Current Government Policies Risk $1.6 Trillion Energy Transition Risk

March 9th, 2018 by Joshua S Hill

Fossil fuel companies are at risk of wasting $1.6 trillion worth of expenditures through to 2025 if they base their emissions policies on current government policies which will likely result in global warming increasing to 2.7° degrees above pre-industrial levels, as compared to the 1.5° degree scenario of the Paris Climate Agreement.

This is the warning highlighted in a new report published this week by London-based think-tank Carbon Tracker entitled Mind the gap: the $1.6 trillion energy transition risk. The report, for the first time, models and analyzes three scenarios published by the International Energy Agency (IEA): the Beyond 2 Degrees Scenario (B2DS) which is currently aligned with a 1.75°C global warming outcome; the Sustainable Development Scenario (SDS) which is aligned with a 2°C warming outcome; and the New Policies Scenario (NPS) which is aligned with 2.7°C warming outcome, and which is consistent with current global government policies.

The report warns that if fossil fuel companies base their business decisions on emissions policies currently in place and announced by governments, instead of on international climate goals, they are at risk of wasting $1.6 trillion in capital expenditures by 2025. Or, to look at it in another way, the 1.75°C B2DS requires $1.6 trillion less capital expenditure between 2018 and 2025 than does the 2.7°C NPS, and $0.9 trillion less than the 2°C SDS.

“At present, governments’ policies fall a long way short of the ultimate goal committed to at Paris, but we should expect a ratcheting up of international efforts,” said report author Andrew Grant, senior analyst at Carbon Tracker. “Companies that misread the signals and overinvest in marginal oil, gas and coal projects based on a false sense of security could destroy shareholder value worth billions of dollars.”

Carbon Tracker compared demand for the three primary fossil fuels — oil, gas, and coal — in a 1.75°C world against demand in a 2.7°C world, focusing on fossil fuel production through to 2035 and capital investment through to 2025. Per fossil fuel, the authors of the report found:

Oil — $1.3 trillion of future spending is currently at risk. Specifically, any new oil sands investments will be uneconomic, and only a small amount of potential new Arctic and extra heavy oil investment will actually go ahead. The United States remains the most exposed with $545 billion at risk, followed by Canada with $110 billion at risk, China with $107 billion at risk, Russia with $85 billion at risk, and Brazil with $70 billion at risk.

— $1.3 trillion of future spending is currently at risk. Specifically, any new oil sands investments will be uneconomic, and only a small amount of potential new Arctic and extra heavy oil investment will actually go ahead. The United States remains the most exposed with $545 billion at risk, followed by Canada with $110 billion at risk, China with $107 billion at risk, Russia with $85 billion at risk, and Brazil with $70 billion at risk. Gas — $228 billion of future investments are currently at risk and half of the potential future spending of European gas development could be rendered uneconomic at the same time that there will be no need for new liquefied natural gas (LNG) capacity for a decade. Currently, Russia remains the most exposed with $57 billion at risk, followed by the United States with $32 billion at risk, Qatar with $14 billion at risk, and Australia, Canada, and Norway all with $13 billion at risk.

— $228 billion of future investments are currently at risk and half of the potential future spending of European gas development could be rendered uneconomic at the same time that there will be no need for new liquefied natural gas (LNG) capacity for a decade. Currently, Russia remains the most exposed with $57 billion at risk, followed by the United States with $32 billion at risk, Qatar with $14 billion at risk, and Australia, Canada, and Norway all with $13 billion at risk. Coal — $62 billion is at risk. The authors of the report deem that no new coal mines will be viable, except in India as a means to replace imports, and no new export coal production is necessary. China stands to risk $41 billion and the United States $10 billion.

Another important finding from the report is that private investors are at greater risk than state-owned companies, being exposed to 88% of the spending on unnecessary oil and gas projects. “The range of competitive positioning along the cost curves within each fossil fuel means that there are strong differences in outcomes between the companies that hold those resources,” the authors of the report explain. “The majority of oil & gas reserves might be held by state-controlled companies, but we find that private investors have disproportionate exposure to the higher risk portions that might be affected by demand destruction as shown below.”

It is also worthwhile noting that the authors determined that there are new oil and gas projects currently needed, even in the low-demand scenarios. Material investments for new oil and gas projects is required even in the low-demand scenarios — $1.6 trillion in the B2DS and $2.1 trillion in the SDS. But — and this is the important “but” — not all the planned and announced projects are necessary. Specifically, almost a quarter of investments into new projects as part of the NPS don’t fit in the SDS, and over 40% don’t fit into the B2DS.

“The energy industry is entering an era of uncertainty,” added Andrew Grant. “Technological developments and climate policy are combining to slow fossil fuel demand in a way that is unprecedented in the modern world, leading investors to call for businesses to be tested against scenarios that reflect higher levels of climate ambition.

“Energy companies must be transparent about their thinking surrounding low-carbon outcomes, and convince shareholders that they are taking these risks seriously.”











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