how can investors prepare for the low-carbon...
TRANSCRIPT
Navigating stranded assetshow can investors prepare for the
low-carbon transition?
Bridge to the Future, Oslo
Mark Campanale, Founder
Carbon Tracker Initiativewww.carbontracker.org
@carbonbubble #strandedassets
Oil facing a culture shock
• Demand for oil is set
to peak around 2020
• But the industry is
betting on continued
rise in both prices
and demand!
#strandedassets #ArcticCOP21
Carbon budget – clear overhang above level
giving a 50% chance of limiting warming to 2⁰C
RESOURCES: the estimated amount of hydrocarbon contained in the depositRESERVES: the amount of resources that are technologically and economically feasible to extract
For more technical definitions, please visit www.carbontracker.org
Carbon budget deficit for listed companies
Less than 900 GtCO2 can be burnt to keep global
warming below 2 degrees celsius
When will we break the carbon budget?
Such Carbon Budget could be broken in few decades
Listed entities could use up most of the carbon
budget if production continues at same rate
Listed fossil fuel potential production to 2050
But there is also the state owned production which would at least double that, exceeding
the carbon budget to 2050 of c. 900 GtCO2
There is massive potential for fossil fuel
demand destruction and creation of stranded assets
Businesses need to move from a growth-based
business model to an ex-growth one
• The Paris Agreement is to limit global average warming to “well
below” 2˚C.
• The goal for net zero GHGs after 2050 implies an even earlier
phasing out of CO2 emissions by as early as 2050.
• 187 countries have submitted plans that cover around 95% of
global CO2 emissions and include China and India.
• These INDCs commit the world to 10% lower fossil fuel demand
than BAU to 2030
The Paris Climate Agreement sends a
clear signal to markets
The direction of travel towards
low-carbon is clear…
Note: MTOE is million tons of oil equivalent. Source: IEA
Under 2 degree scenario, or 450 ppm
• Coal consumption in 2030 is around 33% below the New Policies• For oil and gas, the equivalent figures are around 25%. • By 2040, those decline figures increase to 80%, 50% and 40%.
Are fossil fuel companies betting
on an uncertain future?
Expectations for the future fuel supply mix
Demand - Energy forecasting mis-read:fossil fuel industry predicts a high carbon future
Incumbents are not willing to accept that they have peaked
and adjust to a smaller market for their products.
• BP is projecting a 24% increase in fossil fuel use
by 2035
• Exxon expects a 27% increase by 2040
• Shell’s ‘Current Outlook’ 37% to 2040
• OPEC is clinging valiantly to 54% to 2040
Are fossil fuel companies betting on an
uncertain future?
…Yet
Companies are overstating energy demand, underestimating an
increasing role for renewables and ignoring looming changes in
energy.
Based on latest available companies forecasts, Jan 2016
Which are the fossil fuel companies with resources in high cost, high carbon areas at risk of committing too much capex to uneconomic projects?
Supply - Carbon Supply Cost Curves
Capex trials & tribulations
Shell in the Arctic:
$8 bn & wondering
Petrobras & the sub-salt:
$221 bn over 5 yearsCanada & the tar sands:
50 year financing? Really?
Kashagan
$50 bn & counting
Oil majors recently slashed their capital expenditure
Oil-equivalent production (oil & gas)
Total Capex
High-cost projects owned by private listed corporations
Highest
proportion
of projects
requiring
above
$80/barrel
are owned
by
listed
corporations
Source: Goldman Sachs Global Investment Research. Annotated by Tom Randall/Bloomberg
How Profitable Is $70 Oil? Or $50 Oil?
Example: BP’s future projects, how
profitable at $32 a barrel?
• BP’s future projects that are yet to be approved have breakeven prices that range from around $20 to over $100
• So the more the company invests, the lower the incremental margin will be • BP’s case, roughly half of its projects would lose money at current prices
BP has a portfolio of projects with a wide range of costs
Graph based on BP planning scenarios, excluding Russian and onshore US, using Wood Mackenzie data
Oil Carbon Supply Cost CurveWe analyse the carbon budget by looking at the most
expensive and most carbon intensive projects
#strandedassets #ArcticCOP21
Resulting in planned projects that
make no financial sense...
With OPEC members not
cutting production, high-
cost Arctic projects are a
trap waiting in the danger
zone.
$69 billion of capital
expenditure in Arctic oil
projects are surplus to
requirement in a 2°C world
This is over 50% of
existing and proposed
projects!#strandedassets #ArcticCOP21
Resulting in planned projects that
make no financial sense…
$20 billion of
capital expenditure
in Arctic gas
projects are surplus
to requirement in a
2°C world
This is over 68% of
existing and
proposed gas
projects!
#strandedassets #ArcticCOP21
… and no environmental sense
• 1.6 Gt CO2 could be avoided from not developing these unneeded
oil and gas projects – the equivalent of 22 coal mines
#strandedassets #ArcticCOP21
Ranking of companies by unneeded capex under
450 Scenario 2015–25 ($bn)
No new coal
mines required
Demand peak
in 2020,
no need for
continued growth
Growth will
disappoint,
esp. capital
intensive
LNG
The $2trn stranded assets danger zone:
How investor returns are at risk
Nov 2015
Download full report at
http://www.carbontracker.org/report/stranded-assets-danger-zone/
$220bn excess capex
$1.4tn excess capex$520bn excess capex
Dealing with the “Carbon Bubble”
1. Decarbonising the economy has
to start with contracting the fossil
fuel industry
2. Cancelling the next phase of
fossil fuel projects requires
investors to be in agreement
3. Fossil fuel companies now have
to plan an orderly transition out
4. Investors have to ensure climate
competent company boards
Renewables share of new annual electricity additions: by sector