Big Oil’s Very Risky $50 Billion Bet

The oil majors have ploughed $50 billion into projects that are not aligned with the Paris Climate agreement, according to a new report.

Or, put another way, they have invested $50 billion into projects that won't be economically viable if the governments adhere to climate targets. This does not include projects that are operational or given the greenlight prior to Paris - these investments were either approved in 2018 or are on target for approval this year. In other words, the majors are making a risky bet that climate targets will not be realized.

The calculation comes from Carbon Tracker, which notes that in 2018, all of the oil majors gave final investment decisions on large projects that fall outside a "well below 2 degrees" budget.

A few examples include Royal Dutch Shell's massive $13 billion LNG Canada project, which includes a long distance gas pipeline and LNG export terminal on Canada's Pacific coast. Another example includes an offshore oil project in Angola, led by ExxonMobil, Total SA and BP.

Also, no new oil sands projects are economically viable in a low-carbon world, even as ExxonMobil (Imperial Oil) gave the go-ahead on the $2.6 billion Aspen project last year - one that was subsequently delayed due to Alberta's mandatory production cuts.

Notably, Carbon Tracker says that several U.S. shale companies "have portfolios that are entirely out of the budget." And because of their "homogenous cost structures," the sector faces a binary future. They are either "all in" if the world blows past its climate targets, or "all out" if governments get serious about hitting the 2C target. Related: Scientists Find Cheaper Way Of Tapping Shale Gas Resources

Ultimately, the carbon from projects that have already been sanctioned would take the world past 1.5C, leaving very little room for any additional development. "Every oil major is betting heavily against a 1.5 degree Celsius world and investing in projects that are contrary to the Paris goals," said report co-author Andrew Grant, who formerly worked in Barclays' private equity unit. Co-author Mike Coffin was a geologist at BP for 10 years. In order to "meet climate goals, it is an unavoidable consequence that fossil fuel use must drop dramatically," they wrote in the report.

Chevron said in a statement that "most outlooks we track conclude that oil and gas demand will continue to grow over the coming decades." That position is essentially what Carbon Tracker concludes - that the majors are betting that the world blows far past climate targets.

There is a bit of strategy difference between the European oil majors and their American counterparts. Although Royal Dutch Shell's $13 billion LNG project in Canada is called out in Carbon Tracker's report, the Anglo-Dutch oil major is also arguably one of the furthest along in transitioning to a cleaner future with various investments in renewables, EV infrastructure and other ventures outside of oil and gas. Still, their core business in oil and gas remains.

Carbon Tracker said that BP was closest to having a portfolio that conformed with the Paris constraints. Roughly 83 percent of its capex would likely be safe in a 2C world. Meanwhile, Exxon was at the bottom among oil majors, with only 63 percent of its capex in alignment. Although, as Bloomberg noted, all companies pushed back the conclusion that they are investing in uncompetitive projects. Related: Three Essential Factors For Oil Prices In 2020

Meanwhile, equity research firm Redburn downgraded the entire class of oil majors from "buy" ratings, arguing that oil demand is likely set to be at least 30 percent lower in the future than most analysts believe. Redburn says that as governments tighten the screws, the oil industry will be hit hard. "When industries face existential risk, historical multiples provide no floor for share prices," Redburn analysts wrote in their report, as carried by the FT. "Rather, accelerating uncertainty means the sector's cost of capital will rise further, perpetuating the derating."

Echoing Carbon Tracker's conclusion, Redburn said that ExxonMobil was at particular risk. Redburn issued a "double downgrade" to the oil major, moving it from "buy" to "sell."

While the majors insist that oil demand will continue to rise, and that in reality governments have proven very slow to react, Redburn argues that any delay only increases the odds of a sudden and draconian crackdown on carbon at a later point. "Each year oil demand remains on its current trajectory the risk of greater future disruption increases," Redburn analysts said.

By Nick Cunningham of Oilprice.com

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