US supermajors ExxonMobil, ConocoPhillips and Chevron are leading a pack of international oil companies (IOCs) that risk stranding over $1trn in assets over the next decade due to the slow pace of their shifting of capital into renewable energy projects, according to a new report from Carbon Tracker.

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The financial think-tank said IOCs have “not woken up to the ‘seismic implications’ of the International Energy Agency’s finding” that investment in new oil & gas developments must be halted immediately if global heating is to be limited to 1.5°C above pre-industrial levels, which would result in production cuts of “50% or more” for half of world’s 40 largest listed oil & gas companies.

ConocoPhillips is the oil major “most exposed” to such production collapses as it is facing a drop of 69%. It is followed by Chevron (52%), Eni (49%), Shell (44%), BP (33%), ExxonMobil (33%) and TotalEnergies (30%).

Carbon Tracker, in its report Adapt to Survive: Why oil companies must plan for net zero and avoid stranded assets, warned IOCs continue to “bet against” global climate action, spotlighting some $18bn of investment approved in 2020 in major projects that are “not even consistent with limiting warming to 1.65°C”, while even IOCs with net zero commitments, such as as Eni, Shell, BP, TotalEnergies and Equinor, are still planning to explore for new hydrocarbons.

“Oil & gas companies are betting against the success of global efforts to tackle climate change. If they continue with business-as-usual investment they risk wasting more than a trillion dollars on projects which will not be competitive in a low-carbon world,” said Mike Coffin, head of oil, gas and mining at Carbon Tracker, pointing to $70bn of Exxon’s planned capital expending being in the frame to be stranded in a “low-carbon world” by 2030.

“If the world is to avert climate catastrophe, demand for fossil fuels must fall sharply. Companies and investors must prepare for a world of lower long-term fossil fuel prices and a smaller oil & gas industry, and recognise now the risk of stranded assets that this creates.”

In total, “more than $1trn of business-as-usual investment is at risk”, according to Carbon Tracker’s calculations, including $490bn in shale/tight oil projects and $200bn in deepwater projects.

Carbon Tracker associate analyst Axel Dalman said: “In general, no new projects and a rapid decline in production could deliver a serious shock to company valuations, as new project options are rendered effectively worthless and future cashflows are reduced. Lower equity valuations would in turn increase the cost of capital and insolvency risk.

“It is crucial for companies to have a strong transition plan, winding down oil and gas activities in an orderly manner and either diversifying into low-carbon businesses or returning capital to shareholders.”

The value for IOCs of shifting capital into renewables portfolios to offset falling revenues from oil & gas production, Dalman said, “remains an open question”.

It’s important to stress that companies will find different ways of adapting to the energy transition. Whether they should shift towards renewables or simply wind down and return capital to shareholders, or some mix of the two, is an open question from our perspective,” he told Recharge.

“What’s crucial is that companies recognise the need for fossil fuel demand to fall sharply and prepare accordingly, minimising stranded asset risk before it’s too late.”

Exxon example

“Exxon is a good example. Our modelling suggests that $70bn of Exxon’s business-as-usual upstream capex could be at risk of becoming stranded in a low-carbon world over the next decade, and the company is planning just $3bn on ‘low-carbon’ technologies over the next five years.”

European majors that have set out energy transition strategies “could arguably be doing more as well”, Dalman added, citing TotalEnergies as planning to allocate “at most $2-3bn annually to renewables this decade, only slightly more than the amount of business-as-usual upstream capex that appears at risk of stranding in a low-carbon world according to our modelling.”

The suggestion, he adds, is that “there’s still scope to shift even more capital away from uncompetitive fossil fuel assets towards more resilient low-carbon alternatives, or indeed to simply return it to shareholders instead.”

Among the megaprojects planned for construction that are “not even compatible with a 1.65°C target” are:

  • ExxonMobil’s $5.5bn Payara and $1.8bn Pacora oil fields in Guyana,
  • Petrobras’ $4bn Itapu oil field in Brazil,
  • Woodside’s $3.9bn Sangomar oil field in Senegal, and
  • Petrobras, Shell and TotalEnergies’ $2.7bn Mero 3 oil field in Brazil.

“The present circumstances are particularly dangerous. Oil prices – currently at around $70/barrel – are tantalisingly high compared with last year” as the global economy recovers from Covid and OPEC keeps a tight grip on supply,” said the report, which flags “this may encourage companies to approve new projects in the hope of cashing in on a new commodities ‘supercycle’.”

Dalman said: “Investors have a crucial role to play in driving the changes to the oil and gas industry’s behaviour necessary to reduce their exposure to transition risks. If they want to align with a 1.5°C climate target, it’s crucial that they only hold companies with robust plans to reduce production of oil & gas and approve no new projects.

“Investors seeking to align with other temperature outcomes must ensure that companies demonstrate how any projects they approve are compatible with a low-demand world, not just short-term prices.”

The Carbon Tracker report used the IEA’s ‘net zero emissions by 2050’scenario to analyse the implications of a 1.5°C demand pathway for the world’s 40 largest listed IOCs, as well as modelling global oil and gas supply under a 1.65°C temperature rise, with a benchmark assumption that projects with the lowest production costs would be most competitive, while those with higher breakeven prices run the risk of becoming stranded assets.