Undeveloped oil projects a $91bn gamble, as carbon bubble grows

Some of the world’s biggest future oil projects, planned by some of the world’s biggest publicly listed oil companies, risked more than $9o billion of investor funds over the next decade if taken into production, a new report has found.

The report, released on Friday by the Carbon Tracker Institute, ranks the world’s oil majors according to their capex exposure to undeveloped high-risk exploration projects.

The main aim of the report, says CTI, is to alert institutional investors to the risks of being exposed to a future double hit of falling oil prices and growing climate regulation in an increasingly carbon-constrained world.

The research found that BP, ConocoPhillips, ExxonMobil, Chevron, Total, Eni and Royal Dutch Shell were considering investing $357 billion over the next decade to develop new production in costly and often technically-challenging projects.

The top 20 of these projects – most them oil sands in Canada or deep water projects in the Atlantic – represented $91 billion of capital (from 2014-25), which could be returned to shareholders rather than gambled away on a carbon-loaded fuel bet.

The report follows on from CTI’s carbon cost curve study, which estimated that through 2050, cumulative emissions of carbon dioxide from oil should be no more than 360 billion tonnes, or 40 per cent of the overall 900 billion-tonne 2°C carbon budget for all fossil fuels.

As CTI’s Reid Capalino and Mark Fulton wrote in RenewEconomy in May, this suggests a “2°C safe” average level of global oil production through 2050 of 57 million barrels per day,” – a level that is nearly 40 per cent lower than 2013 production.

“Examining the supply curve for global oil production, we find that nearly 100 per cent of “2°C safe” production can come from oil with a supply cost of $60 per barrel or less (i.e. projects that, after adding a standard “contingency” margin, would require a market oil price of $75 per barrel in order to be approved development),” Capalino and Fulton said.

But as this latest CTI report has calculated, the to 20 undeveloped high-risk oil exploration projects would require at least $95 a barrel for sanction – some of them more than $150 per barrel.

As CTI also showed in May, oil prices have collapsed as low as $40 per barrel twice in the last decade, while climate laws are tightening around the world – in fact, according to UNFCCC head Christiana Figueres, the world now has 500 climate laws in 60 countries covering 80 percent of global emissions.

“Investors are concerned about the levels of capital being sunk into future fields by the oil sector, but are not getting answers on the economics of the projects from the companies,” said James Leaton, CTI’s research Director. “CTI has responded to demand for detail to enable shareholders to challenge where money is spent.”

The report found that BP and Total had particularly high exposure to deep water and ultra-deep water deposits through 2025, while ConocoPhillips was unusually exposed to Arctic projects.

High carbon-emitting oil sands projects accounted for 27 per cent and 26 per cent respectively of Shell and Conoco’s potential high-cost development spend.

“This analysis demonstrates the worsening cost environment in the oil industry, and the extent to which producers are chasing volume over value at the expense of returns,” said Andrew Grant, CTI Analyst. “Investors will ask whether it is prudent for oil companies to bet on ever higher oil prices when they could be returning cash to shareholders.”

Recently, some oil majors have admitted that their capex would either need to fall or stay flat over the next few years to compensate for dwindling returns.

Some majors have started culling projects already, with Total and Suncor shelving the $11 billion Joslyn oil sands project and Royal Dutch Shell putting on hold its Pierre River project – both this year.

BP has mothballed its Mad Dog extension in the Gulf of Mexico, and Chevron is reviewing its $10 billion Rosebank project in the North Sea. In the Arctic, Statoil and Eni have deferred a decision on the $15.5 billion Johan Castberg project.

CTI says the responses from some of the oil majors to its work on stranded assets show that they “have not resolved the contradiction between their acceptance of the need to tackle climate change, and their irresponsible plans to spend billions on high-risk oil projects at the wrong end of the cost curve.”