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As much as up to 50 percent of the production of oil majors could be hit by carbon costs in the next ten years if legislators that currently price carbon extend the policy to the upstream sector, Wood Mackenzie said in a new report on how oil majors would respond to the global energy transition and rising pressure for low-carbon energy.
Wood Mackenzie has identified three main risks that the majors would be facing with the global drive to switch from fossil fuels to low-carbon energy: the growth in the renewables industry, intensified carbon policy, and growing low-carbon competition.
The energy consultancy predicts that demand for coal and oil could peak well ahead of 2035, while natural gas and zero-carbon fuels would meet at least 60 percent of the rise in the world’s energy demand until 2035.
“As carbon policy intensifies, the oil and gas Majors will face more regulatory burden and are likely to face increasing costs. Green financing could also mean higher cost of capital for more carbon-intensive oil assets such as oil sands, as investors shift to alternative fuels and lower-carbon technologies,” according to Paul McConnell, research director of global trends for Wood Mackenzie.
All majors have factored in a price on carbon in their long-term strategies, but the question is, how much risk have the companies accounted for in their forecasts, McConnell noted. Timeline, geography and prices vary enormously, with a price on carbon of between US$6 to US$80 a ton, he added.
Big Oil is facing pressure to diversify, but diversification into renewables would be challenging, Wood Mackenzie reckons. However, the oil and gas groups’ biggest risk would be not to do anything, “and be left exposed to investors making their own minds up,” the consultancy said.
“Global carbon risks could depress oil prices for the long term with slowing demand and an increase in costs, making it crucial for the Majors to push break-evens down further,” McConnell noted.
Earlier this month, Wood Mackenzie suggested that oil majors would have to hack off some US$370 billion from their total costs this year and next, which would result in a production decline of around 3 percent this year and 4 percent next year.
By Tsvetana Paraskova for Oilprice.com
Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews.