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Fossil fuel sector seen risking $2.2 trillion on stranded assets

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* Half of the supply in new LNG projects 'unneeded'

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Fossil fuel companies risk wasting up to $2.2 trillion in the next decade by pursuing projects that could be uneconomic in the face of international action to limit climate change, UK-based financial think-tank Carbon Tracker Initiative said Tuesday.

Two-thirds of the total financial risks are currently earmarked for new and existing oil projects, the biggest fossil fuel sector at risk behind natural gas, according to the report.

It said that around 20-25% of oil and gas majors' potential investment is on projects that would not be needed in a scenario where the world agrees to limit climate change to 2 degrees. Due to the higher cost of developing oil shale and oil sands and Arctic oil, the total relates to only 11% of potential production, according to the report.



Rising pressure on governments to tighten their climate change policies and growing public awareness over the climate impact of fossil fuels has fueled investor pressure on oil majors to mitigate or avoid carbon-intensive projects. As a result, concerns are increasingly being voiced that oil companies may not be able to develop parts of their proven reserves due to growing global controls on carbon emissions.

Bank of England Governor Mark Carney in September raised energy industry hackles after saying investors should be cautious over the potential for huge losses on the value of fossil fuel assets as a result of the impact of potential new regulations to limit CO2 emissions.

OIL MAJORS, NOCs AT RISK

The countries with the largest amounts of oil sector capex at risk over the next decade are the US, Canada, Russia, Mexico and Kazakhstan, which together represent half of the global unneeded capex, according to the report.

The US exposure is primarily shale oil, while Canada's oil sands weigh heavily, but conventional oil projects in Russia are mostly at risk, according to Carbon Tracker.

Mexico's state-run Pemex has the biggest share of unneeded planned upstream investment over the next decade, according to the report, with $77 billion of spending not needed in order to meet the climate change goals. Shell, ExxonMobil, Rosneft, BP, and Chevron follow in the list of top energy companies, dominated by oil majors, with most unneeded capex to 2025, the report shows.

"The data is clear -- the energy transition is underway, and the direction of travel is away from fossil fuels," it said.

In a 2 degree world, gas growth would be also at a lower level than expected under a business as usual scenario, the think tank said.

"Capital expenditure of $459 billion on new projects and $73 billion on existing projects is surplus to requirements," it said.

The US, Australia, Indonesia, Canada and Malaysia have the greatest exposure, accounting for three-quarters of investment risk.

"Half of the supply in new LNG projects is unneeded and very little new capacity will be needed in the US and Canada in a 2 degree scenario," it said.

"If the industry misreads future demand by underestimating technology and policy advances, this can lead to an excess of supply and create stranded assets. This is where shareholders should be concerned -- if companies are committing to future production which may never generate the returns expected," it said.

The US has the greatest financial exposure, with $412 billion of unneeded fossil fuel projects to 2025 at risk of becoming stranded assets, followed by Canada ($220 billion), China ($179 billion), Russia ($147 billion) and Australia ($103 billion), it said.

Carbon Tracker last month said that future demand for fossil fuels could be lower than industry has assumed as rapid advances in technology, increasingly cheap renewable energy, slower-than-expected economic growth and lower-than-expected population rise combine to dampen fossil fuel demand significantly by 2040.

--Robert Perkins, robert.perkins@platts.com
--Stuart Elliott, stuart.elliott@platts.com
--Edited by Derek Sands, derek.sands@platts.com