Exposure to capex outside the 2D budget varies widely throughout the curve.

Companies that have a lower percentage of unneeded capex can be seen as more aligned with a 2D budget; companies with a greater percentage of unneeded capex warrant further attention from investors. Further disclosure could be requested to explain how the company is attempting to be more “future proof” by expressly cancelling or selling high-cost projects, or reconsidering its business model entirely.

For a sample universe of companies, the percentage of total potential capex that is outside the 2D budget is shown below. Percentage of upstream capex has been arranged into bands, with companies with more than a third of capex outside of 2D having higher than average exposure.

CompanyCountry of headquarters% of upstream capex outside 2D budget (% band)2017-2035 carbon budget (GtCO2)Potential CO2 outside 2D carbon budget (GtCO2)
Source: Rystad Energy, CTI analysis
Southwestern Energy United States 60% - 70% 1.0 0.6
Apache United States 60% - 70% 1.1 1.0
Cabot Oil and Gas United States 50% - 60% 0.6 0.4
Energen United States 50% - 60% 0.2 0.1
Murphy Oil United States 50% - 60% 0.4 0.3
Concho Resources United States 50% - 60% 0.4 0.3
Imperial Oil (Public traded part) Canada 50% - 60% 0.4 0.2
Vermilion Energy Canada 50% - 60% 0.1 0.1
Oil Search Papua New Guinea 50% - 60% 0.2 0.1
Encana Canada 50% - 60% 1.0 0.6
Chesapeake United States 40% - 50% 1.8 1.2
Inpex Japan 40% - 50% 1.4 0.3
ExxonMobil United States 40% - 50% 8.6 3.1
Husky Energy Canada 40% - 50% 0.9 0.3
Woodside Australia 40% - 50% 0.7 0.3
Suncor Energy Canada 40% - 50% 2.3 0.4
EQT Corporation United States 30% - 40% 1.2 0.4
Devon Energy United States 30% - 40% 1.6 0.5
Chevron United States 30% - 40% 6.4 2.0
Eni Italy 30% - 40% 4.6 1.1
Shell Netherlands 30% - 40% 9.9 2.7
Galp Energia SA Portugal 30% - 40% 0.3 0.1
Canadian Natural Resources (CNRL) Canada 30% - 40% 2.0 0.5
Noble Energy United States 30% - 40% 1.3 0.6
Repsol Spain 30% - 40% 1.8 0.3
Newfield Exploration United States 30% - 40% 0.4 0.2
Total France 30% - 40% 6.3 1.2
Crescent Point Energy Canada 30% - 40% 0.2 0.1
Hess United States 30% - 40% 0.8 0.2
Origin Energy Australia 30% - 40% 0.3 0.1
Rosneft Russia 30% - 40% 9.5 1.3
Continental Resources United States 20% - 30% 0.7 0.3
Anadarko United States 20% - 30% 2.5 0.6
Cimarex Energy United States 20% - 30% 0.7 0.1
Occidental Petroleum United States 20% - 30% 1.6 0.5
BP United Kingdom 20% - 30% 6.5 1.5
Lukoil Russia 20% - 30% 5.0 0.5
PetroChina China 20% - 30% 9.6 0.7
ConocoPhillips United States 20% - 30% 3.8 0.8
EOG Resources United States 20% - 30% 2.3 0.6
CNOOC China 20% - 30% 2.9 0.5
Gazprom Russia 20% - 30% 17.8 2.0
Santos Australia 20% - 30% 0.4 0.1
Statoil Norway 20% - 30% 4.3 0.6
Rice Energy United States 20% - 30% 0.7 0.1
RSP Permian United States 10% - 20% 0.4 0.1
Marathon Oil United States 10% - 20% 1.1 0.2
OMV Austria 10% - 20% 0.5 0.1
QEP Resources United States 10% - 20% 0.4 0.1
Cenovus Energy Canada 10% - 20% 0.9 0.1
Tullow Oil United Kingdom 10% - 20% 0.3 0.0
Parsley Energy United States 10% - 20% 0.2 0.0
Ecopetrol Colombia 10% - 20% 0.8 0.1
Lundin Petroleum Sweden 10% - 20% 0.3 0.0
Sinopec China 10% - 20% 2.3 0.2
Pioneer Natural Resources United States 0% - 10% 1.8 0.2
Peyto Canada 0% - 10% 0.3 0.1
Petrobras Brazil 0% - 10% 5.9 0.4
Surgutneftegas Russia 0% - 10% 2.0 0.0
Tatneft Russia 0% - 10% 1.1 0.0
Range Resources United States 0% - 10% 2.0 0.0
Saudi Aramco Saudi Arabia 0% - 10% 30.2 0.4
Novatek Russia 0% - 10% 2.8 0.1
Arc Resources Canada 0% - 10% 0.5 0.0
Gulfport Energy United States 0% - 10% 0.8 0.0
Tourmaline Oil Canada 0% - 10% 1.0 0.0
Diamondback Energy United States 0% - 10% 0.4 0.0
Antero Resources United States 0% - 10% 1.3 0.0
Seven Generations Energy Canada 0% - 10% 0.7 0.0

It is clear that some companies would have to forego the majority of their options in a 2D future, significantly impacting growth plans. Other companies are already highly resilient to this scenario, including Saudi Aramco for example. Oil sands operators generally do not perform well, which reflects the ongoing challenges to expanding production with both carbon limits and export infrastructure constraints. Shale operators are spread along the cost curve, with some positions performing better than others.

Optionality and flexibility

Discussions with oil companies indicate that there is a desire to retain a certain amount of optionality to allow flexibility depending on which future emerges, responding to possible changes in oil price. In other words, to retain some higher-cost projects as future development possibilities without committing if not warranted in the price environment at the time. This is understandable, but will only deliver a 2D aligned scenario if all companies choose not to exercise this optionality. Different types of project also offer greater flexibility. For example, US shale producers have relatively short cycle options which offer greater ability to reduce investment and lower production quickly. Conversely, major projects with high initial capital investment and long payback periods such as greenfield oil sands projects or LNG plants are more difficult to wind down and expose developers to longer periods of risk.

However, such optionality is not entirely cost free – for example, companies may have to pay fees to acquire acreage even if it is not developed, or licence terms may commit them to an exploration programme. Furthermore, companies that are encouraged by higher oil prices to press ahead with such projects run the risk of being caught out by prices deteriorating after they have committed material capital, like some of those sanctioned prior to 2014’s downturn.

Company carbon budgets equivalent to the UK

It is also worth noting how significant the production of the oil majors and NOCs are in terms of the remaining carbon budget. As context, the UK-estimated carbon budget for the period 2018-32 is 6.26 GtCO2 according to the UK Climate Change Committee. This means that a single major company is producing enough oil and gas to use up the UK’s entire carbon budget for the period. This demonstrates the importance of investors tackling climate change by ensuring major oil companies are aligning with climate objectives.

High cost projects – examples of projects outside the 2D budget

The largest projects that are outside the 2D budget can be put forward as examples of high cost options that should not be pursued in a demand-constrained world. In this exercise, high risk projects are listed in order of capex, giving an indication of the possible financial risk of developing them. The list is limited to projects which are “new”, meaning either at the discovery stage or not yet discovered (i.e. excluding projects which are already in production or under development). Undeveloped projects have lower sunk costs, and are thus easier to cancel than projects which have already received significant capital, and would therefore require the company to write that expenditure off.

Companies may have already decided to defer or cancel some of these projects, and revisit a final investment decision in the future. This is where companies can provide transparency about which projects they see are part of their future strategy, or how they think they are aligned or not with a 2D scenario. This list highlights projects that the cost curve data indicates are not consistent with a 2D scenario – the companies are best placed to indicate where in their project pipeline a project sits. Whilst a certain degree of optionality around the marginal production point is sensible, the highest cost projects are clearly those that are most at risk in a 2D world (and indeed are highest risk and lowest return in any demand scenario).

For example, the five oil projects with the highest capex not needed outside the 2D budget are shown in the table below.

ProjectKashagan, KZJunin-6, VELulu, NSBonga Southwest- Aparo, NGBonga, NG
Source: Rystad Energy, CTI analysis
Asset Kashagan (Phase 2), KZ Junin-6 (Phase 2), VE Lulu, NS Bonga Southwest, NG Bonga North, NG
Companies Total, Eni, KazMunaiGaz (parent), Shell, CNPC (parent), Samruk Kazyna, ExxonMobil, Inpex PDVSA, Rosneft, Gazprom, Gazprom Neft (Public traded part) Saudi Aramco, Kuwait Petroleum Corp (KPC) Eni, Chevron, Total, Shell, Lukoil, ExxonMobil Eni, Shell, ExxonMobil, total
Life cycle stage Discovery Discovery Discovery Discovery Discovery
Category

Conventional (land/shelf)

Extra heavy oil Conventional (land/shelf) Deep water Deep water
2017-2025 potential capex 33.5 17.9 10.2 9.6 9.2
Breakeven band (15% IRR) 110-120 90-100 150+ 100-110 90-100
2017-2035 carbon emissions 0.5 0.2 0.1 0.1 0.1

At the global level, some of the largest projects outside the 2D budget will be in the hands of state-owned companies, making them less transparent and moving the risks to taxpayers rather than private investors.

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Produced in collaboration with Carbon Tracker

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2 degrees of separation: Transition risk for oil and gas in a low carbon world