New research by the Carbon Tracker Initiative  reveals how many oil projects make neither economic nor climate sense.

The risk analysis identifies that many higher cost oil projects are too far up the cost curve to fit within low demand, low price scenarios that would also limit oil-related emissions to within a carbon budget. The research identifies $1.1 trillion of potential capital expenditure (capex) up to 2025 in key locations requiring a market price over $95/bbl. The Carbon Tracker Initiative (CTI) recommends that investors now engage with companies to discuss the risk of capital being wasted on carbon intensive projects that are not certain to generate value and are not consistent with the coming carbon constrained world.

Carbon Tracker research director James Leaton says, “This risk analysis shows that many oil companies are betting on a high demand and price scenario. Investors need get ahead of the carbon supply cost curve to ensure capital is not being wasted.”

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This report urges investors to challenge the demand and price assumptions underlying the capital expenditure plans of oil companies. Gambling on high oil prices on behalf of shareholders is risky given that oil prices have dropped to $40 per barrel twice in the last decade. Demand could be impacted by a range of future issues, such as the increasing constraints on emissions, efficiency gains, improvements in technology, and slowdown in the Chinese economy. The CTI research shows that oil production requiring a market price above $75 per barrel would take the world beyond 2°C of warming, based on a reference scenario of continued business as usual consumption of the main fossil fuels – coal, oil and gas.

Mark Fulton, adviser to Carbon Tracker Initiative and a former Head of Research at Deutsche Bank Climate Advisors says, “For the first time, this report bridges the worlds of oil project economics – in terms of both the marginal cost of supply  – and carbon, allowing investors to gauge where risk lies, given a range of demand scenarios. It makes it clear that investors have reason to engage companies on many high cost and high carbon content projects.”

Looking further forward to 2050, the analysis found that around $21 trillion of capex would need to be invested by the private sector in high risk projects; investment which would not pay for itself in a world where demand is lower and that continues to take climate change and air quality seriously.

Investors have already started engaging with listed oil companies regarding concerns over carbon asset risk. The CTI analysis shows that the private oil companies are the major player in funding high cost oil production, where national oil firms have limited interests. If investors demand capital discipline from oil majors as CTI recommends, it will require a refocus on shareholder value instead of a pursuit of production volume. Practically, that could see returns to investors through buy-backs and dividends, rather than investments in high-cost oil exploration.

Carbon Tracker CEO Anthony Hobley says, “CTI’s research has created a new debate around climate change and investment. Numbers are the bedrock of financial markets and it is the numbers that allow you to move from the general to the specific in the investment world. This analysis is another critical tool from CTI to help financial experts identify carbon investment risk in the capital markets today.”