Carbon Tracker highlight stranded asset risk

On 16 May 2014, Royal Dutch Shell issued a public letter “in response to enquiries from shareholders regarding the ‘carbon bubble’ or ‘stranded assets’ issues”. Following this, on 9 July 2014, CTI and ETA released an analytical response to that letter, in the spirit of furthering a productive dialogue between the company and its investors on capital management & capital discipline.

Despite Shell’s understatement of any “stranded asset risk” for its proven reserves, Carbon Tracker believes that climate regulation and related environmental policy is gathering pace, and Shell’s resources are facing a steadily rising “financial value destruction” risk from action on climate change.

Particularly, Carbon Tracker believe that Shell underestimates a risk for up to $77 billion of high cost oil projects (with a market price above $95 per barrel).

Below are some engagement paths Carbon Tracker think could be undertaken by investors with Shell:

  • “Stranded asset” risk, in terms of high cost, low return investments leading to shareholder value destruction, is a real and current issue for oil producers to address, due to (1) the potential for global oil demand to decline within the next 10-15 years (even without a global deal); and (2) the 15-20 year lead times required to bring many newly-discovered resources to market.
  • Oil companies should examine and disclose demand/price/carbon risks to all potential future production, rather than restricting focus to proven reserves alone.
  • Shell should provide more detail on the role its internal carbon price of $40 per tonne plays in hitting demand for its oil.
  • Shell’s $77 billion of potential capex (2014-25) on new high-cost (above a market price of $95 per barrel) oil production ought to be a focal point for engagement with investors.
  • To help shareholders to assess risk, oil companies ought to disclose estimated breakeven oil prices (BEOPs) of all new projects
  • Shareholders should use the CTI/ETA analysis to engage with management to ensure that capital is not allocated to high breakeven oil price (BEOP) projects that appear marginal in a BAU environment and value destroying in a low-carbon scenario.
  • Rather than dismissing low-carbon outcomes as unlikely, Shell’s long-term energy outlooks ought to more seriously consider the implications of a 2°C climate scenario.

CTI presented the report to the public during the Boston and New York events co-organised with CEREs, MSCI and the New York Society of Financial Analysts. Supporting the work to encourage disclosure, the PRI are currently working on 15 key engagements in areas such as Fracking, Water Risks, Human Rights in the Extractives Sector and Director Nominations. For a full list of PRI led engagements, please click here.