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6 September 2019

Oil firms treat 2.7ºC warming as fine – feel no Paris pressure

There is a growing divergence between most of the electricity industry and the oil and gas industry – whereby one half believes in the 1.5 degree worldview of the IPCC, and the other ignores it completely.

This is now shown in stark contrast by a report out this week from Carbon Tracker, an organization which has explored the financial implications of the shift to a lower carbon economy over the past 8 years.

It turns out that almost all oil companies are investing in projects which cannot reach any kind of payback if the world meets its 1.5 degree targets.

Here at Rethink Energy we have been calling out individual forecasts from oil companies which insist that the world will not make it to 2 degrees, but more likely 2.7 degrees. We have fired volleys at Wood Mackenzie for supporting that kind of thinking, and at BP for coming out with its own timeline, which fails the IPCC forecast.

Either they are all correct, in which case the level of climate disaster is going to be far worse that anyone considers safe, and the world will be a bad place to do business or they are wrong and all these investments they are making will go down the pan. Here are some listed below in the diagram listing the projects and their investors.

Carbon Tracker shows in this report how it goes about applying its process of counting projects and this time it has taken a look at alignment in terms of short term actions – which individual projects are non-Paris compliant and shouldn’t go ahead in an economically rational Paris-aligned world, yet nonetheless either a) they were sanctioned last year; or b) are targeting sanction this year.

What is surprising is that companies which have openly claimed they are shifting to a zero emissions world, notably Shell, Equinor and BP, have all sanctioned projects which will become stranded assets if the world legislates in favor of a 1.5 degree world. Their investors may be interested to hear that.

We would expect the “axis of evil” companies like Exxonmobil to be on this list, but not those who are supposedly “green friendly” in their public relations persona and public statements. The message is to investors who do not agree with the oil companies “dump their shares,” so they can  avoid the re-pricing that will inevitably come when these projects are cancelled.

Carbon Tracker points out that this is all about old habits dying hard – the financial markets are still trying to value these companies based on how much they have in reserves, so all their cash is spent on exploration for fossil assets that can only be burned in a world where nobody can breathe, eat, drink water or survive outdoors. Executives are used to doing this and make scant investment in changing, and offer paltry investments towards zero emissions strategies but give them great public fanfare. They are clearly waiting for a US governmental lead on this. It will not come if Trump wins the next election – which he is likely to do unless climate change becomes THE central issue, which it is not right now.

The shift to a Paris-compliant world will require a dramatic change in behavior from the ingrained growth model. Compared to the IEA’s central scenario (which incorporates the Paris INDCs, but is associated with 2.7ºC warming), 2019-2030 capex on new oil projects should be 83% lower in a 1.6ºC scenario and 60% lower in a 1.8ºC scenario.

Last year, all of the major oil companies sanctioned projects that fall outside a “well below 2 degrees” budget on cost grounds. These will not deliver adequate returns in a low-carbon world. Examples include Shell’s $13 billion LNG Canada project and BP, Total, ExxonMobil and Equinor’s Zinia 2 project in Angola. Carbon Tracker highlights $50 billion of recently sanctioned projects across the oil and gas industry that fail the Paris alignment test by a margin.

We are certain that few people understand what a 2.7 degree world looks like – there is food uncertainty, droughts, desertification of huge swathes of the earth and billions of people on the move – leading to wars and mass human kill offs. It will be hard to sell oil on that world or maintain any kind of society.

This is perhaps the biggest danger of talking about and offering hope to carbon capture technologies – it gives these companies and investors a signal that carrying on as we were, is just fine, because carbon capture will become our white knight. It doesn’t seem to occur to anyone that even if carbon capture technologies emerged quite quickly, as fully formed technologies, they would bear a cost that would make many of these projects uneconomic.  And we are fairly clear that no amount of carbon capture can make tar sands clean, anyway.

These major oil firms also hold a number of projects targeting approval this year which don’t fit in a Paris-compliant world. Examples include Total’s assets in Uganda, and various projects in Brazil. Some have already been given a final investment decision, e.g. BP, Chevron, ExxonMobil and Equinor’s ACG project in Azerbaijan. They seem to be taking decisions based on where they are investing, and its current leadership, not on how investors see them.

No new oil sands projects fit within a Paris-compliant world. Despite this, ExxonMobil sanctioned the $2.6bn Aspen project last year – the first new oil sands project in 5 years. Indeed, only a handful fit within a business-as-usual world of missed climate targets; industry growth expectations look optimistic.

Several US shale specialists have portfolios that are entirely out of the budget. Their relatively homogenous cost structures puts them in an “all or nothing” position – substantially all in if the world misses Paris commitments, but all out if temperatures are limited to “well below 2 degrees”. And anyway all shale gas companies are losing money.

Get the report here