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$1.1 trillion in oil investments at risk if world ignores carbon bubble

08 May 2014
$1.1 trillion in oil investments at risk if world ignores carbon bubble

LONDON: New research shows as much as US$1.1 trillion of capital expenditure in the oil industry could be at risk in the next decade due to over investment in high-cost oil fields, combined with the impact of tougher climate policies. The findings are a warning shot to investors in high carbon and high-cost oil operations, such as in Brazil’s deep offshore waters, the Arctic, and Canada’s oil sands.

Climate policy

The Carbon Tracker Initiative’s Carbon Supply Cost Curves is designed to better inform investors and shareholders about the various risks of carbon assets associated with oil sector projects, which make little financial sense when assessed against demand, price and emissions scenarios.

Introducing the concept of a ‘carbon supply cost curve’, the report says a huge amount of investor money could be wasted because there is only so much oil (and carbon) the world can burn if the increase in global temperature is to be kept below 2C this century.

Warming at and above this level is likely to deliver dangerous and costly climate change according to scientists. Governments are working towards a new global climate treaty in Paris next year, to agree measures that would keep the world below the temperature rise threshold.

Financial risk

The starting point for the report’s analysis is the oil sector’s 40% contribution to the world’s current total energy supply. Assuming this percentage contribution remained constant in the future – but in a carbon-constrained world designed to keep temperature rise below 2C – the report calculates that total emissions from the oil sector would be limited to 360 billion tons of CO2, or the equivalent of 760 billion barrels of oil. Based on currently available global reserves, such a volume can be profitably extracted at a cost of US$75 per barrel or less.

The critical question the report poses, is what happens to investments that require a price per barrel over US$75? The short answer is that it will be wasted, to the tune of an estimated US$1.1 trillion of capital expenditure earmarked for high cost oil projects that need a market price of over $95 until 2025.

High-risk projects such as Arctic drilling and particularly Canada's oil sands, are highlighted. Investors seeking to reduce their exposure to the high end of this cost curve are urged to address these areas first, focusing on ‘value’ over ‘volume’.

Carbon Tracker’s landmark research in 2012 demonstrated the concept of ‘unburnable carbon’, and was followed in 2013 by a report highlighting ‘wasted capital’. This new report is the first of three – the next two focusing on coal assets and then gas – that builds on these studies to identify specific projects at risk of wasted capital. All reports demonstrate the extreme economic risks of continuing on a business-as-usual, high-carbon pathway.

In the report’s foreword, Anthony Hobley, CEO, The Carbon Tracker Institute, writes: “There is a realization that ignoring climate risk and hoping it will go away is no longer an acceptable risk management strategy for investment institutions.[…] This analysis serves as a reminder to investors to ensure company strategy is aligned with their best long-term interests.”

Low carbon energy

The study will boost support for greater investment in renewable energy, providing investors with motivation to divest from oil and indeed other fossil fuels. The global clean tech market is already worth over US$2.5 trillion, and will grow to more than US$5 trillion in size within the next 10 years.

Christiana Figueres, the UN's climate chief, delivered a keynote speech at the report launch. Commenting on the importance of Carbon Tracker’s research in supporting growth that respects the global 2 degree global temperature rise limit, she said: “This report in particular shines light on the use of oil and shows how drastically and quickly we must switch to efficient transportation and clean power – a need increasingly recognized by security forces, megacities and small-island States across the world.”

She added: “And because knowledge is useless unless it is applied, I challenge everyone here today to take what is outlined in Carbon Supply Cost Curves and apply it to your own capital expenditures, to your own investment portfolios and to your own business strategies or consumer choices. I challenge you to be part of the groundswell of momentum that strengthens the new agreement through visible action and vocal support. I challenge you to accelerate your own action and support all other action right now, as governments prepare contributions to the new, universal climate change agreement slated for 2015.”

Stranded assets

Following the release of Carbon Tracker’s last report in 2013, a group of 70 global investors that manage more than US$3 trillion worth of collective assets, launched the first-ever joint effort to spur the world’s top power companies to assess the financial risks of climate change by sending letters to 45 of the world's biggest oil, gas, coal and electric power companies. They were resonding to the report's findings that in 2012 alone, the 200 biggest publicly-traded fossil fuel companies collectively spent around US$675 billion on new reserves which could never be used and would become worthless, or ‘stranded assets’.

Last month, the UK’s Environmental Audit Committee also warned of the risk to international financial security posed by a ‘carbon bubble’, calling for greater green investment to avert it.

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By Clare Saxon and Damian Ryan

Image by Sergio Russo/Flickr

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