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$1 trillion at risk if companies continue to pursue business-as-usual investment LONDON/NEW YORK,...Read More
Research Presentation | Adapt to Survive: Why oil companies must plan for net zero and avoid stranded assets
15 September | Online Committing to net zero is not enough – the emissions reduction pathway is...Read More
Mike Coffin, Carbon Tracker Head of Oil, Gas and Mining and report co-author, said: “Oil and gas companies are betting against the success of global efforts to tackle climate change. If they continue with business-as-usual investment they risk wasting more than a trillion dollars on projects which will not be competitive in a low-carbon world. If the world is to avert climate catastrophe, demand for fossil fuels must fall sharply. Companies and investors must prepare for a world of lower long-term fossil fuel prices and a smaller oil and gas industry, and recognise now the risk of stranded assets that this creates.”
Axel Dalman, Carbon Tracker Associate Analyst and report co-author, said: “In general, no new projects and a rapid decline in production could deliver a serious shock to company valuations, as new project options are rendered effectively worthless and future cashflows are reduced. Lower equity valuations would in turn increase the costs of capital and insolvency risk. It is crucial for companies to have a strong transition plan, winding down oil and gas activities in an orderly manner and either diversifying into low-carbon businesses or returning capital to shareholders.”
Committing to net zero is not enough – the emissions reduction pathway is critical
Carbon Tracker’s fifth annual analysis of the risk of investing in oil and gas producers – warns investors that companies have not woken up to the “seismic implications” of the International Energy Agency’s finding that no investment in new oil and gas production is needed if the world aims to limit global warming to 1.5°C.
In this report we primarily focus on modelling the International Energy Agency’s Sustainable Development Scenario (SDS), associated with 1.65°C of warming. We also show the implications of the IEA’s new, more stringent Net Zero Emissions by 2050 Scenario (NZE), which targets 1.5°C of warming. Both scenarios result in net zero emissions, but at different times and through different means. For comparison, we also include the Stated Policies Scenario (STEPS), which we use to represent a high-demand or business-as-usual pathway resulting in 2.7°C of warming.
Under the NZE, production levels in the 2030s of the world’s largest listed oil and gas companies drops. For most companies including majors like Shell, Chevron and Eni – production falls by at least half. Most shale companies see production fall by over 80%.
Even in a slower, “well below 2 degrees" pathway, asset stranding risks are severe. For those investors that choose not to align with the NZE (or other 1.5°C scenarios), we caution that asset stranding is still a major risk under slower transition pathways such as the SDS, albeit in the form of investment on unsanctioned assets. To model this risk, we use a least-cost approach that assumes any supply gap is satisfied by the cheapest unsanctioned project options. Investment into more expensive project options will not earn a sufficient return, with those assets considered stranded.
- 1.5°C is fast becoming a seriously-considered benchmark for Paris alignment.
- The IEA’s Net Zero Emissions by 2050 Scenario – limiting warming to 1.5°C – means rapid production declines as a result of “no new projects”.
- Shale companies see the sharpest production declines.
- Even in a slower, “well below 2 degrees” pathway, asset stranding risk via unsanctioned assets is severe.
- Large projects inconsistent even with a 2.7°C world appear to be on course for future sanction.
- The most exposed companies are among the world’s largest.
- Despite stranding risks to existing discoveries, companies continue to explore for more.
Updated on 24/09/2021
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Carbon Tracker is an independent financial think tank that carries out in-depth analysis on the impact of the energy transition on capital markets and the potential investment in high-cost, carbon-intensive fossil fuels.
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