This paper examines Chevron’s current disclosures in the context of Carbon Tracker’s April 2015 Blueprint, where we identified the key company information needed by investors to understand whether and how fossil fuel companies are managing energy transition risk.
Since the publication of the Blueprint several fossil fuel companies have enhanced their discussions of carbon asset risks, stranded assets, and further considered the implications of low-carbon scenarios. These are important steps, but the assumptions guiding those analyses and their capital allocation implications are largely absent, especially at a quantitative level of detail. One concern is that companies are saying they are examining the risks but not showing investors how they’ve done so.
We focus on Chevron in part because its disclosures (considered as a whole) lag behind its peers in terms of planning information and how its planning decisions incorporate climate risk.
Table 1. Comparing CO2 implications for oil forecasts against the IEA INDC scenario, 2012-2030 (GtCO2 )
However, in many ways, Chevron’s views are emblematic of thinking across the sector. In examining Chevron’s regulatory disclosures and website discussion of how the company manages climate risk, we make these observations, among others:
- Chevron appears to view future fossil fuel demand from an IEA Current Policies Scenario that assumes no climate action through 2035— but such a scenario is exceedingly unlikely given actions to date. Moreover, it is a far cry from the “downside” case implied by climate policy.
- Chevron seems to acknowledge that in a two-degrees demand scenario, oil demand might have gone ex-growth by 2035, but does not discuss the implications of that crucial development.
- OPEC’s decision to no longer artificially restrict supply has pushed pricing downwards; this might suggest that companies like Chevron should focus more on their relative position on the global oil supply cost curve.
- Here, the key question is who owns the lowest-cost new production options? Out to 2035, it is clear that the private sector’s production sits at the higher end of the cost curve.
- Chevron still views the climate goals agreed to in the Paris Agreement as unlikely. But prudent planning suggests they should at least consider that governments do what they say. Informational disclosure from the company on the implications of a low-carbon scenario, and not just its likelihood, is critical.
- Chevron suggests a cost/benefit framework for considering climate risk. But this also means weighing the costs of action against the harms from inaction.
- Here, the global warming costs could be significant—potentially $44 trillion (0% discount rate) with 2.5°C of warming as calculated by Citi, further suggesting that the economic calculus may not favor fossil fuels.
We believe that companies such as Chevron could clarify the discussion of stranded assets if they tested their potential portfolio of projects against a two-degree demand scenario— regardless of whether management believes such a scenario is “likely.”