$1 trillion of oil investment at risk from ‘carbon bubble’

oil investment

New research warns trillions could be wasted on high-cost, risky oil projects that will see no return for investors. Creative Commons: Louisiana GOHSEP, 2010

Oil companies are poised to waste $1.1 trillion of investors’ money through to 2025 on expensive, uneconomic projects that will never see a return in a carbon constrained world, according to analysis from the Carbon Tracker Initiative released today.

It warns that continued investment in many oil extraction projects makes neither economic nor climate sense.

It is widely accepted that a finite amount of greenhouse gas emissions can be emitted to stay below the internationally agreed threshold of 2ºC of warming.

Responsible for 40% of global emissions, oil’s share of the world’s 900 GTCO2 carbon budget (to 2050) is just 360 GTCO2.

At business as usual consumption levels, Carbon Tracker warns that just by burning known, low cost, conventional oil sources – those expected to cost less than $75 a barrel to produce – the world would pass the 2°C limit.

James Leaton, Research Director, Carbon Tracker said:

This risk analysis shows that many oil companies are betting on a high demand and price scenario. Investors need to get ahead of the carbon supply cost curve to ensure capital is not being wasted.

Risky, high cost and unconventional projects including shale oil, Arctic and deepwater drilling and oil sands are of particular high risk.

$1.1 trillion of capital expenditure is earmarked for such projects to 2025; investments that will not pay for themselves in a world where demand is lower and climate change and air quality are taken seriously.

Looking ahead to 2050, the analysis shows an estimated $21 trillion of high-cost oil projects could be wasted.

Carbon Tracker says these projects are not certain to generate value, are not consistent with a carbon constrained world and should be the starting point for investors wanting to reduce their exposure to risky carbon assets.

The region with the highest risk of wasted capital is Alberta, home to Canada’s controversial oil sands, which is expected to see $400 billion of investment by 2025 – Canadian Natural Resources Limited, Suncor and Shell are the companies with the biggest exposure to risk there.

The Deepwater oil projects in the Gulf of Mexico and off Brazil are also seen as high risk, with ExxonMobil and Petrobras set to invest $100 billion each.

Ultra-deepwater projects, which drill in ocean depths greater than 1500m, expose Total and BP to the risk of capital being wasted, says the report.

While in the Arctic, Statoil is most exposed, with $22bn capital expenditure projected by 2025.

In general, the report shows that private listed companies have more exposure to potential production than national oil companies, especially further up the cost curve.

Together private companies and partially listed national companies represent 65% of future capital expenditure.

But it is not only the large multinationals that are at risk. Smaller companies have high percentages of their potential capital expenditure (capex) – that’s the funds used by a company to acquire or upgrade physical assets such as property, industrial buildings or equipment – in high cost, high risk projects over the next decade.

The latest Carbon Tracker report adds to the growing body of evidence which shows that the future is not in fossil fuels.

Today’s release builds on previous research warning that over $600 billion is invested annually in finding coal, oil and gas assets that will be left unburnable in a carbon constrained world.

On the back of such warnings, Carbon Tracker says investors are beginning to press fossil fuel companies to manage such risks, labelling those that fail to do so – for example ExxonMobil – as irresponsible.

Paul Spedding, a former HSBC Oil & Gas Sector Analyst said:

Many investors are concerned about the growing number of capital that the oil companies have thrown at low return, cost heavy projects. The majors’ strategies need to be challenged. As this report shows, returns are falling and costs are rising. To reverse this, a greater focus is needed on higher return, lower cost assets. If this means lower capital investment and higher dividends or buybacks, so much the better. This analysis is important as it provides the data investors need to challenge proposed investments on the basis of returns as well as carbon content.

Today’s report will likely be welcomed by investors and campaigners alike who join Carbon Tracker’s call for greater transparency to carbon exposure.

In a bid to highlight this, the divestment movement released its own analysis last week highlighting the world’s 200 biggest fossil fuel companies.

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