Oil company Shell is failing to account for long term climate risks, according to the Carbon Tracker Initiative
By Megan Darby
Shell was accused of “Orwellian doublethink” in its attitude to climate change on Wednesday, as an influential think-tank published new analysis.
In the latest instalment of the “carbon bubble” debate, the Carbon Tracker Initiative (CTI) highlighted flaws in the oil major’s optimistic assessment of its future profitability.
In a letter to shareholders in May, Shell dismissed as “alarmist” warnings that global action to mitigate climate change could destroy the value of its assets.
Executive vice president JJ Traynor played down the likelihood of effective action to limit global temperature rise to 2C. The company predicts fossil fuel demand will grow 40% to 60% by 2050.
Anthony Hobley, CEO of CTI, said: “With this combative stance, Shell has missed an opportunity to explain to its shareholders how its capital expenditure plans are resilient to the impending energy transition.
“Acknowledging the seriousness of the climate challenge whilst at the same time asserting no effective action will be taken until the end of the century is as classic a case of Orwellian double think as you are likely to find.”
The Carbon Bubble is the idea that certain companies are overvalued because of a failure to account for climate change risks. This mainly applies to the fossil fuel sector. Effective global action to tackle climate change will mean burning less carbon. Meanwhile, energy companies and governments continue to exploit new fossil fuel sources.The contradiction is becoming increasingly difficult to ignore.
The Carbon Tracker Initiative, which has most actively campaigned on the issue, estimated in 2012 only one fifth of known fossil fuel reserves could be safely burned. Proven reserves amounted to 2,795 gigatonnes of carbon dioxide emissions, while the remaining carbon budget to limit temperature rises to 2C in 2050 was just 565 GtCO2.
The CTI, in partnership with Energy Transition Advisors, has produced a detailed rebuttal of Shell’s argument. It said Shell had selectively focused on its proven fuel reserves, which are expected to last for 11.5 years at current extraction rates.
The company’s growing portfolio of unconventional and deepwater projects involve higher capital costs, longer lead times and longer payback periods.
Over the next 10 years, the CTI estimates Shell could invest US$ 77 billion in high cost, high risk projects that would need an oil price of US$ 95/barrel to pay off. These assets are at greater risk of becoming “stranded” by pollution limits, the CTI warned.
While Shell’s assessment mainly focused on today’s energy realities, the CTI said it relied on carbon capture and storage (CCS) as a panacea to allow the continued burning of fossil fuels.
CCS technology is not yet commercially viable and can only extend the global carbon budget by 14% to 2050, according to CTI research.
Perhaps most critically, Shell acknowledged the need for urgent action on climate change but based its assurances to shareholders on the expectation world leaders will fail to deliver.
It cited the authoritative International Panel on Climate Change report: “There is a high degree of confidence that global warming will exceed 2 degrees Celsius by the end of the 21st century.” That is the politically accepted safe level of warming.
This quote misrepresents the report, the CTI said, as that is only one stated outcome if no action is taken to reduce carbon emissions. In a direct opposition of Shell’s position, the CTI believes climate regulation is gathering pace.
Mark Fulton, ETA founding partner and advisor to CTI, said: “We believe that by stress testing more aggressively Shell’s future assumptions about demand and climate policy that this will lead to a productive dialogue with investors on capital management and capital discipline in relation to high-price high-carbon investments.”