FT: “Oil companies with reserves in high-cost areas such as Canadian tar sands or deep water are at risk of committing too much capital to uneconomic projects, according to an environmental campaign group that works with investors to highlight the risks of climate change.”
“In a report to be published on Thursday, Carbon Tracker warned that policies to curb greenhouse gas emissions and improve energy efficiency would restrict future oil demand and prices, meaning that companies with high-cost production would find they could not earn acceptable returns on their investments.
….Mark Fulton, a consultant with Energy Transition Advisors who wrote the report, said companies committing high proportions of their capital spending to higher-cost areas such as the oil sands “are betting the farm on high oil prices”.
….Concerns about assets being stranded as a result of climate policies were rejected by ExxonMobil in two reports this year.
BP took a similar line, arguing that the warning from Carbon Tracker and others about “unburnable” reserves “oversimplifies the complexity of the issue and overstates the potential financial impact”.
However, both Exxon and BP have plans to curb their capital spending over the next few years.”
Carbon Tracker’s research has created a new debate around climate change and investment. This report – “Carbon Supply Cost Curves: Evaluating Financial Risk to Capital Expenditures” – is a risk analysis which provides a tool for the majority of investors who cannot simply divest, so they can understand their risk exposure and start directing capital away from high cost, excess carbon projects.
The report focuses on the following main topics:
Challenge demand assumptions: Conducting risk analysis to understand the implications of lower demand, price and emissions scenarios needs to be an open process. These stress tests can inform investor understanding and engagement on capex plans. Demand may be affected by a range of factors including supply costs, air quality standards, technological advances and carbon regulation.
Understand exposure on the carbon supply cost curve: Investors can consider a range of demand scenarios and then determine which price bands of production cost they think are at risk. This oil price sensitivity is an important proxy for how well a company can adapt to a low carbon future.
The private sector plays a key role: Listed companies have more exposure to potential production than national oil companies, especially as you go up the cost curve. This shows how important the private sector will be in determining how far up the cost curve we go, and what emissions we produce. Differentiating on production costs paints a very different picture to just looking at overall statistics on reserves and resources ownership.
Majors can enhance value: The majors have large interests across the cost curve, reflecting the sheer scale of their interests, and the desire to be involved in any large developments. Reducing high cost options may be viewed favourably by the market as a way of cutting capex and maintaining dividends.
Independents are gambling on a high oil price: Smaller companies have high percentages of their potential capex over the next decade in high cost, high risk projects. Some specialists in deepwater or oil sands have 100% of capex requiring above a $95 oil price. A low demand scenario challenges the whole business model of these operators.
Oil sands, Arctic and Deepwater: There is an estimated $1.1trillion of capex earmarked for high cost oil projects needing a market price of over $95 out to 2025. This is largely made up of Deepwater, Arctic, Oil sands and other unconventionals. This should be the start point for investors seeking to reduce their exposure to the high end of the cost curve.
The report – and the accompanying technical papers produced in collaboration with Energy Transition Advisors
can be downloaded here.
For a more detailed overview of the report please view the key findings presentation by Mark Fulton, former Deutsche Bank Climate Change Advisors head of research.
“The carbon cost curves report enhances the ability of investors to hedge against risks and capture rewards in a carbon constrained world. Governments have agreed to limit global temperature rise to less than 2 degrees Celsius. Governments have also agreed to put in place the pathways to deliver this with a new and universal agreement in Paris towards the end of 2015. In order to reach this goal, large amounts of coal and oil will have to stay in the ground, unburnt. Carbon Tracker’s new Curves report indicates where in respect to the oil industry some of those stranded assets and some of those red lines will lie.”
Christiana Figueres, Executive Secretary, United Nations Framework Convention on Climate Change (UNFCCC)