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Majors' capex ignores Paris Agreement risk

Report finds investments will not deliver adequate profits if carbon emissions are limited to a level that keeps global warming 'well below' two degrees

Every oil and gas major last year sanctioned investment in projects that would not produce sufficient returns if national leaders stick to their commitments to the COP 21 Paris Agreement, according to a new report by NGO Carbon Tracker.

"There is a finite limit to global carbon emissions that can be released for the world to reach the goals of the Paris Agreement—the carbon budget. We find that no oil and gas companies currently reflect these limits in their investment processes," report co-author and analyst Mike Coffin tells Petroleum Economist.

The 2015 agreement requires governments to constrain greenhouse gas emissions to levels that equate to global warming remaining 'well below' two degrees above pre-industrial levels. President Trump withdrew the US from the commitment in 2017 but 194 countries including China, by far the world's biggest greenhouse gas emitter, remain signatories.

The Carbon Tracker found that projects already sanctioned would take the world past the 1.5ºC target, assuming carbon capture and storage remains sub-scale. It also found that none of the oil sands projects sanctioned in 2018 work in a Paris-compliant world and several US shale specialists have portfolios entirely outside the climate budget.

Investor responsibilities

Pension schemes are increasingly being required to consider the financial risks attached to long-term investments in industries that may be impacted by climate change.

"Our analysis shows that since the start of 2018, all of the majors, including the European companies, have sanctioned projects that fall outside a 'well below' two degrees budget," says Coffin. "If investors wish to have Paris-aligned portfolios then they will want to challenge oil majors' investment in such projects."

Several UK pension schemes are even considering whether to invest in clean energy in emerging markets as a cost-effective way of mitigating emissions and complying with regulations that take effect in October.

"Investing in oil-hungry companies won't provide the dividends [funds] need to pay members when they take their pension in 30-40 years" — Martin, Share Action

"Investing in oil majors brings with it the responsibility to open up a critical dialogue and engage forcefully with these boards," says Jeanne Martin, senior campaigns officer at UK think tank ShareAction. This means asking companies to publish "new business strategies aligned with the Paris climate goals—instead of throwing capex at projects that will be defunct in a world soon to be dominated by low-cost, cleaner energies".

The Carbon Tracker report provides some "compelling evidence" that current plans are fundamentally misaligned with Paris, Martin adds. "Pension funds should be particularly alert to these financial risks, as more and more young people start saving for a pension. Investing in oil-hungry companies will not provide the dividends they need to pay members when they take their pension in 30-40 years.

"Pension schemes should be having these conversations with their asset managers, and escalating engagement with fossil fuel companies by supporting and filing shareholder resolutions that ask for strategies aligned with climate science and voting out directors of climate laggard companies."

This week, delegates at the SPE Offshore Europe 2019 conference heard Christiana Figueres, former UN climate leader urge majors to lead the energy transition.

"Pension funds are generally diversified and should consider the impact of climate change and the energy transition across their entire portfolios," says Carbon Tracker's Coffin. "Accordingly, it is in their interests to mitigate climate risks, including through engagement with fossil fuel producers."

Room for improvement

The report identified four large European companies—BP, Shell, Total and Equinor—that were "doing the most to reassure investors that they are responsive to climate concerns" but still approved projects that would not deliver adequate returns in a low-carbon world. Each fared better than the other majors and independents mentioned in the report.

BP has "supported the aim of the Paris Agreement" since it was agreed, the firm says. "Our strategy is to produce advantaged barrels, which involves considering factors like whether they are economic to produce, low risk to bring to market and lower carbon from an emissions standpoint."

The IEA forecasts that the world could still require 70mn bl/d oe of oil and gas in 2040, even in a Paris-consistent scenario. BP is "determined to supply the most advantaged barrels to meet that need". As competitive barrels are discovered, "they could help to push other more costly and high-carbon barrels out of the mix," just as gas is replacing coal. "It makes financial and environmental sense."

BP spent around $0.5bn of capex on renewables during 2018. "Our production is coupled with our renewables spend… and our robust work to reduce emissions, improve our products and create low carbon businesses," the firm says.

"All of this is aimed at evolving BP from an oil and gas focused company to a much broader energy company so that we are best equipped to help the world get to net zero while meeting rising energy demand."

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