Rebounding crude markets could lure international petrogiants into making multi-billion-dollar capital commitments to projects that are poised to become stranded assets as per-barrel prices slump this decade under the influence of climate action-led government policy and the accelerated build-out of renewables technologies worldwide, according to new calculations from Carbon Tracker.

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The climate finance analyst house found that in a ‘worst case scenario’, where the oil price fell to an average of $40/barrel after 2026, some $500bn of investment would be squandered on hydrocarbon developments that were “no longer commercial” – a figure that would be “double that” in a sub-$30/barrel crude market.

Even using a ‘high investment scenario’ of a breakeven price of $60/barrel – in line with European majors’ present price forecasts – large-scale oil & gas projects now being greenlighted by companies including ExxonMobil, Shell and Petrobras would hit peak output “just as demand starts to decline significantly”, triggering “heavily oversupplied market prices to plummet and high-cost projects to risk becoming stranded”.

“Short-term demand growth would see even greater reductions required subsequently to keep the goals of the Paris Agreement alive. Policy action is likely to strengthen post-COP26, while the rapid adoption of EVs will potentially further weaken demand,” said Axel Dalman, oil & gas analyst at Carbon Tracker and lead author of the report, Managing Peak Oil: Why rising oil prices could create a stranded asset trap as the energy transition accelerates.

“Companies may see high prices as a huge neon sign pointing towards investment in more supply. However, this could become a nightmare scenario if they go ahead with projects which deliver oil around the time that demand stars to decline.

“Shareholders could face catastrophic levels of value destruction as prices fall,” said Dalman, adding: “It wouldn’t be the first time that the industry has fallen into this trap.”

Mike Coffin, head of oil & gas at Carbon Tracker, said: “We know demand will weaken as the policy response to the climate crisis and deployment of new technologies accelerates. For companies to effectively manage this transition, they must resist the temptation to invest heavily on short-term price signals.

“Failure to acknowledge the sea-change risks wasting huge amounts of capital, delivering sub-par returns to investors, and locking-in emissions that take the world beyond Paris goals.”

The Carbon Tracker report spotlighted a number of potentially exposed big-ticket oil and gas developments that are hingeing on markets supporting per-barrel price of over $50 when they come online later this decade. These include: Kuwait Petroleum’s $7.5bn Lower Fars heavy oil project in Kuwait; ExxonMobil-Shell’s $6.7bn Bosi project in Nigeria; Petrobras, Shell and Galp’s $3.1bn Tupi project in Brazil; and ExxonMobil, Equinor, Galp and Sinopec’s $3bn Bacalhau project in Brazil.

The report – which explores a non-linear demand pathway using the Inevitable Policy Response’s forecast policy scenario commissioned by the UN’s PRI (principles for responsible investment), which is consistent with limiting global temperature rise to 1.8°C – concludes that the “best route” is to stick to a conservative approach to long-term investment and meet short-term demand with shale developments “that can deliver new production quickly”.

Lead author of the Carbon Tracker report, Axel Dalman Photo: Carbon Tracker

In the report’s ‘managed investment case’ oil companies would only give approval to long-term projects up to a $30/barrel break-even, meeting short-term demand with fast-track production from shale projects with a break-even of $50/barrel.

“This would satisfy most short-term demand up to 2026, leaving a supply gap of 2 million barrels a day that the [Organisation of Petroleum Exporting Countries] and other producers can meet by deploying spare capacity,” said Dalman.

“This scenario would largely balance the market as demand falls after 2026, meaning that there will be less pressure on long-term oil prices. If they averaged $50/barrel up to 2040 no investment would be wasted. Even if long-term prices fell below this level the report finds that this managed approach would waste far less investment than a high-investment strategy.”

The oil companies that come out in strongest financial fettle from this key phase of the global energy transition, according to Carbon Tracker, will be those that “can manage the peak in demand, while reducing the risk of wasting investment, and preparing to wind down production in line with the Paris Agreement target”.

Mark Fulton, chair of Carbon Tracker’s research council, said: “A sustained surge in the oil price is not necessary as the industry can both meet peak demand and manage its way through that without wasting capital by applying discipline.”