented commitment taking steps to reduce the risk of stranded assets within the oil and gas industry,” said the five institutional investors in a joint statement.

“Lack of transparency at company level has, however, been a bottleneck to understanding how companies are responding to the considerable changes in the energy market. This extensive research clearly emphasises that some companies have to reconsider their business strategy and will eventually lead investors to more efficiently price the financial risks associated with a 2 degree world.”

ExxonMobil has been under a lot of pressure lately, not least of all from its own shareholders, who last month went against the wishes of the company’s board and voted 62% in favor of reporting annually on how advances in energy technologies and global 2⁰C climate change policies will affect the company’s business and investment plans.

“This extraordinary result, on the heels of the majority Occidental vote, indicates growing institutional investor concern,” said Robert Schuwerk, US Senior Counsel, at the time of the vote.

“The vote foreshadows what is likely to materialise as recommendations on climate risk disclosure by the TCFD chaired by Michael Bloomberg and Bank of England governor Mark Carney.

Climate change is now front and center in investors’ engagement. As Exxon is a standard bearer for the oil and gas industry, smaller companies should take note and respond accordingly.”

The “Occidental vote” mentioned by Robert Schuwerk was a similar vote by shareholders of Occidental Petroleum, requiring their company to assess and report the impact of climate change on its business.

More recently, AP7, Sweden’s largest pension fund, announced that it had divested itself of all investments in companies it said had violated the Paris Climate Agreement in some way — companies including ExxonMobil, Gazprom, Westar, Southern Corp, TransCanada, and Entergy.

“Since the last screening in December 2016, the Paris agreement to the U.N. Climate Convention is one of the norms we include in our analysis,” AP7 said in a statement.

“There are clear signs that oil demand could peak in the early 2020s — so companies need to start taking project options that would come onstream then off the table, and be transparent about how they are aligning with a low carbon future,” explained James Leaton, Director, Carbon Tracker’s research.

“Sticking with the growth at all costs scenario just doesn’t add up for shareholder value when the policy and technology momentum is heading in the opposite direction.”

Source: Cleantechnica. Reproduced with permission.  

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  • Radbug

    Not if they’re funded by Federal Reserve fiat money corporate bond-buying. Then the financial burden shifts to the entire global financial system via the $US’s reserve status.

  • Ren Stimpy

    Is this the underground democracy we need in these troubling times – shareholders with ethics who keep their own companies honest and accountable to life as we know it?

  • raaj

    let us how Trumpian statement of rubbishing 2 deg unfolds .. article is corporate sponsored

  • Allan Barr

    Trillions of dollars in stranded assets, rapid transition into renewables. Lots of money to be made and lots of money to be lost. Meanwhile our biosphere is burning up, if anyone has not noticed.

    • Alastair Leith

      i noticed. And i live in a state called WA where the new Labor Government didn’t even appoint a Climate Change minister, has no mention of CC even in a token way in it’s Health and Education party platforms (despite Lancet identifying CC in won of the largest cross discipline research efforts not just in medicine but in anything, ever, as the biggest threat to health in the 21st century). And they confidently* bat away any suggestion of a RET even though every Labour govt in every other stat has one of at least 50% by 2030.

      * ignorance is a wonderful enabler for confidence right?

  • Ray Miller

    If the Paris agreement aim is in fact to limit warming to only 1.5C, this exercise should be done with this figure to expose the true trillion dollar risk? The money lenders should be very worried by the collapsing house of cards.

    Why then are we allowing oil exploration in the Great Australian Bight? And for that matter any new coal mine?

    • Alastair Leith

      1.5º C is no longer possible. Even if all human sourced GHG emissions stopped tomorrow at 6PM we’d still hit 1.5º C — or higher — due to climate lag (positive feedbacks like for eg continuing ice melt reducing albedo effect thereby increasing temperature which increases ice melt) and the removal of short lived cooling aerosols from coal smoke stacks and jet aircraft disappearing in short time.

      Kevin Anderson of Tyndall–Centre for CC Research says it was put in as a (cynical) sop to the nations that will drown as a result of existing GHG emissions.

      Given that some GHG emissions sources are not even included properly in UNFCCC national accounting (i.e. Land Use sector in Australia is actually 44% (GWP 100) or 56% (GWP 20) depending on how you do the math ) it’s not conceivable 2.0º C is even that feasible given that it would require the following maths:
      If allowing India and China etc until 2050 to get zero emissions by 2050 that would require developed and rich nations to decarbonise by ~2030. That means a 10% p.a. C abatement plan, starting next year. Australia’s ambition is for 26-28% reduction on 2005 (a cheat year) by 2030. That’s barely 10% per decade. a factor of ten out.

      • Ray Miller

        Then it makes the case to go as hard and fast as possible to limit the damage, and makes the value of any fossil shares worthless.

        • Alastair Leith

          Yes, it also makes it worth attacking short term warming climate pollutants (STCPs) at the same time as CO2 emissions. IPCC and the majority of climate scientists (certainly those on Climate Council and CCA) have emphasised going after CO2 and not getting distracted by methane and the shorter lived GHGs for fear it would come at the cost of CO2 abatement.

          We no longer have that luxury, as short term warming is damaging the planet now.

          One third of the current 1.0º C of warming is due to anthropogenic methane released since 1850. It’s time to target methane and all the STCPs on a parallel track to addressing CO2 from fossil fuels.

      • neroden

        Well, we could accomplish 1.5C if we aggressively extracted carbon from the air (reforestation, algae blooms, carbon-negative industrial processes, etc), but it doesn’t seem likely, does it?

        • Alastair Leith

          Unlikely and doesn’t scale. We’re land clearing high sequestering forest at acres a second rates globally, and replanting lower sequestration plantations in more marginal areas at <1% of what is being cleared. Reforest the land exclusively devoted to ruminant livestock and grain production for livestock in this country and we'd start getting somewhere but even then a 1.5º C peak is not going to eventuate. Not even close.

  • RobSa

    Some of the big fossil fuel companies, if not most of them, must collapse. It cannot be any other way.

    • Joe

      Lets have no sympathy for Exxon who gave us The Prince William Sound catastrophe and for decades did a “Big Tobacco” of sorts, in lying and spreading mis information about fossil fuel use and climate change that their own in house scientists warned the Exxon bosses about. The sooner these bastards get rubbed out the better.

  • Brunel

    They should learn from cigarette makers and cola makers.

    The cigarette firms acquired food firms like KRAFT or got acquired by food firms.

    Makes sense. People must eat.

    Coca Cola acquired a bottled water/juice firm – if people switch from drinking cola to water/juice, the profits will still go to Coca Cola.

    The oil majors should acquire supermarkets or merge with them.

    Coles Group probably gets most of its revenue from retailing groceries and hardware (Bunnings) with a bit from retailing petrol. If petrol sales collapse, no big deal for Coles because they are mostly a grocery and hardware retailer.

  • Continuing to pump oil is literally insane. People do not understand that even at 1 degree C, where it is now – the disruptions have started worldwide @ – 1.5% will be disproportionately worse and at 2 degrees it could spiral out of control and limit life on Earth. I repeat – Limit life (yours and mine) on this, the only planer we have – once it is totally obvious – it will be too late – that is the nature and danger of a threat like climate change…..no one said – “Man is not allowed to destroy himself” at this rate , sadly, he will

    • Joe

      ….there is only one species on Earth that soils its own nest…supposedly the most intelligent of all the species. How dumb are we really !

      • Alastair Leith

        too smart for our own good. Legendary Buddhist meditation teacher Ajahn Chah once said ‘the brighter the city lights get, the duller the minds become’.

  • Alastair Leith
  • Alastair Leith

    Makes sense of Big Oil looking to dob in Big Coal for a carbon price. Squirrel.