Oil majors gambling US$91bn on 20 high-risk projects

Tar sands and deep sea oil projects are bad for business as well as the environment, analysts warn

Tar sand exploration in Alberta, Canada: a risky investment, says the Carbon Tracker Initiative

Tar sand exploration in Alberta, Canada: a risky investment, says the Carbon Tracker Initiative

By Megan Darby

Green campaigners have sought to block oil exploitation of the Arctic and Canada’s tar sands in horror at the impact on the natural environment.

The Carbon Tracker Initiative (CTI) is taking a different tack: highlighting the financial risk of such projects.

Its latest research shows the top 20 undeveloped high-cost oil projects – which happen to be among the most environmentally damaging – risk wasting US$91 billion of investors’ money over the next decade.

If the major oil companies cancelled these and other risky plans they could return US$357 billion to shareholders by 2025, it found.

“Investors are concerned about the levels of capital being sunk into future fields by the oil sector, but are not getting answers on the economics of the projects from the companies,” said James Leaton, CTI’s research Director.

“CTI has responded to demand for detail to enable shareholders to challenge where money is spent.”

Oil companies are exploring ever more difficult environments, from ultra deep water to tar sands, to find resources.

From Greenpeace’s Save the Arctic campaign to Tar Sands Action, protesters have focused on the climate impact of such ventures and risk of oil spills in sensitive environments.

Analysis from CTI shows such projects are also a gamble for investors, which include the pension funds and insurance companies ordinary people rely on to safeguard their money.

These projects depend on a high future oil price to get a return on the capital investment. Meanwhile, political action to halt dangerous climate change is expected to cut demand for oil, pushing the price down.

International negotiators are aiming for a deal in Paris next year to cut greenhouse gas emissions and keep world temperature rise to 2C.

If they succeed, then only a fraction of the world’s fossil fuel reserves can be burned within the remaining “carbon budget”, estimated by the Intergovernmental Panel on Climate Change (IPCC) to be less than 500 gigatonnes of CO2.

Price gamble

The think-tank’s earlier research showed effective action on climate change should rule out ventures that need a price of more than US$95 a barrel to break even.

Some of the projects identified by CTI in its latest report need a price of more than US$150/bbl. That is according to data compiled by industry experts at Rystad Energy.

The most expensive was a US$2 billion Canadian tar sands venture by ConocoPhillips, which needs a price of US$159/bbl.

For the investment to pay off, the oil price would have to rise significantly from the US$105/bbl Brent benchmark price today. Oil prices can be volatile and have fallen as low as US$40/bbl twice in the last decade.

Shell is the most exposed, CTI found, with US$84 billion earmarked for risky projects. Exxon Mobil is next, with plans to spend up to US$56 billion on projects needing more than US$95/bbl to break even. Chevron and Total are each considering US$52 billion worth of high-cost ventures.

“This analysis demonstrates the worsening cost environment in the oil industry, and the extent to which producers are chasing volume over value at the expense of returns,” said Andrew Grant, CTI analyst.

“Investors will ask whether it is prudent for oil companies to bet on ever higher oil prices when they could be returning cash to shareholders.”

Industry position

Oil companies have shelved some risky projects already, as they try to keep capital spending under control.

Total, Suncor, Shell, BP, Chevron, Statoil and Eni have all cancelled or deferred oil sands and deep sea projects this year.

However, they have rejected the CTI’s analysis of the systemic problems in the sector.

The CTI put the “carbon bubble” concept on the map in March 2012 and it has been steadily gaining traction ever since.

This is the idea that fossil fuel companies are overvalued, because they are not taking account of climate change risk.

The report warned that to put the world on a 2C path, 80% of known fossil fuel reserves had to stay in the ground.

By continuing to explore new and expensive sources of fossil fuels, companies risk creating “stranded assets”. Their investments will become worthless as demand for their product is constrained.

In May, the CTI homed in on the oil sector. It has similar analyses of the coal and gas sectors in the pipeline.

It drew a defensive response from oil companies, with Shell branding the report “alarmist”.

A round-up of oil company arguments by Carbon Brief found they broadly accepted the science of climate change. However, they cast doubt on the likelihood of effective political action to curb emissions and insisted demand for their product would continue.

In a rebuttal to Shell’s assurances, CTI accused the company of “Orwellian doublethink”.

The sector has yet to reconcile the contradiction between its acceptance of the need to tackle climate change and its pursuit of high-risk oil projects, the CTI says.

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