CarbonTracker.org: “Following on from our focus on 2012 capital expenditure (CAPEX) in our 2013 Unburnable Carbon analysis, we have reviewed the data from 2013. This reveals some interesting trends.”
Coal – 2013? The level of coal CAPEX in 2013 was pretty much identical to the previous year in total. However within this flat figure, around one third of the 100 coal extracting companies have increased capex, with two thirds reducing it compared to 2012. Looking at the coal mining companies which increased CAPEX, a number of these are steel manufacturers, and a number are Chinese and Indian operators. Whilst construction demand in growing economies is still there, the global weakening of the thermal coal market puts pressure on all producers with exposure to seaborne trade.
Some our coal producers in the US and Australia did increase their capex. For the diversifieds, BHP Billiton did increase coal CAPEX slightly but has already announced that 2013 will be the peak, as it has no new coal capex planned. Rio Tinto has also not indicated any new coal CAPEX, and has agreed to dispose of $1bn of coal assets. The improved cashflow from reduced capital commitments and better cost management has seen Rio’s 2014 dividend announcement exceed expectations. GlencoreXstrata also indicated to analysts that coal capex in Indonesia and Australia had been slashed.
Oil and Gas – 2014? The level of CAPEX across the 100 oil and gas companies we tracked in 2013 was up 10% overall. Nearly two-thirds of companies increased their CAPEX compared to 2012.
The oil majors all upped their CAPEX in 2013, with Chevron making the biggest jump, followed by Shell, Total, BP, Exxon and ConocoPhillips. However Chevron’s ramp up is a stark contrast to ConocoPhillips’s measured approach.
Whilst this cash-rich sector is spending big, it is getting less back in return. The oil majors are having to commit every larger sums just to stand still in terms of production, as captured in the WSJ graphic here. So an increase in CAPEX does not necessarily equate to an increase in production and ultimately carbon emissions.
Statoil of Norway’s investor presentation makes interesting reading. Statoil are telling a story around focusing on creating value and prioritising capital allocation, rather than the pursuit of volume at all costs. BG Group has announced that 2013 will be the peak year for CAPEX, which will now be trending downwards. And now ExxonMobil is talking about disciplined capital allocation, with total capex down slightly in 2014.
So it seems that the oil companies and their shareholders are realising that it does not add up that companies can both cover dividends and maintain ever rising capital expenditure.
KXL revisited: One region with capital expenditure on hold is Canada’s oilsands. The initial analysis with our partner ETA showed how the prospect of improved margins with KXL could act as a driver for increased investment in new production. However this could prove to be a mirage for investors unless oil prices continue rising ahead of costs. The State Department’s final SEIS referenced our analysis in its market analysis and concurred on the methodology, but came to different conclusions.
We have just revisited the issues to demonstrate why we think it is important to consider a more representative range of production costs and oil prices. Especially as the 5-year Brent oil price is $91 – ie lower than the 2013 average of $108.
Mark Fulton, who led the analytics commented “Following through the numbers in the KXL market analysis, we found there is a significant amount of production that could be enabled by the pipeline with a production cost of $48-60.”
The US State Department only conducted analysis of a hypothetical production cost at $45 / barrel, which does not represent the costs of the actual projects that could fill the pipeline. Carbon Tracker’s extension to more realistic costs shows that the improved economics with KXL for the $48-60 / barrel range mean that the pipeline would instigate the production needed to fill the pipeline. We consider the 5-6GtCO2 emissions from this production over its lifetime to be a significant contribution to emissions for a single pipeline.
Read the Huffington Post article or explore the analysis here.
Regulatory oversight: The UK Environmental Audit Committee published its Green Finance report, leading with a headline about the carbon bubble.
Chair of the EAC, Joan Walley MP, said: “The UK Government and Bank of England must not be complacent about the risks of carbon exposure in the world economy. Financial stability could be threatened if shares in fossil fuel companies turn out to be over-valued.’
Following evidence provided by Carbon Tracker, the EAC recommendations include:
– the FPC and BoE should ‘regularly consult with the Committee on Climate Change to help it monitor the risks to financial stability associated with a carbon bubble’.
– ‘the Government should ensure that company reporting requirements provide investors with the information required to assess carbon exposure’.
Find out more details on the report and coverage here
Meanwhile in Europe, the Committee on Economic and Monetary affairs has passed a resolution on the long-term financing of the European economy which calls for:
“the Commission, in cooperation with the European Systemic Risk Board, to assess systemic risks to capital markets and society at large owing to the overhang of unburnable carbon assets; asks the Commission to report on that assessment as a follow-up to its Green Paper;”
Meanwhile in the US, research by our partner CERES indicates that current climate risk disclosures continue to fall short of investor needs, and calls for intervention from the SEC.”