Fossil fuel companies risk wasting up to $2tn (£1.3tn) of investors’ money in the next decade on projects left worthless by global action on climate change and the surge in clean energy, according to a new report.
The world’s nations aim to seal a UN deal in Paris in December to keep global warming below the danger limit of 2C. The heavy cuts in carbon emissions needed to achieve this would mean no new coal mines at all are needed and oil demand peaking in 2020, according to the influential thinktank Carbon Tracker. It found $2.2tn of projects at risk of stranding, ie being left valueless as the market for fossil fuels shrinks.
The report found the US has the greatest risk exposure, with $412bn of projects that could be stranded, followed by Canada ($220bn), China ($179bn) and Australia ($103bn). The UK’s £30bn North Sea oil and gas projects are at risk, the report says, despite government efforts to prop up the sector. Shell, ExxonMobil and Pemex are the companies with the greatest sums potentially at risk, with over $70bn each.
The failure of the fossil fuel industry to address climate change is laid out in a second report on Wednesday, in which senior industry figures state there is “a significant disconnect between the changes needed to reduce greenhouse gas emissions to the [2C] level and efforts currently underway”.
Lord John Browne, former BP boss, Sir Mark Moody-Stuart, former Shell and Anglo American chair and others say there must be “fundamental reassessment of the fossil fuel industry’s business models” and that companies should seize commercial opportunities in low-carbon energy.
The Carbon Tracker report looked at existing and future projects being considered by coal, oil and gas companies up to 2025 and determined which could proceed if carbon emissions are cut to give a 50% chance of keeping climate change under 2C. Many high-cost projects, including Arctic and deepwater drilling, tar sands and shale oil are unneeded and therefore uneconomic in the 2C scenario, the report found, although some are required to replace fields that are already depleting.
“Business history is littered with examples of incumbents – like Kodak and Blockbuster – who fail to see a transition coming,” said Anthony Hobley, chief executive of Carbon Tracker. “Our report offers these companies a warning [about] avoiding significant value destruction.”
For coal, the report found “it is the end of the road for expansion of the sector”, with no new coal mines required anywhere in the world if dangerous climate change is to be avoided.
“In the [2C] scenario, oil demand peaks around 2020,” found the report. “This means the oil sector does not need to continue to grow, which is inconsistent with the narrative of many companies.”
Spending of $1.3tn on new oil projects and $124bn on existing projects is unneeded, it concluded. For gas, demand in a 2C scenario is significantly lower than companies forecast, with $459bn of new projects and $73bn of existing projects surplus to requirements.
The second report is produced by Critical Resource, a firm that advises fossil fuel companies, and involved senior industry and climate figures, including former European climate commissioner Connie Hedegaard.
The report said “meeting [a 2C] target will result inevitably in steep declines in fossil fuel production over the coming decades” but that the “industry has so far generally been locked in defensive mode”. It added: “While most companies recognise the importance of climate change to their businesses, there is little evidence that most are altering their strategic plans.”
However, it concluded: “Companies [should] urgently develop strategic plans to identify how they can compete commercially in a [2C] world. The aim is to unleash the industry’s creativity and innovation in finding profitable solutions.”
“There is a very big gap between what the industry needs to do to compete in a 2C world and what they are doing,” said Daniel Litvin, MD of Critical Resources. “It may be the case that the most effective use of shareholder funds is to pay out more dividends and invest less.” But he said fossil fuel companies’ expertise in managing large projects across the world and long-term relationships with governments could give them an advantage in low-carbon projects.
Litvin said the fossil fuel industry has been too slow in developing carbon capture and storage technology, which could bury emissions but has yet to be proven at commercial scale. “CCS is critically important,” he said. “It is the only way gas or coal will have a long-term future. Companies have waited for governments to move, but governments largely haven’t, yet the industry is facing an existential threat.”
There are signs of structural shifts towards low-carbon energy in the utility sector, following moves from Enel and E.On, and Litvin said such a shift could happen in the fossil fuel sector with ambitious leadership and the right signals from the Paris climate summit.
“The critical mass point could be as soon as a couple of years down the road, which is pretty soon for an industry that has been around for 100 years,” he said.