High cost oil reserves pose investment risk

Exploring for new fossil fuel reserves poses threat of stranded assets, says Carbon Tracker Initiative in new study

 Pic: Tim Montgomerie/Twitter

Pic: Tim Montgomerie/Twitter

By Gerard Wynn

Oil companies are poised to spend some $1.1 trillion developing reserves which are at risk both from price volatility and climate policies, said the Carbon Tracker Initiative lobby group on Thursday. 

The study analysed the investment risk associated with particularly high cost, physically challenging oil reserves, largely comprising in deep water, Arctic, tar sand and other unconventional assets.

The reserves corresponded to oil which was economic only at an oil price above $95, compared with about $110 presently.

The analysis also measured what carbon emissions corresponded with burning such high cost reserves, and calculated they were at a level which would put global warming far above an internationally agreed 2C threshold for dangerous climate change.

The study concluded that investors in oil companies involved in such high cost assets were exposed both to price volatility and prospective climate policies such as carbon pricing, which motivated a shift to low carbon energy.

Such matching of the breakeven oil price and carbon emissions associated with particular oil reserves was a first, the report authors said.

“For the first time, this report bridges the worlds of oil project economics, in terms of both the marginal cost of supply and carbon, allowing investors to gauge where risk lies, given a range of demand scenarios,” said Mark Fulton, adviser to Carbon Tracker Initiative (CTI) and former Head of Research at Deutsche Bank Climate Advisors.

“It makes it clear that investors have reason to engage companies on many high cost and high carbon content projects.”

Oil companies would require some $1.1 trillion in capital investment to exploit the identified high cost reserves through 2025, principally relying on capital markets, the Carbon Tracker report said.

“This should be the start point for investors seeking to reduce their exposure to the high end of the cost curve,” the report said.

The UN Intergovernmental Panel on Climate Change (IPCC) recently said that countries should halve global carbon emissions by 2050 to avoid costly climate change. It said that “business as usual” was not an option, leading to temperature rises of 3 to 5C, and extreme dangers including species extinctions, lower crop yields, human conflict, and sea level rise that would wipe out islands and coastal communities


The CTI report is based on the concept of carbon budgets, which estimate what level of global average surface warming would result from any specified amount of cumulative CO2 emissions.

CTI has previously used that concept to develop the notion of “unburnable carbon” – the fossil fuel reserves which energy companies are presently exploring but which cannot be burned if the world is to avoid dangerous climate change.

Thursday’s report showed which reserves were economic at what oil price, and with what implied climate change impact if they were fully exploited.

“Our analysis shows that if demand for oil is not substantially reduced we are clearly heading for a level of warming far in excess of 2°C,” said CTI chief executive, Anthony Hobley.

“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.”

The report calculated that staying below 2C implied emitting no more than 360 billion tons of CO2 from burning crude oil, which in turn was equivalent to reserves economic at a market price of $75 or less.

It identified which oil companies were most exposed to the $1.1 trillion investment needed to unlock more expensive, higher carbon reserves through 2025, according to various categories of asset including conventional, Arctic, oil sands, deep water and ultra deep water.

The most exposed firms in terms of allocated investment in each of these five categories were, respectively: Rosneft, Statoil, Canadian Natural Resources (CNRL), Petrobas and Total. Petrobas was the most exposed oil company overall, and CNRL the most exposed among companies where more than half their total allocation was to these high cost reserves.

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