2°C temperature threshold puts oil investments at risk

5th June 2014

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Paola Reason

Shell says demand for fossil fuels will remain buoyant and continue to attract a high price.

Investment worth $1.1 trillion in oil projects are at risk up to 2025 if the increase in global temperatures is to be kept below the critical 2ºC threshold. Scientists believe that any rise greater than that caused by oil being being burned could trigger dangerous climate change.

The warning comes in a new report from financial specialists the Carbon Tracker Initiative (CTI). It says projects that require the price of a barrel of oil to be at least $95 over the next 10 years will be increasingly nonviable due to tougher climate policies and advances in vehicle technology, for example, that will cut demand for oil. Concern is raised mainly about projects that involve extracting unconventional types of hydrocarbons, such as shale oil and oil sands, or operating in physically-demanding environments, such as ultra deepwater and the Arctic. In his foreword to the report, CTI chief executive Anthony Hobley warns: “Either policy or technological tipping points will reduce demand … or we will face levels of warming described as catastrophic by many.”

The CTI has developed a “carbon supply cost curve” to identify the oil projects most at risk. Its analysis assumes that oil will have a 40% share of a carbon budget necessary to keep the temperature rise below 2ºC and builds on its previous work on “unburnable carbon”. Assuming this share remains constant, the CTI estimates that total emissions from the oil industry will be pegged at 360 giga tonnes of CO2, which is equivalent to 760 billion barrels of oil. If so, only oil that can be extracted for a market price of $75 per barrel or less will remain viable. To avoid wasted capital, the CTI advises investors to only finance projects at the low end of the cost curve. “There is a realisation that ignoring climate risk and hoping it will go away is no longer an acceptable risk management strategy for investment institutions,” writes Hobley.

The CTI research places Shell fourth – behind Petrobas, ExxonMobil and Rosneft – in its list of oil companies with the highest total capital expenditure exposure over the next 10 years in projects above the $95 per barrel market price. However, Shell does not believe any of its proven reserves will be non-performing or become “stranded assets”.

In a letter to stakeholders, Shell acknowledged the need to tackle climate change, but said: “Energy demand growth, in our view, will lead to fossil fuels continuing to play a major role in the energy system – accounting for 40–60% of energy supply in 2050 and beyond, for example. The huge investment required to provide energy is expected to require high energy prices, and not [a] drastic price drop.”

CTI responded: “Shell does not explain how it is solving the contradiction between the predictions of high oil demand and its acceptance of the need to address climate change. [We] argue that high-cost production and growing oil demand assumptions are inconsistent with a more resilient global economy and stable global climate.”
The House of Commons’ environmental audit committee warned in March that global financial markets were in danger of creating a “carbon bubble” due to the over-valuing of fossil fuel assets. “Financial stability could be threatened if shares in fossil fuel companies turn out to be overvalued because the bulk of their oil, coal and gas reserves cannot be burned without further destabilising the climate,” said Joan Walley, chair of the EAC.

The MPs said the government must ensure investors have all of the information they require to assess carbon risk.

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