ExxonMobil and its peers risk blowing $2.3 trillion on oil projects that will not be needed if the world hits peak demand in the next decade.
A new report from The Carbon Tracker Initiative analyzed what would happen if the oil market saw demand peak by 2025, a scenario that would be compatible with limiting global warming to just 2 degrees Celsius. The headline conclusion is that about one-third of the global oil industry’s potential spending – or about $2.3 trillion – would not be needed. In other words, the oil industry is on track to waste a massive pile of money if demand peaks in less than ten years.
Of course, the vulnerability to peak demand varies by company. Carbon Tracker surveyed 69 global oil and gas companies, and their exposures range from 10 to 60 percent of their potential spending. That is, 10 to 60 percent of their spending could be unnecessary or wasteful if demand peaks by the middle of the next decade. The latest report adds more detail to the “stranded assets” theory – the notion that large volumes of oil will be left in the ground because demand peaks, whether because of alternatives or climate regulation, or both.
Some medium-sized companies like Southwestern Energy and Apache Corp. topped the list with 60 to 70 percent of their potential upstream capex vulnerable in a peak demand scenario. As for the oil majors, ExxonMobil would be the most vulnerable to peak demand, with about half of its potential spending through 2025 unneeded. Other oil majors fare a bit better, although not by much. Chevron, Eni and Shell could see 30 to 40 percent of their capex spent on wasted projects.
Which projects are subject to redundancy largely comes down to economics. U.S. shale drilling has seen dramatic costs declines, pushing some higher-cost projects out of the range of viability in this scenario.
Intriguingly, Carbon Tracker concludes that there should not be any spending growth from 2016 levels. The global oil industry savagely cut spending between 2014 and 2016, a response to the plunge in oil prices. A large number of projects were scrapped, exploration and drilling dried up, and very few new greenfield projects moved forward. With spending still roughly stuck at a fraction of the pre-2014 level, Carbon Tracker says that it needs to be frozen today’s levels and not rise as many companies have planned.
Importantly, however, Carbon Tracker says that about two-thirds of the potential oil and gas production that could find itself unneeded in a peak demand scenario is controlled by the private sector. In other words, state-owned national oil companies from the likes of OPEC are much more likely to hold onto market share, while expensive projects under the control of the oil majors would run into trouble.
This matters because some large-scale projects, such as oil sands and deepwater, can produce for decades. If demand peaks, some of them might not be needed for the full potential lifespan that companies have planned.
The upshot is that that publicly-listed oil and gas companies need to be more transparent about their long-term strategies, which Carbon Tracker says makes “it difficult for investors to understand and test the degree of alignment with a 2D scenario. Companies may have already decided to put a number of high cost projects on hold, but more can be done to tell this story to their shareholders.”
Peak demand is a possibility that until recently, few had considered likely. But it isn’t just environmentalists – even some oil companies see threats looming on the horizon, although they differ widely on timeframes. Executives from Royal Dutch Shell have voiced some agreement with the Carbon Tracker scenario, predicting demand will peak in the next decade. BP, on the other hand, sees demand rising through 2040
But, for now, there are only small signs that the oil majors are preparing for this eventuality. They have fought against shareholder resolutions calling for more disclosure of their vulnerabilities to climate change regulation, although there have been a few high-profile defeats recently.
At the same time, the oil majors are hedging their bets. There has been a huge exodus by the oil majors from the Canadian oil sands this year, as they divert money into shorter-term shale projects. They are also pouring money increasingly into natural gas, and in a few minor cases, renewable energy.
However, by and large, they are still planning to produce oil for decades to come. That may work out for them. But if oil demand hits a peak in the 2020s, they will waste hundreds of billions of dollars on projects that are no longer needed.
By Nick Cunningham of Oilprice.com
