how can investors prepare for the low-carbon...
TRANSCRIPT
![Page 1: how can investors prepare for the low-carbon transition?broentilframtiden.com/wp-content/uploads/2015/06/... · Capex trials & tribulations Shell in the Arctic: $8 bn & wondering](https://reader034.vdocuments.net/reader034/viewer/2022050423/5f9216a304c53a0c283a6dcf/html5/thumbnails/1.jpg)
Navigating stranded assetshow can investors prepare for the
low-carbon transition?
Bridge to the Future, Oslo
Mark Campanale, Founder
Carbon Tracker Initiativewww.carbontracker.org
@carbonbubble #strandedassets
![Page 2: how can investors prepare for the low-carbon transition?broentilframtiden.com/wp-content/uploads/2015/06/... · Capex trials & tribulations Shell in the Arctic: $8 bn & wondering](https://reader034.vdocuments.net/reader034/viewer/2022050423/5f9216a304c53a0c283a6dcf/html5/thumbnails/2.jpg)
Oil facing a culture shock
• Demand for oil is set
to peak around 2020
• But the industry is
betting on continued
rise in both prices
and demand!
#strandedassets #ArcticCOP21
![Page 3: how can investors prepare for the low-carbon transition?broentilframtiden.com/wp-content/uploads/2015/06/... · Capex trials & tribulations Shell in the Arctic: $8 bn & wondering](https://reader034.vdocuments.net/reader034/viewer/2022050423/5f9216a304c53a0c283a6dcf/html5/thumbnails/3.jpg)
Carbon budget – clear overhang above level
giving a 50% chance of limiting warming to 2⁰C
![Page 4: how can investors prepare for the low-carbon transition?broentilframtiden.com/wp-content/uploads/2015/06/... · Capex trials & tribulations Shell in the Arctic: $8 bn & wondering](https://reader034.vdocuments.net/reader034/viewer/2022050423/5f9216a304c53a0c283a6dcf/html5/thumbnails/4.jpg)
![Page 5: how can investors prepare for the low-carbon transition?broentilframtiden.com/wp-content/uploads/2015/06/... · Capex trials & tribulations Shell in the Arctic: $8 bn & wondering](https://reader034.vdocuments.net/reader034/viewer/2022050423/5f9216a304c53a0c283a6dcf/html5/thumbnails/5.jpg)
RESOURCES: the estimated amount of hydrocarbon contained in the depositRESERVES: the amount of resources that are technologically and economically feasible to extract
For more technical definitions, please visit www.carbontracker.org
Carbon budget deficit for listed companies
Less than 900 GtCO2 can be burnt to keep global
warming below 2 degrees celsius
![Page 6: how can investors prepare for the low-carbon transition?broentilframtiden.com/wp-content/uploads/2015/06/... · Capex trials & tribulations Shell in the Arctic: $8 bn & wondering](https://reader034.vdocuments.net/reader034/viewer/2022050423/5f9216a304c53a0c283a6dcf/html5/thumbnails/6.jpg)
When will we break the carbon budget?
Such Carbon Budget could be broken in few decades
![Page 7: how can investors prepare for the low-carbon transition?broentilframtiden.com/wp-content/uploads/2015/06/... · Capex trials & tribulations Shell in the Arctic: $8 bn & wondering](https://reader034.vdocuments.net/reader034/viewer/2022050423/5f9216a304c53a0c283a6dcf/html5/thumbnails/7.jpg)
Listed entities could use up most of the carbon
budget if production continues at same rate
Listed fossil fuel potential production to 2050
But there is also the state owned production which would at least double that, exceeding
the carbon budget to 2050 of c. 900 GtCO2
![Page 8: how can investors prepare for the low-carbon transition?broentilframtiden.com/wp-content/uploads/2015/06/... · Capex trials & tribulations Shell in the Arctic: $8 bn & wondering](https://reader034.vdocuments.net/reader034/viewer/2022050423/5f9216a304c53a0c283a6dcf/html5/thumbnails/8.jpg)
There is massive potential for fossil fuel
demand destruction and creation of stranded assets
Businesses need to move from a growth-based
business model to an ex-growth one
![Page 9: how can investors prepare for the low-carbon transition?broentilframtiden.com/wp-content/uploads/2015/06/... · Capex trials & tribulations Shell in the Arctic: $8 bn & wondering](https://reader034.vdocuments.net/reader034/viewer/2022050423/5f9216a304c53a0c283a6dcf/html5/thumbnails/9.jpg)
• The Paris Agreement is to limit global average warming to “well
below” 2˚C.
• The goal for net zero GHGs after 2050 implies an even earlier
phasing out of CO2 emissions by as early as 2050.
• 187 countries have submitted plans that cover around 95% of
global CO2 emissions and include China and India.
• These INDCs commit the world to 10% lower fossil fuel demand
than BAU to 2030
The Paris Climate Agreement sends a
clear signal to markets
The direction of travel towards
low-carbon is clear…
![Page 10: how can investors prepare for the low-carbon transition?broentilframtiden.com/wp-content/uploads/2015/06/... · Capex trials & tribulations Shell in the Arctic: $8 bn & wondering](https://reader034.vdocuments.net/reader034/viewer/2022050423/5f9216a304c53a0c283a6dcf/html5/thumbnails/10.jpg)
Note: MTOE is million tons of oil equivalent. Source: IEA
Under 2 degree scenario, or 450 ppm
• Coal consumption in 2030 is around 33% below the New Policies• For oil and gas, the equivalent figures are around 25%. • By 2040, those decline figures increase to 80%, 50% and 40%.
Are fossil fuel companies betting
on an uncertain future?
![Page 11: how can investors prepare for the low-carbon transition?broentilframtiden.com/wp-content/uploads/2015/06/... · Capex trials & tribulations Shell in the Arctic: $8 bn & wondering](https://reader034.vdocuments.net/reader034/viewer/2022050423/5f9216a304c53a0c283a6dcf/html5/thumbnails/11.jpg)
Expectations for the future fuel supply mix
Demand - Energy forecasting mis-read:fossil fuel industry predicts a high carbon future
Incumbents are not willing to accept that they have peaked
and adjust to a smaller market for their products.
![Page 12: how can investors prepare for the low-carbon transition?broentilframtiden.com/wp-content/uploads/2015/06/... · Capex trials & tribulations Shell in the Arctic: $8 bn & wondering](https://reader034.vdocuments.net/reader034/viewer/2022050423/5f9216a304c53a0c283a6dcf/html5/thumbnails/12.jpg)
• BP is projecting a 24% increase in fossil fuel use
by 2035
• Exxon expects a 27% increase by 2040
• Shell’s ‘Current Outlook’ 37% to 2040
• OPEC is clinging valiantly to 54% to 2040
Are fossil fuel companies betting on an
uncertain future?
…Yet
Companies are overstating energy demand, underestimating an
increasing role for renewables and ignoring looming changes in
energy.
Based on latest available companies forecasts, Jan 2016
![Page 13: how can investors prepare for the low-carbon transition?broentilframtiden.com/wp-content/uploads/2015/06/... · Capex trials & tribulations Shell in the Arctic: $8 bn & wondering](https://reader034.vdocuments.net/reader034/viewer/2022050423/5f9216a304c53a0c283a6dcf/html5/thumbnails/13.jpg)
Which are the fossil fuel companies with resources in high cost, high carbon areas at risk of committing too much capex to uneconomic projects?
Supply - Carbon Supply Cost Curves
![Page 14: how can investors prepare for the low-carbon transition?broentilframtiden.com/wp-content/uploads/2015/06/... · Capex trials & tribulations Shell in the Arctic: $8 bn & wondering](https://reader034.vdocuments.net/reader034/viewer/2022050423/5f9216a304c53a0c283a6dcf/html5/thumbnails/14.jpg)
Capex trials & tribulations
Shell in the Arctic:
$8 bn & wondering
Petrobras & the sub-salt:
$221 bn over 5 yearsCanada & the tar sands:
50 year financing? Really?
Kashagan
$50 bn & counting
![Page 15: how can investors prepare for the low-carbon transition?broentilframtiden.com/wp-content/uploads/2015/06/... · Capex trials & tribulations Shell in the Arctic: $8 bn & wondering](https://reader034.vdocuments.net/reader034/viewer/2022050423/5f9216a304c53a0c283a6dcf/html5/thumbnails/15.jpg)
Oil majors recently slashed their capital expenditure
Oil-equivalent production (oil & gas)
Total Capex
![Page 16: how can investors prepare for the low-carbon transition?broentilframtiden.com/wp-content/uploads/2015/06/... · Capex trials & tribulations Shell in the Arctic: $8 bn & wondering](https://reader034.vdocuments.net/reader034/viewer/2022050423/5f9216a304c53a0c283a6dcf/html5/thumbnails/16.jpg)
High-cost projects owned by private listed corporations
Highest
proportion
of projects
requiring
above
$80/barrel
are owned
by
listed
corporations
![Page 17: how can investors prepare for the low-carbon transition?broentilframtiden.com/wp-content/uploads/2015/06/... · Capex trials & tribulations Shell in the Arctic: $8 bn & wondering](https://reader034.vdocuments.net/reader034/viewer/2022050423/5f9216a304c53a0c283a6dcf/html5/thumbnails/17.jpg)
Source: Goldman Sachs Global Investment Research. Annotated by Tom Randall/Bloomberg
How Profitable Is $70 Oil? Or $50 Oil?
![Page 18: how can investors prepare for the low-carbon transition?broentilframtiden.com/wp-content/uploads/2015/06/... · Capex trials & tribulations Shell in the Arctic: $8 bn & wondering](https://reader034.vdocuments.net/reader034/viewer/2022050423/5f9216a304c53a0c283a6dcf/html5/thumbnails/18.jpg)
Example: BP’s future projects, how
profitable at $32 a barrel?
• BP’s future projects that are yet to be approved have breakeven prices that range from around $20 to over $100
• So the more the company invests, the lower the incremental margin will be • BP’s case, roughly half of its projects would lose money at current prices
BP has a portfolio of projects with a wide range of costs
Graph based on BP planning scenarios, excluding Russian and onshore US, using Wood Mackenzie data
![Page 19: how can investors prepare for the low-carbon transition?broentilframtiden.com/wp-content/uploads/2015/06/... · Capex trials & tribulations Shell in the Arctic: $8 bn & wondering](https://reader034.vdocuments.net/reader034/viewer/2022050423/5f9216a304c53a0c283a6dcf/html5/thumbnails/19.jpg)
Oil Carbon Supply Cost CurveWe analyse the carbon budget by looking at the most
expensive and most carbon intensive projects
#strandedassets #ArcticCOP21
![Page 20: how can investors prepare for the low-carbon transition?broentilframtiden.com/wp-content/uploads/2015/06/... · Capex trials & tribulations Shell in the Arctic: $8 bn & wondering](https://reader034.vdocuments.net/reader034/viewer/2022050423/5f9216a304c53a0c283a6dcf/html5/thumbnails/20.jpg)
Resulting in planned projects that
make no financial sense...
With OPEC members not
cutting production, high-
cost Arctic projects are a
trap waiting in the danger
zone.
$69 billion of capital
expenditure in Arctic oil
projects are surplus to
requirement in a 2°C world
This is over 50% of
existing and proposed
projects!#strandedassets #ArcticCOP21
![Page 21: how can investors prepare for the low-carbon transition?broentilframtiden.com/wp-content/uploads/2015/06/... · Capex trials & tribulations Shell in the Arctic: $8 bn & wondering](https://reader034.vdocuments.net/reader034/viewer/2022050423/5f9216a304c53a0c283a6dcf/html5/thumbnails/21.jpg)
Resulting in planned projects that
make no financial sense…
$20 billion of
capital expenditure
in Arctic gas
projects are surplus
to requirement in a
2°C world
This is over 68% of
existing and
proposed gas
projects!
#strandedassets #ArcticCOP21
![Page 22: how can investors prepare for the low-carbon transition?broentilframtiden.com/wp-content/uploads/2015/06/... · Capex trials & tribulations Shell in the Arctic: $8 bn & wondering](https://reader034.vdocuments.net/reader034/viewer/2022050423/5f9216a304c53a0c283a6dcf/html5/thumbnails/22.jpg)
… and no environmental sense
• 1.6 Gt CO2 could be avoided from not developing these unneeded
oil and gas projects – the equivalent of 22 coal mines
#strandedassets #ArcticCOP21
![Page 23: how can investors prepare for the low-carbon transition?broentilframtiden.com/wp-content/uploads/2015/06/... · Capex trials & tribulations Shell in the Arctic: $8 bn & wondering](https://reader034.vdocuments.net/reader034/viewer/2022050423/5f9216a304c53a0c283a6dcf/html5/thumbnails/23.jpg)
Ranking of companies by unneeded capex under
450 Scenario 2015–25 ($bn)
![Page 24: how can investors prepare for the low-carbon transition?broentilframtiden.com/wp-content/uploads/2015/06/... · Capex trials & tribulations Shell in the Arctic: $8 bn & wondering](https://reader034.vdocuments.net/reader034/viewer/2022050423/5f9216a304c53a0c283a6dcf/html5/thumbnails/24.jpg)
No new coal
mines required
Demand peak
in 2020,
no need for
continued growth
Growth will
disappoint,
esp. capital
intensive
LNG
The $2trn stranded assets danger zone:
How investor returns are at risk
Nov 2015
Download full report at
http://www.carbontracker.org/report/stranded-assets-danger-zone/
$220bn excess capex
$1.4tn excess capex$520bn excess capex
![Page 25: how can investors prepare for the low-carbon transition?broentilframtiden.com/wp-content/uploads/2015/06/... · Capex trials & tribulations Shell in the Arctic: $8 bn & wondering](https://reader034.vdocuments.net/reader034/viewer/2022050423/5f9216a304c53a0c283a6dcf/html5/thumbnails/25.jpg)
![Page 26: how can investors prepare for the low-carbon transition?broentilframtiden.com/wp-content/uploads/2015/06/... · Capex trials & tribulations Shell in the Arctic: $8 bn & wondering](https://reader034.vdocuments.net/reader034/viewer/2022050423/5f9216a304c53a0c283a6dcf/html5/thumbnails/26.jpg)
Dealing with the “Carbon Bubble”
1. Decarbonising the economy has
to start with contracting the fossil
fuel industry
2. Cancelling the next phase of
fossil fuel projects requires
investors to be in agreement
3. Fossil fuel companies now have
to plan an orderly transition out
4. Investors have to ensure climate
competent company boards
![Page 28: how can investors prepare for the low-carbon transition?broentilframtiden.com/wp-content/uploads/2015/06/... · Capex trials & tribulations Shell in the Arctic: $8 bn & wondering](https://reader034.vdocuments.net/reader034/viewer/2022050423/5f9216a304c53a0c283a6dcf/html5/thumbnails/28.jpg)
Renewables share of new annual electricity additions: by sector