The latest report from Carbon Tracker Initiative, a non-profit analysis house in London, suggest that up to a third of currently planned oil and gas projects may now never go ahead because of climate change policy.
In “2D of Separation”, CTI presents the potential risks to shareholders and investors in the world’s largest fossil fuel companies of “stranded assets”: the idea that if world leaders do what they said they would in the Paris Climate Change agreement, fossil fuel production will tail off. And that in turn means that plans for investment in new projects are riskier. And that in turn means companies who invest in new projects that would produce more carbon than be accommodated in the world’s carbon budget risk wasting their shareholders money.
We know that companies have been factoring in this risk of stranded asset for many years now. Global majors such as BP, Shell, Total and Chevron have been applying carbon prices internally to determine which potential projects are most at risk. The question is: who is going to do the same for the many countries around the world whose economies and public finance depend on fossil fuel production?
There are lots of factors in play, of course, price being the main one. New investment has taken a hit since the oil price crash of 2014, rebounding a little as the US shale industry has figured out how to cut costs and present more “agile” supply to the market. And there is no certainty that either policy or the ever dropping costs of green energy will guarantee that the commitments made by governments in the Paris Agreement will be honoured.
Nevertheless, if the Kashagan oil field in Kazakhstan gets stranded, stranding any investment by Shell, the government of Kazakhstan will see its benefits from the project stranded. The same with ExxonMobil’s investment in the Bonga field in Nigeria, or Oil Search’s potential investment in Papua New Guinea. All around the world governments are making plans for economic growth and revenues to Treasury which are at risk, and there is little sign that they are receiving professional advice to help them plan for that. The case is even more pronounced with LNG, presenting risk to governments like Mozambique and Tanzania, which are making plans on the basis of vast new offshore projects.
And it is not just that some projects may not go ahead. There will be other projects where carbon budget considerations make the project more marginal but potentially viable – if the companies can convince countries to restructure terms. Companies could propose deals which maximised revenues to them in the short term, offering governments a larger share of revenues as the project progresses, some time down the road. But if governments are not aware of the overall business environment, what happens if by the time the government’s higher share kicks in, the whole game has moved on? That high return in the future will never, in fact, arrive.