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Oil firms need to come clean on climate threat

The sector must step up its investments in clean energy and efforts to mitigate climate change or risk being left with expensive, stranded assets, says a new report

Climate change's impact on oil companies' spending is already in the spotlight following investor pressure on ExxonMobil and other big producers to be more transparent. Now, a team led by advocacy group Carbon Tracker has produced a report that aims to spell out what's at stake—and the headline figures don't make great reading for oil bulls.

Five of the world's six largest listed oil companies risk wasting more than 30% of potential spending on upstream projects that could be surplus to requirements in a world committed to keeping global warming down to 2°Celsius above temperatures in pre-industrial times, the principal goal of the Paris agreement.

Of the majors, Exxon would be hit hardest, with 40-50% of capital expenditure allocated to uneconomic projects if operations continue on a business-as-usual basis. Shell, Chevron, Total and Eni risk 30-40% of spending, while 20-30% of BP's spending would be at risk. For Saudi Aramco, the figure would be just 10%—the kingdom's low-cost oil is likely to remain more economic to get out of the ground for longer.

The report values at $2.3 trillion—or around a third of projects on the table to 2025—the planned investment Carbon Tracker thinks would be inconsistent with international objectives to limit global warming to within 2°Celsius. These projects include the $33.5bn Kashagan Phase 2 in Kazakhstan, which will need an oil price of at least $110 a barrel to break even, the report says. That project is being developed by a consortium including Exxon, Eni, Shell and Total.

"There are clear signs that oil demand could peak in the early 2020s—so companies need to start taking project options, that would come onstream then, off the table and be transparent about how they are aligning with a low carbon future," said James Leaton, Carbon Tracker's research director. "Sticking with the growth at all costs scenario just doesn't add up for shareholder value when the policy and technology momentum is heading in the opposite direction."

Time to step up

The report uses oil and gas demand forecasts from the International Energy Agency's 450 Scenario , which assumes that policy makers will take steps to limit global warming to within 2°Celsius.

But the IEA also provides other scenarios, based on less rigorous adherence to policies designed to mitigate climate change—an admission that the world is not currently on target to meet its global warming goals. This might suggest the report's forecasts for the fossil fuel industry are excessively apocalyptic.

What is clear is that a growing number of investors want oil and gas companies to take a more pro-active approach to climate change. At Exxon's annual general meeting in May, a shareholder resolution calling on the company to disclose more information about how green technology and climate-change regulations could affect its business was passed, with the support of around 62% of votes cast. The world's largest asset manager, Blackrock, was among shareholders voting in favour.

The "2 degrees of separation" report was produced by Carbon Tracker and Principles for Responsible Investment in collaboration with five institutional investors: Swedish pension fund AP7, French fund Fonds de réserve pour les retraites, the UK's Legal & General Investment Management, Dutch pension fund manager PGGM and Danish pension fund PKA.

The institutions outlined their perspective in a statement about the report, saying that lack of transparency from firms had "been a bottleneck to understanding how companies are responding to the considerable changes in the energy market. This extensive research clearly emphasises that some companies have to reconsider their business strategy and will eventually lead investors to more efficiently price the financial risks associated with a 2-degree world."

While big oil companies themselves—in part due to pressure from their increasingly demanding investors—have said they recognise their role in the fight against global warming, the report is a warning that those decisions will need to be taken sooner rather than later.

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