2 degrees of separation:

Transition risk for oil & gas in a low carbon world

Executive summary


Carbon budget alignment: company by company

This analysis gives a window into whether the supply options of the largest publicly traded oil and gas producers are aligned with demand levels consistent with various scenarios of carbon constraint, resulting in different climate outcomes.

By allocating the carbon budget to potential oil and gas projects, through applying the economic logic of a carbon supply cost curve, it is possible to identify which companies have the highest exposure to potential capital expenditure (capex) to 2025. This report provides a snapshot of the potentially excess capex spend for 72 global oil and gas companies – highlighting the wide-ranging degree of exposure amongst companies in the sector.

This report updates 2017’s “2 Degrees of Separation” analysis using new 2018 data and adjusted methodology in response to feedback.

Excess capex

Carbon Tracker’s March 2018 report “Mind the Gap: the $1.6 trillion energy transition risk” looked at capex in the oil, gas and thermal coal industries under different scenarios – a 2ºC scenario and a 1.75ºC scenario that arguably better aligns with the Paris Agreement’s goal of “well below 2ºC” and to “pursue efforts” for 1.5ºC. At the industry level:

  • Compared to the 2ºC scenario, the 1.75°C scenario puts a further $0.7tr capex at risk over the period 2018-2025 for the three fossil fuels. Compared to the IEA’s central New Policies Scenario (NPS, aligned with 2.7ºC warming), the 1.75ºC scenario requires 33% less capex and the 2ºC scenario 18% less.
  • Coal carries disproportionate danger to the climate, but absolute capex dollars are low compared to oil and gas. Oil and gas account for over 90% of total investment under each scenario, and of the intervals between each scenario
  • New oil and gas projects are needed, but not all of them. Nearly a quarter of investment dollars in new projects that go ahead in the NPS don’t fit in the 2ºC scenario, and over 40% of potential capex is surplus to requirements in the 1.75ºC scenario.
  • No investment in new greenfield oil sands projects is required before 2025 under either 2ºC or 1.75ºC.

This analysis extends the Mind the Gap analysis and looks at the company level for a basket of the largest publicly listed oil and gas producers, and finds that while some companies have substantially all of their potential capex within even a 1.75ºC budget, at the other end of the scale others have a majority of their potential capex outside a 1.75ºC or 2ºC budget.

Projected capex under 2D scenario

Source: Rystad Energy, CTI analysis

Identifying the potential winners and losers

This analysis focuses on the metric “percentage of potential capex outside budget”. This can effectively give investors a sense of what proportion of the company’s investment plans may fail to deliver an acceptable return in the scenario of a world limited to a 1.75°C or 2°C global warming outcome – i.e. become “stranded”. This can be interpreted in different ways according to investment strategies and policies.

In terms of risk management, some may prefer a degree of optionality – but the higher the level of unneeded capex, the more growth strategies would have to be tempered. For investors seeking to align with a relatively benign climate outcome, it is clear that some companies are better positioned than others.

Increased transparency required

Oil and gas companies have options in terms of which new projects they plan to develop in the future. At present there is little transparency of these strategies, making it difficult for investors to understand and test a company’s alignment with a 2ºC (or lower) 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.

Taskforce on Climate-related Financial Disclosures (TCFD) provides reference point

The Financial Stability Board’s (FSB) TCFD recommendations recognise the value of 2ºC scenario analyses, and particularly highlight disclosure of 2ºC reference scenario tests as one of the key ways to improve and help standardise company reporting around future climate risks.

While such tests are increasingly common amongst larger oil and gas companies, this research also proves that it is possible even for small organisations to produce an analysis of relative positioning under a 2ºC reference scenario. With a number of investment institutions and companies already committed to following the final recommendations, the impetus for those left to follow suit is clear.

While including a 2ºC scenario in this analysis, we also respond to investor interest in higher ambition scenarios with the addition of a 1.75ºC scenario.

Quartile Company (alphabetically by quartile) Country of headquarters % of NPS upstream capex outside 2˚C/SDS
budget (% band)
% of NPS upstream capex outside 1.75˚C/B2DS budget
(% band)
4 Apache United States 30% - 40% 50% - 60%
4 Concho Resources United States 40% - 50% 60% - 70%
4 Crescent Point Energy Canada 40% - 50% 40% - 50%
4 Devon Energy United States 20% - 30% 30% - 40%
4 Ecopetrol Colombia 20% - 30% 40% - 50%
4 Energen United States 50% - 60% 50% - 60%
4 ExxonMobil United States 20% - 30% 40% - 50%
4 Hess United States 20% - 30% 40% - 50%
4 Imperial Oil (Public traded part) Canada 20% - 30% 60% - 70%
4 Murphy Oil United States 20% - 30% 30% - 40%
4 Petrobras Brazil 20% - 30% 40% - 50%
4 Repsol Spain 20% - 30% 30% - 40%
4 Sinopec China 30% - 40% 40% - 50%
4 Surgutneftegas Russia 20% - 30% 40% - 50%
4 Total France 20% - 30% 30% - 40%
4 Tullow Oil United Kingdom 30% - 40% 40% - 50%
4 Vermilion Energy Canada 30% - 40% 50% - 60%
4 WPX Energy United States 40% - 50% 60% - 70%
 
3 Aker BP Norway 20% - 30% 40% - 50%
3 Canadian Natural Resources (CNRL) Canada 20% - 30% 20% - 30%
3 Chevron United States 10% - 20% 30% - 40%
3 CNOOC China 20% - 30% 30% - 40%
3 Encana Canada 10% - 20% 30% - 40%
3 Eni Italy 10% - 20% 30% - 40%
3 Galp Energia SA Portugal 10% - 20% 40% - 50%
3 Gazprom Russia 10% - 20% 30% - 40%
3 Gulfport Energy United States 20% - 30% 50% - 60%
3 Husky Energy Canada 20% - 30% 60% - 70%
3 Lukoil Russia 20% - 30% 40% - 50%
3 Marathon Oil United States 10% - 20% 50% - 60%
3 OMV Austria 20% - 30% 40% - 50%
3 PetroChina China 10% - 20% 20% - 30%
3 Rosneft Russia 20% - 30% 40% - 50%
3 Shell Netherlands 20% - 30% 30% - 40%
3 Statoil Norway 20% - 30% 40% - 50%
3 Suncor Energy Canada 10% - 20% 10% - 20%
 
2 Anadarko United States 0% - 10% 10% - 20%
2 Arc Resources Canada 0% - 10% 50% - 60%
2 BP United Kingdom 10% - 20% 20% - 30%
2 Cenovus Energy Canada 10% - 20% 20% - 30%
2 Chesapeake United States 0% - 10% 20% - 30%
2 ConocoPhillips United States 0% - 10% 30% - 40%
2 Continental Resources United States 0% - 10% 20% - 30%
2 Diamondback Energy United States 10% - 20% 10% - 20%
2 Inpex Japan 0% - 10% 10% - 20%
2 Newfield Exploration United States 10% - 20% 20% - 30%
2 Noble Energy United States 0% - 10% 20% - 30%
2 QEP Resources United States 10% - 20% 50% - 60%
2 Range Resources United States 10% - 20% 30% - 40%
2 RSP Permian United States 0% - 10% 0% - 10%
2 Santos Australia 0% - 10% 10% - 20%
2 Tatneft Russia 0% - 10% 10% - 20%
2 Tourmaline Oil Canada 0% - 10% 0% - 10%
2 Woodside Australia 10% - 20% 10% - 20%
 
1 Antero Resources United States 0% - 10% 0% - 10%
1 BHP Billiton Australia 0% - 10% 20% - 30%
1 Cabot Oil and Gas United States 0% - 10% 0% - 10%
1 Cimarex Energy United States 0% - 10% 20% - 30%
1 EOG Resources United States 0% - 10% 20% - 30%
1 EQT Corporation United States 0% - 10% 10% - 20%
1 Lundin Petroleum Sweden 0% - 10% 0% - 10%
1 Novatek Russia 0% - 10% 20% - 30%
1 Oil Search Papua New Guinea 0% - 10% 0% - 10%
1 Origin Energy Australia 0% - 10% 0% - 10%
1 Oxy United States 0% - 10% 30% - 40%
1 Parsley Energy United States 0% - 10% 40% - 50%
1 Peyto Canada 0% - 10% 10% - 20%
1 Pioneer Natural Resources United States 0% - 10% 0% - 10%
1 Sasol South Africa 0% - 10% 10% - 20%
1 Saudi Aramco Saudi Arabia 0% - 10% 0% - 10%
1 Seven Generations Energy Canada 0% - 10% 0% - 10%
1 Southwestern Energy United States 0% - 10% 0% - 10%