Posted inEnergy Transition

Oil companies must plan major production drop by 2030s to meet 1.5°C target

$1 trillion at risk if companies continue to pursue business-as-usual investment, according to Carbon Tracker Initiative

by Carla Sertin
Sustainability, reducing greenhouse gas emissions, and the energy transition have been hot button issues for the oil and gas industry as the sector looks to build back from the COVID-19 pandemic. Policy makers around the world have been examining methods to encourage companies to reduce carbon emissions. Among these, instituting carbon pricing, a term referring to a policy that would put a dollar cost on emissions that emitters would have to pay, has emerged as a popular topic of discussion. A new report from multinational professional services firm Pricewaterhouse Coopers (PwC) has found that an international carbon price floor (ICPF) for carbon dioxide and other greenhouse gas emissions could reduce global greenhouse gas emissions by 12.3 percent. Encouragingly, the firm found that the cost of implementing the policy would be equal to less than one percent of GDP, and, more importantly, that this cost would effectively pay for itself by avoiding economic losses associated with global warming. “We found that introducing an ICPF could be done without severe economic damage to livelihoods and business, although the effects would be somewhat uneven across the world. The costs to society and business of failing to act are far greater,” says Robert Moritz, global chairman of the PwC network. PwC analysed a proposal from the International Monetary Fund announced in June to set an ICPF of greenhouse gas emissions that by 2030 would reach $75 per tonne for high-income countries, $50 per tonne for middle-income countries, and $25 per tonne for low-income countries. Importantly, this policy is designed to encourage greenhouse gas emissions to be lowered everywhere, rather than emitters simply moving operations to countries were the cost of greenhouse gas emissions would are lower. Today, carbon is priced anywhere between $0 and $130 per tonne of CO2 equivalent in different territories around the world. As such, countries have been reluctant to place onerous costs on the production of carbon due to the risk of decreasing their international competitiveness. By implementing a global policy, this problem is greatly reduced – along with reducing the possibility businesses shifting carbon production from one area to another in a bid to avoid additional costs, a dynamic referred to as carbon leakage. PwC’s scenario found that an ICPF would not lead to major carbon leakage, but also found that its impact would be uneven across territories and sectors, with lower-income countries that rely heavily on coal for energy being harder hit, for example. As such, PwC noted that examining the use of the revenue gained from carbon pricing would be key to understanding the efficacy of the policy. “The political and technical challenges remain very significant, but we hope the research will encourage countries to consider pricing carbon in such a way that it scales up effort to reach net zero in time to limit the worst effects of climate change on people and our planet,” Moritz says. Revenues that would be raised from a carbon pricing policy would be significant, which could then be used to help ease the transition. In some regions, PwC found that revenues from an ICPF could be as high as three percent of GDP. In the firm’s scenario, these funds are collected and then redistributed to all regions where the revenues were collected, creating, in effect, a carbon dividend which would help households that have been hit by the additional costs caused by the introduction of the ICPF. Additionally, these revenues could be used to supplement innovation research, create jobs, or lower taxes. PwC estimates that for low-income economies, only 13 percent of revenues raised by the ICPF in high-income economies would be needed to compensate for GDP losses caused by the policy. In particular, the firm points to the South African Customs Union and China as regions which would be most heavily impacted by the ICPF. In these regions, PwC believes carbon pricing revenues could reach 2.8 percent and 1.7 percent of GDP, respectively. “The results of analysis of the ICPF are extremely positive. Public-private cooperation will be key for next steps and to accelerate efforts for a more sustainable and inclusive recovery,” Børge Brende, President at the World Economic Forum says. The firm also analysed the differences between the application of an ICPF if it were limited only to high-income countries versus middle-income countries as well. PwC found that if only high-income countries were included, the global emission drop would reach just 1.9 percent, compared to estimated 2030 figures without an ICPF. However, if middle-income countries, particularly China, are included then the drop in emissions would jump to eight percent. For the 12.3 percent figure to be hit, an ICPF would need to be applied to all countries globally. If the ICPF were implemented globally, and when combined with countries’ existing pledges for emission reductions, global warming could be limited to 2C, the firm said. While this figure is still significantly higher than the 1.5C limit that scientists have previously pointed to as essential to prevent catastrophic climate damage, PwC believes that an ICPF, combined with additional climate ambition and action, would give the world a much greater chance of adhering to 1.5C.
Carbon

The world’s largest listed oil and gas companies cannot be considered aligned with global climate targets unless they plan for major production declines, with half facing cuts of 50% or more by the 2030s, warns a new report from the financial think tank Carbon Tracker released today.

It reveals that companies are still approving billions of dollars of investment in major projects that are inconsistent with the 1.5°C Paris climate target, and even those with “net zero” commitments are continuing to explore for new oil and gas.

Mike Coffin, Carbon Tracker Head of Oil, Gas and Mining and report co-author, said: “Oil and gas companies are betting against the success of global efforts to tackle climate change. If they continue with business-as-usual investment they risk wasting more than a trillion dollars on projects which will not be competitive in a low-carbon world.

“If the world is to avert climate catastrophe, demand for fossil fuels must fall sharply. Companies and investors must prepare for a world of lower long-term fossil fuel prices and a smaller oil and gas industry, and recognise now the risk of stranded assets that this creates.”

Adapt to Survive – Carbon Tracker’s fifth annual analysis of the risk of investing in oil and gas producers – warns investors that companies have not woken up to the “seismic implications” of the International Energy Agency’s finding that no investment in new oil and gas production is needed if the world aims to limit global warming to 1.5°C.

This would see production at 20 of the world’s 40 largest listed companies shrink by at least 50% by the 2030s as existing projects run down with no replacements, the report finds. Most large shale oil companies would see production drop by over 80%.

ConocoPhillips, a shale specialist, is the oil major most exposed, facing a drop of 69%, followed by Chevron (52%), Eni (49%), Shell (44%), BP (33%), ExxonMobil (33%), and TotalEnergies (30%). Saudi Aramco is the only one of the world’s largest listed oil and gas companies that would see increased production because of its large spare capacity from existing fields.

Axel Dalman, Carbon Tracker Associate Analyst and report co-author, said: “In general, no new projects and a rapid decline in production could deliver a serious shock to company valuations, as new project options are rendered effectively worthless and future cashflows are reduced. Lower equity valuations would in turn increase the cost of capital and insolvency risk.  It is crucial for companies to have a strong transition plan, winding down oil and gas activities in an orderly manner and either diversifying into low-carbon businesses or returning capital to shareholders.“

The report also warns that if companies continue to invest in projects expecting a business-as-usual future of stable or rising demand, they risk being left with stranded assets that are uneconomic in a low-carbon world. National climate policies and rapid growth of clean technologies will reduce demand, drive down prices and lead to significantly lower revenues. 

Even amid the Covid pandemic, as oil prices collapsed and boards cut dividends, companies continued to make investments that bet against the 1.5°C target. The report identifies five major projects approved in 2020 that are not even compatible with a 1.65°C target, with projected investments worth a total $18 billion over the next decade:

  • ExxonMobil’s $5.5 billion Payara and $1.8 billion Pacora oil fields in Guyana;
  • Petrobras’ $4 billion Itapu oil field in Brazil;
  • Woodside’s $3.9 billion Sangomar oil field in Senegal;
  • Petrobras, Shell and Total’s $2.7 billion Mero 3 oil field in Brazil.

Investors are increasing pressure on fossil fuel companies to align with the Paris climate target as awareness grows of the environmental and financial risks of pursuing business as usual. Carbon Tracker’s research gives them ammunition to challenge companies over their plans for the energy transition. It is used by Climate Action 100+, backed by investors managing over $55 trillion in assets, which presses companies to take action on climate change and cut emissions.

The report states: “The present circumstances are particularly dangerous.” Oil prices – currently at around $70/barrel – are “tantalisingly high compared with last year” as the global economy recovers from Covid and OPEC keeps a tight grip on supply. It warns this may encourage companies to approve new projects in the hope of cashing in on a new commodities “supercycle”.

Although leading companies have adopted net zero targets, only BP, Eni, TotalEnergies and Shell have acknowledged that their oil production will fall over the coming years. Only BP commits to falls in gas production, which Shell and Eni plan to grow.

Yet Shell, TotalEnergies, Eni and Equinor have all picked up new exploration licences in frontier areas like Suriname and Norway’s Barents Sea, despite their high cost. BP plans to develop new “advantaged” assets. “Such moves call into question these companies’ commitment to transitioning away from oil and gas,” the report says.

The report analyses the business-as-usual project portfolios of the world’s 60 largest listed oil and gas companies to assess how resilient they are in a low-carbon world. It finds that even on a slower decarbonisation pathway limiting global heating to 1.65°C, the majority of companies would see more than half their project portfolio at risk of being stranded.

More than a trillion dollars of business-as-usual investment is at risk including $490 billion in shale/tight oil projects and $200 billion in deepwater projects. ConocoPhillips is the oil major that is most exposed, with 88% of its business-as-usual project portfolio likely to be uncompetitive, followed by ExxonMobil 80%; Chevron 60%; Shell 53%; BP 40%; TotalEnergies 39%; and Eni 25%.

Companies specialising in high-cost themes face some of the greatest reductions, including North American shale oil companies such as Pioneer Natural Resources, deepwater offshore companies such as Petrobras and oil sands companies such as Suncor Energy and Imperial Oil. On a 1.65°C pathway, 80% of shale/tight oil, 60% of arctic drilling, and 50% of deepwater projects would be uncompetitive. Almost no oil sands  projects would be economic.

Axel Dalman said: “Investors have a crucial role to play in driving the changes to the oil and gas industry’s behaviour necessary to reduce their exposure to transition risks. If they want to align with a 1.5°C climate target, it’s crucial that they only hold companies with robust plans to reduce production of oil and gas and approve no new projects. Investors seeking to align with other temperature outcomes must ensure that companies demonstrate how any projects they approve are compatible with a low-demand world, not just short-term prices.”