Independent financial think tank Carbon Tracker analyzed the plans of global oil and gas companies and found that these plans are contrary to the Paris climate agreement to limit global warming to 1.5 °C. The review is interesting for data on planned projects and capital expenditures of companies.
The material was prepared by the Institute for the Development of Technologies in the Fuel and Energy Complex.
The independent financial think tank Carbon Tracker analyzes oil and gas companies’ investment plans in the report “Paris Betrayal: Why Investors Should Assess Oil and Gas Companies’ Climate Compliance” and comes to a disappointing conclusion: Achieving greenhouse gas emissions to halt global warming at 1.5°C in line with with the Paris Agreement requires the cessation of new production projects, while most oil and gas companies, on the contrary, plan to expand. The summary of the report looks like an ultimatum to the oil and gas industry.
Under the IEA’s Net Zero Emissions by 2050 (NZE) scenario, there is no need to develop new conventional oil and gas fields – their production will have to decrease compared to 2019 by 22% by 2030 and by 44% by 2035 year, write the authors of the report. However, oil and gas companies are spending huge amounts of money on new production that will lead the world to a climate catastrophe.
The report said that in 2021 and the first quarter of 2022, Chevron, Eni, Shell, TotalEnergies and other companies have approved investments of $58 billion, which will only be required if demand for oil and gas rises to such an extent that global temperature rises above 2.5°C.
With warming limited to 1.5°C, it is required that 90% of the discovered fossil fuels around the world, including those listed on stock exchanges, remain in the ground and not be burned.
Even those asset owners who don’t prioritize the social impacts of climate change, Carbon Tracker warns, should be concerned about the financial risks associated with the global energy transition. Companies that invest in new mining projects face the risk of substitution from new technologies such as renewable energy and electric vehicles, as well as the ever-increasing risk of political action that could lead to lower-than-expected returns.
Shareholders of these companies may see their value drop rapidly. Asset managers have a fiduciary duty to consider climate risks when making asset allocation decisions. Consideration of the degree of compliance of companies’ plans with various climate scenarios allows us to assess these risks.
The authors of the report consider CCUS carbon capture projects meaningless for oil and gas. The oil and gas industry differs from most other industries in that most of its emissions come from the consumption of its products (area 3), rather than direct emissions from activities or energy consumption (area 1 and 2). While companies must decarbonize their operations (and urgently in the event of industrial methane leaks and releases), these industrial emissions typically account for less than 15% of total lifecycle emissions from oil and gas products. .
Most CCUS projects do not necessarily reduce CO2 emissions. This is because most existing CCUS projects are for gas processing, which only reduces the carbon intensity of operations, but in many cases results in a net increase in absolute emissions. The IEA estimates that the annual carbon sequestration capacity in 2021 will be about 40 million tons of CO2 – about a thousandth of total energy-related greenhouse gas emissions. CCUS should be used for hard-to-decarbonize sectors such as cement and steel, and not to justify continued oil and gas production.
If today oil and gas stops developing plans for future production, and stops at already planned projects, then the trajectory of the decline in production will be close to the emission reduction requirements in the 1.5 °C scenario.
Here and later in the report, the following scenarios are mentioned:
• Net Zero Emissions by 2050 (NZE) scenario – a path consistent with limiting warming to 1.5°C, with the global energy sector reaching net zero CO2 emissions by 2050.
• Sustainability Scenario (SDS) – Path consistent with limiting warming to 1.65°C, with no net negative emissions, advanced economies reaching net zero by 2050, China around 2060, and everyone else countries by 2070 at the latest.
• Pledges Scenario (APS) – a scenario corresponding to a 1.7°C outcome, assuming that all national commitments are met in full, whether or not they are written into legislation. This replaces SDS as the IEA scenario of “well below 2°C”.
• Stated Policy Scenario (STEPS) – a more conservative scenario corresponding to a 2.5°C result based on existing and planned policies.
When modeling the STEPS scenario, the break-even price for oil appears to be around $61, which is similar to the long-term price used by many oil companies in their plans.
Figure 4 shows the average company production expected in the 2030s compared to 2019 levels based on existing projects (colored bars) and what would result from investments in the STEPS scenario (shown in gray bars). The larger the gray bar, the less the future production of the company meets the Parisian requirements. Almost all companies are not going to reduce production in a normal development scenario.
Note: 2030-2039 average production as a percentage of 2019 production in barrels of oil equivalent. The colored part of the bars shows future production from already sanctioned projects that potentially corresponds to the IEA’s scenario of zero emissions at 1.5°C by 2050 (NZE) – the color of the bar indicates the company’s classification. Gray bars show production modeled under the IEA’s 2.5°C Stated Policy Scenario (STEPS). Top 20 producers by market capitalization according to S&P global oil index.
According to the authors, shale companies have the greatest potential to reduce production, which correlates with the conclusions of the Goering and Rosenzweig report “Why energy companies will not drill wells”.
Figure 6 of the report presents an analysis of companies’ projects according to the degree of alignment with the Paris goals:
• Yellow—Projects with a relatively low break-even price that potentially meet 1.65°C (SDS).
• Orange—Projects that are not compatible with the 1.65°C scenario, but potentially meet demand under the Paris Agreed 1.7°C (APS) scenario.
• Red – projects that are assessed as not compatible with the Paris scenario (APS), but are likely to be implemented according to the usual plans (STEPS, 2.5°C).
• Black – projects with very high break-even prices that are inconsistent even with business as usual (BAU), STEPS scenario, 2.5°C. These are the projects that are the least climate oriented.
Notes: Capital expenditures for oil and gas production (2022-2030) for unsanctioned projects compatible with different scenarios as % of business as usual (BAU) plans (2.5°C, STEPS scenario) Top 20 producers by market capitalization according to the S&P global oil index, sorted by % capex in accordance with the 1.7°C (APS) scenario.
Table 2 lists the largest projects incompatible with the Paris 1.7°C (APS) scenario by companies where final investment decisions are expected in 2023.
The conclusion of the Carbon Tracker authors is categorical:
“Investment in new low-carbon facilities, while perhaps important to the survival of the company, does not in any way offset emissions from existing production or in any way justify new investment in a system that we must abandon. From the point of view of climate, the amount of greenhouse gases emitted into the atmosphere is important, which for an oil and gas producing company is inextricably linked with its production.
While a variety of additional metrics can be used to assess a company’s compliance, from emissions targets to remuneration policies and proper disclosures, a company’s investment plans are a clear signal of corporate intent. The argument is clear: companies cannot be considered climate-conscious if they are developing oil and gas fields that are incompatible with the climate scenario chosen by investors, with a temperature rise capped at 1.5°C or a less ambitious interpretation of the Paris targets.
Given that no oil and gas producer is meeting “net zero” (1.5°C), investors seeking to meet this temperature result should either sell stakes in such companies or engage seriously with companies to change strategy. The IEA’s “Net Zero at 1.5°C by 2050” scenario requires both a herculean effort to increase CCUS capacity and a drastic reduction in production. Deployment of CCUS and other networks does not eliminate the need to reduce production.
Thus, the oil and gas industry has been given an ultimatum: either you stop new investment in production, or we accuse you of not complying with the Paris restrictions, which may be followed by sanctions. The options are known and tested: forfeiting loans, harassment in the media, inciting environmental activists, not shaking hands … It seems that there is no question of direct sabotage and blocking of fields and refineries by the troops. For now, anyway.
The oil and gas companies don’t seem to be giving up. Below is a chart of companies’ oil price forecasts versus the worst-case Net Zero (NZE) scenario from Carbon Tracker’s “The Importance of Understanding Oil and Gas Price Forecasts Used in Financial Reporting.”
Oil and gas companies, no matter what, apparently plan to survive until 2050.