Investors seeking to reduce their exposure to the risk of stranded carbon assets should start by looking at investments in oil sands, deepwater projects and drilling in the arctic, a study has concluded.
The new report ‘Carbon Supply Cost Curves: Evaluating Financial Risk to Oil Capital Expenditure’ from the Carbon Tracker Initiative – a non-profit company of financial specialists set up to produce new thinking on climate risk – says there is an estimated US$1.1trillion of capital expenditure earmarked for ‘high cost’ oil projects that need a market price of more than US$95 a barrel up to 2025 if they are to be viable.
These are largely deepwater, arctic, oil sands and other ‘unconventional’ projects, which the report says ‘should be the start point for investors seeking to reduce their exposure to the high end of the cost curve’. The study says listed private companies have more exposure to such risky projects than national oil companies, and that smaller oil businesses also have higher percentages of their capital expenditure over the next decade in high cost, high risk projects. It reports that some specialist firms have 100% of their capital expenditure in projects that require a US$95 oil price, and concludes that ‘a low demand scenario challenges the whole business model of these operators’.
While the big global oil companies are less exposed to such risks, ‘reflecting the sheer scale of their interests’, the Carbon Tracker Initiative suggests they should in any case consider reducing their exposure to high cost options as this ‘may be viewed favourably by the market as a way of cutting capital expenditure and maintaining dividends’. The report is thought to be the first of its kind to evaluate the financial risk of climate change to oil capital expenditures, with studies on coal and gas to follow. It concludes that oil industry demand projections often assume that there will be ‘business as usual’ in the future and fail to allow for significant possible changes in the market brought about by factors such as emissions constraints or the growth of renewables. It argues that any project needing a future oil price of above US$80 is potentially ‘economically vulnerable’ due to climate change risks.
In addition to current PRI led engagements on emissions reduction targets and human rights in the extractives sector, the PRI will jointly host a webinar on Thursday 15 May with the Institutional Investors Group on Climate Change (IIGCC), Ceres and the Investor Network on Climate Risk (INCR). The webinar will highlight the new Carbon Tracker research and update you on findings from a collaborative investor engagement with US and European energy sector companies. To register for this webinar click here.