James Leaton
Research Director
Carbon Tracker Initiative
Canada, November 2014
Our research path
Is there more carbon in fossil fuel reserves than fits with a 2°C carbon budget?
How much capital is being spent on developing more reserves?
Who are the winners and losers? Who has the cheapest production?
Carbon: Stocks vs Flows
How much carbon budget is left?
Fossil fuel carbon budget 2013 – 2050 (GTCO2)
Scenario Maximum temperature
rise
50% probability
80% probability
Pessimistic 2°C 886 500
Optimistic 1.5°C 525 -
2°C 1075 900
2.5°C 1275 1125
3°C 1425 1275
Varying Factors:• Level of aerosols
reducing warming effects
• Efforts to mitigate non-CO2
emissions (egmethane from waste and agriculture)
• Probability of temperature outcome
For 2 degrees of warming, we estimate the budget at 500-900 GTCO2
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”
Total reserves
= 2860GtCO2
Carbon budget to 2050
= 884 GtCO2
(IEA Redrawing the Energy Climate map 2013)
Coal, oil & gas vs emissions ceiling
• Impact on price?
• Coal most exposed
-3.5%
-3.0%
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2010-2020 2020-30
Gas Oil CoalGAS OIL COAL
CAGR% 2010-2020 2020-2030
“Only 20% of global coal reserves can be developed by 2050 without
CCS in the 450 scenario” (IEA Redrawing the Energy Climate map 2013)
IEA 450ppm scenario impacts
demand
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 riskSplit oil, coal and gas
CAPEX TO REVIEW
Risk
$CO2
Oil &Gas : Rystad Energy database of project economics and estimated ultimately recoverable reserves
Coal: WoodMac Global Economic Model of supply and cost data
900GtCO2 Carbon Budget to 2050 as a 2°C reference scenario
Output:Breakdown by price, geography, oil type and company
Carbon Supply Cost Curves: Evaluating
Financial Risk to Oil Capital Expenditures
All reports can be downloaded at www.carbontracker.org
Demand Supply Financial Trends
Summary
Carbon Supply Cost Curves: Oil
Low demand scenario
2°C reference scenario
NEW OILSANDS
Alberta has the largest amount of expensive oil
92% of undeveloped oil sands projects need
more than $95/bbl to provide 15% IRR
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
Pote
nti
al c
apex
($
m)
>US$165/bbl
US$135-165/bbl
US$115-135/bbl
US$95-115/bbl
2014-2025 Potential Capex on Discovery-Stage Oil Sands Projects requiring $95/bbl
Company
Potential capex on oil sands discoveries
requiring >$95/bbl($m)
Total capex on all projects
($m)
Oil sands discoveries >$95/bbl (% of total capex on all liquids 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%
2014-2025 Potential Capex on Discovery-
Stage Oil Sands Projects requiring $95/bbl
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
• Regulation• Renewables costs• Production
forecasts• Vehicle efficiency• Oil prices• Demand forecasts• Economic Growth• Commodity cycles
Chinese GDP Quarterly growth
Renewables outpacing IEA projections
0
50000
100000
150000
200000
250000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Win
d g
en
era
tio
n M
W
Year
“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 hence the core business model could come into question unless development costs also fall. This could potentially result in a downgrade of more than one notch if we were to place less reliance on undeveloped or probable reserves than at present.”
What A Carbon-Constrained
Future Could Mean For Oil
Companies‘ Creditworthiness
March 2013
Impact on creditworthiness?
Do oil sands operators have a Plan B
Paul Spedding
Oil & Gas Sector
Analyst, HSBC
• “This report makes it clear that 'business-as-usual' is not a viable option for the fossil fuel industry in the long term. Management should already be looking to new business models that reduce the risk of stranded assets destroying shareholder value, In future, capital allocation should emphasize shareholder returns rather than investing for growth.”
Value or volume?
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:
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
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
Risk of stranded assets – international bodies
taking note
OECD Secretary General,
Angel Gurria: ‘The looming
choice may be either
stranding those [high-
carbon] assets or stranding
the planet’.
World Bank President, Jim Yong Kim: ‘This
is the year to take action on climate change.
Financial regulators need to lead. Sooner
rather than later they must address the
systemic risk associated with carbon-intensive
activities in their economies’. UNEP Executive Director, Achim
Steiner: ‘Track the carbon exposure of
your investment and don’t be misled by
audited accounts which may be in the
black when in reality your company or
investment, five to 10 years down the
line, may be sitting on stranded assets’.
• Do the math – we can’t burn it all
• Need to prepare for a range of scenarios
• Stranded assets already appearing in US coal, European utilities
• Consider the fundamentals of demand and price
• Albertan oil sands are high cost, high carbon, high risk
• There will be winners and losers from the energy transition
• Companies, Investors and Governments already reviewing / reducing exposure
• What is Canada’s Plan B?
Contact: [email protected]
Summary