Five of the world’s six largest listed oil companies, including ExxonMobil and Shell, run the risk of wasting more than 30% of potential investment on high-cost upstream projects that are unnecessary and potentially harmful if we are to ensure the world does not warm beyond 2⁰ Celsius above pre-industrial levels.
This is one of the key findings from a new report published this week by Carbon Tracker and the Principles for Responsible Investment (PRI) and institutional investors. The new report, 2 Degrees of Separation, is the first report to rank 69 oil and gas companies’ exposure to climate risk — company-by-company, evaluating where potential shareholder spending would be most exposed to the low-carbon transition. Overall, the report found that $2.3 trillion worth of projects — or around a third of business-as-usual investments through to 2025 — run inconsistent to the goals and objectives of limiting global warming to a maximum of 2⁰C, not to mention is contrary to the rapid advances already seen and expected to continue in clean energy technologies, and decreasing energy demand.
Projected capex under 2 degree Celsius (2D) scenario
Of course, the issues at play are not restricted solely to environmental, socially-conscious investing. The report finds — in a serious case of Occam’s razor — that “companies are likely to perform better by aligning with a 2⁰C world because lower cost projects have higher margins.” Specifically, the average oil price would have to be around $100 a barrel over the long term for it to be profitable (though not socially or environmentally conscious) for companies to pursue the projects listed above, beyond the 2⁰C limit. Needless to say, for anyone paying even the slightest bit of attention over the last few years, it will be clear that it has been years since barrels of oil went for $100 — current figures are down closer to $40 per barrel.
Oil and gas supply has long been outpacing demand, meaning that only the projects with the lowest cost are likely to go ahead. Projects that rely on high oil prices run a much higher risk of failing to deliver returns to shareholders — not to mention be permanently damaging to the environment. According to the report, these projects include:
- 33% of all spending on oil projects including oil sands and deepwater — a total $1.6 trillion
- 60% of spending on gas projects in North America — a total $0.4 trillion
- 37% of spending on gas projects in Europe — a total $0.1 trillion
- 40% of spending on Liquefied Natural Gas projects — a total $0.2 trillion
Somewhat unsurprisingly, given what we know, ExxonMobil is the most exposed company to the energy transition, with 40% to 50% of capex allocated to uneconomically viable projects. Shell, Chevron, Total, and Eni all have average exposure between 30% to 40%, while BP runs a risk somewhat between 20% to 30%.
“This report is a real game-changer for the future of corporate-investor engagement,” said Nathan Fabian, director of policy & research at PRI. “Investors in oil and gas companies have been in the dark about their exposure to climate risk, but they will now be able to confront companies with precise information and ask hard questions about how they intend to deal with potentially stranded assets.”
“Investors are through an unprecedented commitment taking steps to reduce the risk of stranded assets within the oil and gas industry,” said the five institutional investors in a joint statement.
“Lack of transparency at company level has, however, been a bottleneck to understanding how companies are responding to the considerable changes in the energy market. This extensive research clearly emphasises that some companies have to reconsider their business strategy and will eventually lead investors to more efficiently price the financial risks associated with a 2 degree world.”
ExxonMobil has been under a lot of pressure lately, not least of all from its own shareholders, who last month went against the wishes of the company’s board and voted 62% in favor of reporting annually on how advances in energy technologies and global 2⁰C climate change policies will affect the company’s business and investment plans.
“This extraordinary result, on the heels of the majority Occidental vote, indicates growing institutional investor concern,” said Robert Schuwerk, US Senior Counsel, at the time of the vote. “The vote foreshadows what is likely to materialise as recommendations on climate risk disclosure by the TCFD chaired by Michael Bloomberg and Bank of England governor Mark Carney. Climate change is now front and center in investors’ engagement. As Exxon is a standard bearer for the oil and gas industry, smaller companies should take note and respond accordingly.”
The “Occidental vote” mentioned by Robert Schuwerk was a similar vote by shareholders of Occidental Petroleum, requiring their company to assess and report the impact of climate change on its business.
More recently, AP7, Sweden’s largest pension fund, announced that it had divested itself of all investments in companies it said had violated the Paris Climate Agreement in some way — companies including ExxonMobil, Gazprom, Westar, Southern Corp, TransCanada, and Entergy. “Since the last screening in December 2016, the Paris agreement to the U.N. Climate Convention is one of the norms we include in our analysis,” AP7 said in a statement.
“There are clear signs that oil demand could peak in the early 2020s — so companies need to start taking project options that would come onstream then off the table, and be transparent about how they are aligning with a low carbon future,” explained James Leaton, Director, Carbon Tracker’s research. “Sticking with the growth at all costs scenario just doesn’t add up for shareholder value when the policy and technology momentum is heading in the opposite direction.”