Cost of new oil projects >$100, revenue per boe $72: Morgan Stanley.

Forbes: “ExxonMobil’s publication of a report into its climate risks felt like a ground-breaking moment in the debate about carbon-stranded assets. Just a month later, another such moment has arrived, in the form of the latest report from Carbon Tracker, the campaign group that highlights the risks that climate change presents for investors.”
“The report* says that energy companies have earmarked an estimated $1.1 trillion of capital expenditure for projects that can only make money if the oil price remains higher than $95 per barrel, while some are only viable at a price of $120-$150.
Yet the International Energy Agency says that to meet global climate targets, two thirds of current reserves must remain unburnt, so if a global climate deal is reached in 2015, demand for fossil fuels will come under severe pressure and prices will fall. Many oil companies see this as very unlikely – ExxonMobil, for example, in its report said that “it is difficult to envision governments choosing [a global low-carbon energy strategy] in light of the negative implications for economic growth and prosperity that such a course poses.” Many investors are also deeply sceptical that any meaningful deal will emerge, but it is far from the only risk to high prices.
….At the same time as the costs of alternative sources of energy have been falling, the cost of developing new resources has increased dramatically. For a while, these extra costs were masked by the dramatic increase in the oil price (which was under $40 pb a decade ago and now is more than $100 pb), but since 2010 the price has been fairly stable and the costs have become more apparent, said Martijn Rats, head of European oil and gas at Morgan Stanley MS +1.24%. The five European majors (BP, Shell, Total, Statoil and Eni) generated $121 billion in cash flow last year, he pointed out, but they spent $126 billion and paid $35 billion in dividends.
“That means there is a $40 billion gap. There is tremendous pressure on the financial framework of the majors,” he said. “We believe the cost of new oil projects is well over $100 but the amount of revenue generated per barrel of oil-equivalent is $72. In the current environment, oil development is so expensive that many projects do not make sense from a cost perspective.”
….The oil companies are exploring in these areas because all of the easy-to-access oil has been discovered or is under the control of national oil companies. However, because the NOCs have access to most of the easy oil, it will be the private sector that plays a key role in finding future oil supplies – some 65% of future supplies will involve publicly-listed companies.
That means a big role for investors – and many of them are not at all convinced that these high-cost projects are the best way for their money to be spent. Currently, oil companies are rewarded for finding new resources, but Carbon Tracker says that they should be focusing on value, not volume.
Christine Torklep Meisingset, head of ESG research at Storebrand, said that her company had divested from coal and oil sands companies, even in its passive portfolios. “There are some very real risks in unconventional projects and we need to act on these.”
In absolute terms, the companies with the biggest exposures to high-cost projects are Petrobras, ExxonMobil, Rosneft, Shell, Total, Chevron, BP, Gazprom, Statoil and oil sands producer CNRL. While the oil majors have about 20-25% of their capex allocated to high-cost projects, some independents are invested almost entirely in these areas. Companies that Carbon Tracker says have 100% of their capex exposed to high-price assets include Teck Resources Ltd, Queiroz Galvao E&P, Barra Energia, Rocksource and Famfa Oil, while Paramount Resources, Value Creation, Sunshine Oil Sands, OSUM, Laricina Energy and OGX Petroleo e Gas all have 90% or more of capex committed to such projects.
“We need to set some thresholds,” Meisingset added. “We are going to be invested in oil and gas for some time so let’s get rid of the high-risk projects first. We need to divest from some companies whose whole business model is in high-cost, high-carbon projects.”
FT: “For the largest oil companies, roughly 20-25 per cent of their future capex requires a $95 oil price. This is a problem because the costs of production in the industry are rising, said Martijn Rats, head of European oil and gas at Morgan Stanley. Bloomberg figures show that capex by the largest oil companies is now five times the level it was in 2000, but production has barely increased.
“The five European majors (BPShellTotalEni and Statoil) generated $121bn in cash flow in 2013 – at an average oil price of $108 – but they spent $126bn and paid $35bn in dividends. So there is a $40bn gap and that can’t go on,” Mr Rats said.
The cost of developing many new oil and gas assets is well over $100 per barrel, he added. “In the current environment many projects do not make sense from a cost perspective.”
The situation is even worse for smaller companies because a higher percentage of their future production is in high-cost, high-carbon, high-risk assets. Famfa Oil, Rocksource, Barra Energia, Queiroz Galvão and Teck Resources have 100 per cent of their assets in these segments, ranging from ultra deepwater to extra heavy oil to oil sands, the report said.
“Shifting into more sustainable companies is crucial for our long-term returns,” said Christine Tørklep Meisingset, head of environmental, social and governance research at Storebrand, the Norwegian insurer. “This means we need to divest from some companies whose whole business model is in high-carbon, high-cost assets.”
Investors do not care if the oil companies become smaller, as long as they remain profitable, said Craig Mackenzie, head of sustainability at Aberdeen Asset Management. “If they are smaller, we can invest in the companies of the future.”