The biggest publicly-traded oil and gas firms need to slash their combined production by over one-third in the next two decades to meet world climate commitments, says a new report by Carbon Tracker.
The industry needs to tamp down greenhouse gas emissions to protect shareholder value and save the planet, notes the report, which says that none of the major fossil fuel corporations’ current targets align with the 2015 Paris Agreement.
Oil majors must cut output by 35 percent overall by 2040, says the report, which notes that each company’s carbon budget depends on “the proportion of low-cost, low-carbon projects in their portfolio”.
Analysing current and future energy projects to determine which would still be economically viable if the global temperature rise is kept well below two degrees Celsius, the report’s authors argue that companies simply need to get smaller to balance their “carbon budgets”.
With project-level emissions data, the report moves for the first time from the idea of a global carbon budget – how much carbon emissions are within range for the whole world – to individual company carbon budgets.
“There is a finite amount of emissions we can make for a given amount of [global] warming,” said Andrew Grant, a senior analyst at Carbon Tracker.
Referring to the “logic of the market” and the rules of supply and demand, Grant told Al Jazeera that companies should concentrate on “creating value on a per-share basis, instead of getting bigger just to get bigger. From a shareholder point of view, it’s a rational thing to do.”
The report looked at the largest and best-known petroleum companies, not because they are the worst net polluters but “because investors have the most interest in and are most widely invested in [them]”.
Many of the biggest non-Western oil companies – Saudi Aramco, China’s Sinopec, and Russia’s Lukoil – rely on low-cost extraction to stay competitive. However, they may be more sensitive to break-even points with fiscal budgets – in an effort to help fill government coffers – than to carbon budgets set by climate regulation.
While none of the main Western oil giants are on track to meet Paris goals, ConocoPhillips would need to make the biggest cuts (85 percent). ExxonMobil, the largest oil major, faces a 55 percent cut to balance its carbon budget.
Chevron and Total both would also need to cut production 55 percent, while Eni requires a 40 percent cut and BP requires a 25 percent one.
Shell, which is the most aligned with the Paris Agreement, needs to cut just 10 percent of its output because it has the most low-cost, low-carbon projects that would still be economic in a scenario where the temperature rise is limited to 1.6 degrees Celsius.
“If companies and governments attempt to develop all their oil and gas reserves, either the world will miss its climate targets or assets will become ‘stranded’ in the energy transition, or both,” said Mike Coffin, the report’s author and an oil and gas analyst at Carbon Tracker.
“The industry is trying to have its cake and eat it – reassuring shareholders and appearing supportive of Paris, while still producing more fossil fuels,” he added. “If companies really want to both mitigate financial risk and be part of the climate solution, they must shrink production.”
The report assumes that “the projects with the lowest production costs will be most competitive, while high-cost projects relying on higher prices risk becoming ‘stranded assets‘”.
ExxonMobil is currently on trial in the United States, facing a lawsuit by New York State for misleading investors about the risks to its business posed by climate change. Suits against other firms are pending.
US crude production rose almost 600,000 barrels per day (bpd) in August to a record of 12.4 million bpd, boosted by a 30 percent increase in Gulf of Mexico output.
The US is now the world’s number one oil producer, with high-cost output surging as technological advances boost production from shale formations across the states of Texas, New Mexico and North Dakota.
Meanwhile, this week both BP and Shell – oil majors based in Europe – warned that billions of dollars in shareholder returns could be delayed, as oil prices fail to make a long-awaited recovery. The shares of both companies have suffered, as the oil and gas sector continues to underperform compared with most other industries.
The top oil companies can generally make a profit at oil prices of above $50 per barrel, and black gold is currently trading at around $60 per barrel. But most firms depend on higher prices to deliver decent returns.
A not-for-profit think-tank, Carbon Tracker seeks to align the financial system with the energy transition to a low-carbon future, so it urges investors to help promote and support plans for the sector’s rapid drop-off in production.
The organisation describes the “carbon bubble” as the excess of fossil fuels available on Earth beyond what could be burned in a two-degree Celsius scenario. “Unburnable carbon” is the name for those energy sources that should not be ignited if the international community adheres to a given carbon budget.
Essentially, to maximise the chances of keeping global warming at that level, countries and companies must conform to the limits prescribed in such a carbon budget: 1,130 gigatonnes of carbon dioxide emissions – a number that factors in past totals calculated by the Global Carbon Project and the figures outlined by the Intergovernmental Panel on Climate Change (IPCC).
“In carbon dioxide terms, the ultimate level of global warming that will be experienced is determined primarily by the cumulative amount of emissions released into the atmosphere,” the report says. “The higher the total amount of carbon released, the higher the warming.”