Investors warned against sudden ‘handbrake’ on high-polluting oil projects

Fort McMurray, Alberta, is in the middle of Canada's Athabasca oil sands. Oil majors have started divesting from such high-cost projects. [kris krüg / Flickr]

A sudden break on oil drilling caused by last-minute climate action from regulators could halve the value of new projects being developed today, according to fresh analysis published on Friday (31 January).

US oil majors ExxonMobil, Chevron and ConocoPhillips, which have invested the most in high-cost oil sands and shale projects, are the most exposed to a sudden fall in oil demand triggered by belated climate regulations, according to Carbon Tracker, a financial think-tank.

“Oil companies basing future investments on ‘business as usual’ risk seeing the value of their new projects halved on tougher policy,” Carbon Tracker said in a report published today.

These companies “risk being left with stranded assets if they assume governments will not take forceful action to limit climate change,” warned the report’s author, Andrew Grant.

“Oil projects developed pre-2025 may never generate the value expected” if the policy responses are not anticipated, the report adds.

In Europe, oil companies face tighter emission regulations after a new EU executive took office last month, pledging to “make Europe the world’s first climate neutral continent by 2050”. In December, EU heads of states approved the 2050 objective, which is now being enshrined into hard law. Tighter emission targets are also in the pipeline for 2030.

To compensate for that risk, Carbon Tracker argues that investors should demand a higher rate of return from companies pursuing high-cost projects such as oil sands, which are also the most polluting and the most sensitive to price volatility.

And the risk of stranded assets remains “whether the oil price goes up, down or sideways,” Grant told EURACTIV. “Under any scenario, if a company has projects that are lower cost, then by definition they have low-risk and higher return,” he explained.

Timmermans kicks off debate over landmark EU 'Climate Law'

The European Commission launched a public debate about the EU’s upcoming Climate Law on Tuesday (28 January), with a view to enshrining the bloc’s 2050 “climate neutrality” target into binding legislation before the UN climate conference in Glasgow later this year.

Oil companies shrugged off those warnings, saying they will adapt to changing markets conditions and regulatory environments.

“Whatever the influencing factor, it’s in our industry’s genes to be responsive to the market and mobilise skills and technology to remain competitive,” said François-Régis Mouton, director of EU affairs at the International association of Oil & Gas Producers (IOGP).

Carbon Tracker’s estimates are based on the assumption that policymakers “act forcefully” to contain the climate threat by 2025, in line with projections by the International Energy Agency’s stated policies scenario, which is the most conservative.

Early policy action by oil firms makes planning easier and prevents stranding, the report says.

In Europe, Total, Eni and Equinor are seen as the least exposed to climate risks because they have started diversifying their portfolios with investments in renewables or electric car recharging stations.

Saudi Aramco, a state-oil company with low production costs, is one of the least exposed, with around 30% less sensitivity to oil prices than the rest of the industry. By contrast, “the value of ExxonMobil’s existing and modelled new oil projects are around 40% more value-sensitive than the rest of the oil production industry,” the report found.

That should get oil majors to rethink their investment strategies, Carbon Tracker says. “We do not know when or how an Inevitable Policy Response will come, which makes it hard for companies to plan,” Grant admitted.

But he said mounting public pressure on climate change and falling technology costs for renewables will eventually compel every oil company to make a move.

It’s no longer a question of if but when, Grant believes.

Europe's future oil production seen viable at $60 a barrel

Europe is hardly the first place that springs to mind when thinking about the world’s major oil producing regions, and there is a perception that the domestic industry has already seen its heyday, particularly in the North Sea.

BP’s incoming CEO, Bernard Looney, is reported to be preparing new climate targets when he takes office in the coming days. According to Reuters, the targets would for the first time include emissions form fuels and products sold to customers (scope 3) rather than those resulting from its own operations and suppliers (scope 1 and 2).

In fact, oil majors have already started divesting from oil sands. “A lot of the oil majors used to have exposure to oil sands projects. They’ve largely sold them now,” Grant explained, saying these are now owned by “a handful of specialists in Canada” which are the most sensitive to price fluctuations.

ExxonMobil was probably the latest oil major to approve an oil sands project in Canada, in late 2018, Grant said. But it has since slowed the pace of development at the site in Northern Alberta, where first output was expected in 2022.

“It’s important to realise that a company’s competitiveness is based on its entire portfolio, not only on a few specific capital-intensive projects,” said François-Régis Mouton. “The risk is therefore hedged across assets rather than specific ones,” he pointed out.

“Since the 2014 downturn, capital discipline and technological breakthroughs have significantly brought down production costs and strengthened the industry’s resilience to market fluctuations. Investments have turned in part towards short-cycle, less capital intensive projects,” Mouton pointed out, saying those are “very competitive.“

European oil majors are better prepared for the low-carbon transition than their American or Chinese counterparts, according to CDP, a financial watchdog. In a 2018 report, CDP said a “regional split” had become apparent, with European oil companies taking the lead in diversifying their portfolios while Chinese, Russian and US oil majors trailed behind.

European oil majors better prepared for energy transition than US, Chinese counterparts

Oil majors are “lagging” when it comes to preparing for the low-carbon energy transition, according to a new report from financial watchdog CDP, which nonetheless praised BP, Eni, Equinor, Total, Repsol and Shell for taking the industry’s lead.

[Edited by Zoran Radosavljevic]

Subscribe to our newsletters