James Leaton Research Director Carbon Tracker Initiative Canada, November 2014
Our research path Is there more carbon in How much capital is Who are the winners fossil fuel reserves than being spent on and losers? Who has fits with a 2°C carbon developing more the cheapest budget? reserves? production?
Carbon: Stocks vs Flows
How much carbon budget is left? Varying Factors: Fossil fuel carbon budget • Level of aerosols 2013 – 2050 (GTCO 2 ) reducing Scenario Maximum 50% 80% warming effects temperature probability probability • Efforts to rise mitigate non-CO 2 Pessimistic 2°C 886 500 emissions (eg methane from Optimistic 1.5°C 525 - waste and 2°C 1075 900 agriculture) 2.5°C 1275 1125 • Probability of 3°C 1425 1275 temperature outcome For 2 degrees of warming, we estimate the budget at 500-900 GTCO 2
Do the math(s) – go fossil free
There is an overhang of carbon: Fossil fuel reserves > carbon budget • IEA : “ No more than one-third of proven reserves of fossil fuels can be consumed prior to 2050 if the world is to achieve the 2 °C goal, unless carbon capture and storage (CCS) technology is widely deployed .” • Shell: “ The issue of the bubble arises because the combined proven oil, gas and coal reserves currently on the books of fossil fuel companies (and governments in the case of NOCs) will produce far more than this amount of CO2 when consumed. ” • BP: “ We agree that burning all known reserves would probably cause global temperatures to rise by more than 2°C – and that addressing this issue will require the efforts of governments, industry and individuals. ” • Mark Carney, Governor of the Bank of England: “ the vast majority of reserves are unburnable if global temperature rises are to be limited to below 2⁰C” “The tragey of the horizons could cause market failure”
Coal, oil & gas vs emissions ceiling Total reserves = 2860GtCO 2 Carbon budget to 2050 = 884 GtCO 2 (IEA Redrawing the Energy Climate map 2013)
IEA 450ppm scenario impacts demand • Impact GAS OIL COAL Gas Oil Coal 1.5% on 1.0% 0.5% price? 0.0% -0.5% -1.0% -1.5% -2.0% • Coal -2.5% -3.0% most -3.5% 2010-2020 2020-30 CAGR% 2010-2020 2020-2030 exposed “ Only 20% of global coal reserves can be developed by 2050 without CCS in the 450 scenario ” (IEA Redrawing the Energy Climate map 2013)
Dealing with uncertainty
Probability of outcomes I believe humanity is making risky bets in the climate casino . I think it is likely that humanity will continue to make these risky bets. In that case ExxonMobil will be proved right. But it is always possible that humanity will wake up and make the needed investments in rapid change, driven by the magic of the market and technological innovation. If that happened, fossil fuel reserves would indeed be stranded. Investors beware: the risk of that cannot be zero. Martin Wolf, Financial Times, June 2014 Shell, Exxon and carbon: The elephant in the atmosphere The investors may be correct that managers are betting their firms on high oil prices, that this is a gamble and that applying a discount to the value of their investments may make sense. July 2014
China & US set the pace • Were you expecting the bilateral announcement from US & China? • Are you ready to take advantages of the opportunities created by a low carbon economy? • Were you expecting US oil demand to fall? • Were you expecting US domestic oil production to increase? • What year do you expect Chinese thermal coal demand to peak? The rest of the world will follow – or get left behind.
For some sectors capital flows are dependent on emissions
Focus on potential capex at risk Split oil, coal and gas Oil &Gas : Rystad Energy database of project economics and estimated CO 2 ultimately recoverable $ reserves Coal: WoodMac Global Economic Model of supply Risk and cost data 900GtCO 2 Carbon Budget to 2050 as a 2°C reference scenario Output: CAPEX TO REVIEW Breakdown by price, geography, oil type and company
Carbon Supply Cost Curves: Evaluating Financial Risk to Oil Capital Expenditures Summary Demand Supply Financial Trends All reports can be downloaded at www.carbontracker.org
Carbon Supply Cost Curves: Oil NEW OILSANDS Low demand scenario 2°C reference scenario
Alberta has the largest amount of expensive oil
92% of undeveloped oil sands projects need more than $95/bbl to provide 15% IRR
2014-2025 Potential Capex on Discovery-Stage Oil Sands Projects requiring $95/bbl 35,000 >US$165/bbl 30,000 US$135-165/bbl 25,000 Potential capex ($m) US$115-135/bbl 20,000 US$95-115/bbl 15,000 10,000 5,000 0
2014-2025 Potential Capex on Discovery- Stage Oil Sands Projects requiring $95/bbl Potential capex on Total capex on Oil sands discoveries oil sands discoveries all projects >$95/bbl (% of total requiring >$95/bbl ($m) capex on all liquids Company ($m) projects) CNRL 31,619 87,896 36% Suncor Energy 22,989 67,597 34% AOSC 22,183 34,445 64% Cenovus Energy 17,765 51,943 34% Laricina Energy 14,027 15,040 93% OSUM 9,596 9,997 96% Sunshine Oilsands 9,204 10,443 88% PTTEP (Thailand) 7,928 16,711 47% Value Creation 7,590 7,626 100% MEG Energy 7,139 19,767 36% Teck Resources Ltd 5,499 8,760 63%
Oil majors CAPEX exposure to potential projects requiring above $95/bbl price
Do dividends and capex add up?
Oil price dropped $30/barrel in last few months $95
But in the context of 150 yrs of real oil price data - Could it drop further?
And cheap gas frees up pressure on domestic budgets for consumer spending elsewhere
Need to challenge assumptions Chinese GDP Quarterly growth • Regulation • Renewables costs • Production forecasts • Vehicle efficiency • Oil prices • Demand forecasts • Economic Growth • Commodity cycles
Renewables outpacing IEA projections 250000 200000 Wind generation MW 150000 100000 50000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Year
Impact on creditworthiness? Do oil sands operators have a Plan B “Financial models that only rely on past performance and creditworthiness are an insufficient guide for investors.” Analysis of oilsands operators : “We note that under a meaningfully lower long-term oil price, the commercial viability of undeveloped reserves and What A Carbon-Constrained hence the core business model could Future Could Mean For Oil Companies‘ Creditworthiness come into question unless development costs also fall. This could potentially result in a downgrade of March 2013 more than one notch if we were to place less reliance on undeveloped or probable reserves than at present.”
Value or volume? • “This report makes it clear that Paul Spedding 'business-as-usual' is not a viable option for the fossil fuel industry in the Oil & Gas Sector long term. Management should already be looking to new business Analyst, HSBC models that reduce the risk of stranded assets destroying shareholder value, In future, capital allocation should emphasize shareholder returns rather than investing for growth.”
Are coal and oil approaching their Kodak moment? @carbonbubble #kodakmoment
Risk of stranded assets - Statoil takes oil sands writedown “Costs for labour and materials have continued to rise in recent years and are working against the economics of new projects. Market access issues also play a role - including limited pipeline access which weighs on prices for Alberta oil, squeezing margins and making it difficult for sustainable financial returns. "The decision is in line with Statoil’s strategy to prioritise capital to the most competitive projects in its comprehensive global portfolio and is consistent with our stepwise approach to the oil sands,”
Risk of stranded assets – investors trying to get ahead of the curve: In the case of oil-and-gas companies, the Fund has identified a number of companies featuring substantial exposure in high-cost projects, such as oil-extraction from oil sands. The Fund believes these companies face serious climate-related financial risks and that it is highly likely that these projects may either be stranded or unprofitable. AP2 Fund, Sweden I believe anyone investing in tar sands is very likely to end up with stranded assets in the next decade or two. Solar is getting cheaper by the minute, whereas petroleum is getting more expensive. It is only a matter of time before their expenses cross. Jeremy Grantham, GMO After the latest sustainability analysis of the Energy sector, Storebrand has excluded 13 coal and 6 oil sands companies from all investments. The aim of these exclusions is to reduce Storebrand's exposure to fossil fuels and to secure long term, stable returns for our clients. Storebrand, Norway
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