Tag Archives: Carbon Tracker Initiative

Why cheap oil is the key to beating climate change

Repost from The Guardian

Why cheap oil is the key to beating climate change

Keeping the price of a barrel of crude at $75 or less will devastate the profitability of fossil fuel extraction – as the shelving of three tar sands projects demonstrates

By Mitchell Anderson, 11 December 2015 11.59 EST
‘If the Canadian tar sands investments that were halted this year stay dead, the world will avoid another 1.6tn tonnes of dangerous carbon emissions.’ Photograph: David Levene for the Guardian

As world leaders enter the home stretch of the Paris climate negotiations they should keep in mind a key measure of success in limiting carbon emissions: cheap oil. The lower the global price of oil, the more it stays in the ground – due to the brutal, if counterintuitive, logic of the petroleum marketplace.

Most of the easily extracted oil deposits are long gone. What’s left are high-cost, high-risk long shots such as the Alberta tar sandsdeep-water reservoirs off Brazil, and drilling the high Arctic. Companies hoping to profit from the last dregs of the petroleum age need to convince their investors to part with massive amounts of capital in hopes of competitive returns often decades down the road.

Billions have already fled the Alberta oil sands in the last year as the global price of oil collapsed from over $100 per barrel to below $40. Shell has just called a halt to its Carmon Creek project in Northern Alberta, writing off $2bn in booked assets and 418 million barrels of bitumen reserves. A barrel of bitumen will release about 480kg of carbon dioxide from extraction, refining, transport and combustion. This head office write-down means that 200m tonnes of carbon will not be released into the atmosphere.

Two other tar sands projects were also shelved this year with reserves of about 3bn barrels. If these investments stay dead the world will avoid another 1.6tn tonnes of dangerous carbon emissions. Together the cancellation of these three projects alone amount to the equivalent of taking more than 14m cars off the road for the next 25 years.

There a simple correlation between future emissions and the price of oil needed to make that profitable. Such a graph has been compiled by Carbon Tracker, a UK-based non-profit organisation set up to educate institutional investors on the increasing financial risks of the fossil fuel sector.

Its message to investors is simple: the world must limit additional emissions to below 900 gigatons to avoid potentially catastrophic climate consequences – and 40% of this future carbon budget – about 360 gigatons – is projected to come from the oil sector. Anything more than that must stay in the ground – the so-called unburnable carbon.

And what’s the price of oil that could save to world? Anything below $75 a barrel of Brent crude means that companies cannot profitably extract more than 360 gigatons of the world’s remaining reserves – no messy policy solutions required.

Just last year the price of Brent crude was about $110 a barrel, a price that would gainfully produce about 500 gigatons of carbon emissions by 2050. Now it is less than $50, which would only produce 180 gigatons over the same period. If prices stay where they are, the world will avoid some 320bn tonnes of carbon emissions by 2050 in precluded production from uneconomic oil fields.

To put this in perspective, that is 25 times larger than reductions the Kyoto protocol was supposed to achieve if it had worked (it didn’t), and 180 gigatons below the oil emissions limit scientists say we need to avoid a world with more than two degrees of warming. Economic turmoil aside, the global commodities market just served up massive progress on an issue in desperate need of some good news.

Carbon Tracker recently revised its calculations to include the turmoil in the oil market, but the basic correlation is the same: lower fossil fuel prices devastate the economics of future extraction.

Seen through this lens, a key measure of our success in controlling carbon emissions should be keeping commodity prices of fossil fuels low. And while the main driver of the current slump in prices is the current glut of supply, it’s important to realise that almost every policy intervention to avert climate disaster is directly or indirectly aimed at lowering the price or profitability of fossil fuels such as oil and coal.

Efficiency and conservation incentives reduce demand, as do vehicle emission standards and investing in public transit. Carbon pricing means that fossil fuel companies can no longer use the atmosphere as a free dumping ground for CO2, so also lowering profitability.

But doesn’t cheap gas mean that people just use more of it? Not really. While there is a weak economic link between declining prices and increasing consumption, key producers like Saudi Arabia are in fact fretting that slowing growth in Asian markets and already peaked demand in developed countries will lead to a long-term decline in the world’s appetite for oil.

I dearly hope that world leaders can somehow negotiate transformative change. But perhaps the best they can do is nudge economic indicators like crude prices in the right direction and get out of the way. The unstoppable forces of the global marketplace will hopefully do the rest.

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    Oil Majors Resist Call To Boost Leadership On Climate Change

    Repost from Forbes.com
    [Editor: This is a MUST READ report on unsatisfactory results of a great investor effort, called the Carbon Asset Risk (CAR) initiative, (coordinated by Ceres and the Carbon Tracker initiative, with support from the Global Investor Coalition on Climate Change).  – RS]

    Oil Majors Need To Boost Leadership On Climate Change

    5/29/2014  |  Mindy Lubber

    Earlier this month, Shell became the latest oil major to respond to an international group of investors asking the world’s largest fossil fuel companies to assess the risks they face from climate change. These investors, managing trillions of dollars in assets, are motivated by concerns that companies in their portfolios are not adequately preparing for a future of lower demand for fossil fuels as the world transitions to cleaner energy sources. Not to mention climate-related physical impacts such as rising seas, stronger storms and more severe droughts.

    Norwegian oil rig Statfjord A

    Like its peers ExxonMobil and Statoil, which have also responded publicly to the request, Shell says it views climate change as a serious issue, and that the company invests in carbon-reducing technologies and incorporates a carbon price in business planning. And, like Statoil, Shell calls the current international goal to limit global warming to below two degrees Celsius “desirable.”

    While it is good to see these companies publicly acknowledging climate change and the need to reduce carbon pollution, Shell and its peers appear to be preparing for a world of ever rising – not declining – oil demand. Indeed, ExxonMobil, Statoil and Shell all argue that oil demand will keep growing until at least 2030. They largely ignore the grim picture painted by the Intergovernmental Panel on Climate Change of what the world will probably look like if carbon pollution continues unabated, arguing that it is impossible to turn the tide in the timeframe scientists say is necessary. As a result, the companies reject the idea that they face any substantive financial risk.

    Of course, these arguments are not surprising. In fact, the companies’ approach to shareholder engagement on this issue has been a constant refrain about the essential role they play in meeting the world’s insatiable demand for fossil fuels. This perspective is short-sighted and needs to evolve.

    Shell and Statoil do provide some discussion of the International Energy Agency’s scenario that shows how the two-degree goal could be achieved, which shows oil demand peaking around 2020 and then declining. But they are quick to point out that even under that scenario, the world will continue to use oil and companies will need to make new oil discoveries to meet consumer demand. Statoil comes the closest to answering investors, saying, “In Statoil we are of the opinion that we have a fairly robust project portfolio, even in the event that global or regional climate regulations were to become much stricter than what we currently expect.”

    Investors know that the world is not going to stop using oil overnight, and they aren’t advocating for that either. Rather, as smart stewards of capital, investors want to know what oil projects companies are betting billions on, which may be suspect down the road. These riskier, expensive projects – like deepwater drilling and oil sands – might make sense according to the companies’ bullish oil demand growth forecasts, but would be highly questionable in a world where some of that demand growth doesn’t materialize.

    This is a critical question for investors, not just because they don’t want to finance oil projects that shouldn’t go forward in a world that takes the economic threat of climate change seriously, but also because oil demand destruction is a real risk. Companies know this, but are declining to discuss it publicly.

    Recent research by the Carbon Tracker Initiative (CTI) shows that, over the last decade, capital spending by the 11 largest publicly traded oil companies has increased five-fold, while their production levels have remained essentially flat. Meanwhile, despite historically high oil prices, their returns have fallen below a 30-year average of 11 percent, leading firms like Goldman Sachs to raise questions about whether companies can generate enough cash to meet their dividend and investment commitments without oil prices rising even higher. Yet, CTI shows how, in a world that tackles climate change, lower oil demand could push oil prices down to around $75 per barrel.

    In its response, Shell outlines an upstream capital investment budget for 2014, including exploration expenditures of $35 billion, with the “oil” element of that being an estimated $10 billion. Indeed, over the next decade, CTI shows that the oil industry has the potential to invest an estimated $1.1 trillion for high-cost oil projects that require oil prices above $95 per barrel to be profitable. Shell accounts for more than $63 billion of that. While such projects are economically marginal even at today’s oil prices of just over $100 per barrel, they could become uneconomic if oil demand were to decline by a relatively small amount. Shell openly admits that high oil prices are needed to make such projects viable.

    Despite how much certainty these companies have expressed that strong international policies on climate change are unlikely in the next few years – and we have reason to believe they’re wrong – this isn’t the only factor that could dampen oil demand. We’re already seeing increasing fuel efficiency, fuel substitution and technological advances in clean energy and electric vehicles. The oil majors themselves are already seeing flat to declining oil demand in the U.S. and other developed countries due to these factors. They see virtually all of the demand growth coming from the developing world, and argue that meeting that demand is important to improve living standards for the world’s poor. It’s a fair point.

    But what is the best way to meet that energy demand, considering that climate change disproportionately affects the world’s poor? Scientists warn that hundreds of millions of people will be displaced by the end of this century due to climate impacts, increasing the risk of violent conflict and wiping trillions off the global economy. Furthermore, how much oil will the developing world actually demand if prices keep rising? Given that oil prices are high now and the industry needs them to stay that way, oil alternatives would be a safer bet as developing countries reach for the living standards of the developed world.

    It’s not only fair for investors to be asking companies for more transparency around their capital spending plans – it is the fiscally responsible thing to do. We have mistakenly invested in companies and markets that were ‘too big to fail’ in the past, and we have seen the catastrophic results. The fact is that the effects of the subprime mortgage meltdown on the global economy pales in comparison to what will happen if we do not change how we invest in energy. As major players in an industry the world relies on for so much, ExxonMobil, Statoil and Shell have not yet demonstrated the kind of leadership we need from them.

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