Download Getting our arms around “carbon budgets”

Oberlin Climate
Getting our arms around “carbon
budgets”
7th October 2016
Mark Campanale
Carbon Tracker Initiative
www.carbontracker.org
@carbonbubble #strandedassets
Carbon Tracker – Unburnable Carbon
“…an easy and powerful
bit of arithmetical analysis
first published by financial
analysts in the U.K. has
been making the
rounds…
(it) up-ends most of the
conventional political
thinking about climate
change. And it allows us
to understand our
precarious position
with…. simple numbers”.
Bill McKibben
Carbon budgets and the energy transition
“Of all the recent ideas
climate change campaigners
have come up with to
convince the world to do more
to curb global warming, none
has been as potent as
stranded fossil fuel assets” –
Financial Times
So what is the
carbon bubble?
Carbon budget – clear overhang above level
giving a 50% chance of limiting warming to 2⁰C
Unneeded
When will we break the carbon budget?
Such Carbon Budget could be broken in few decades
Using carbon budgets to track climate actions and
measure the resulting Energy Transition
Caveat:numbersareapproximations
Carbon budget deficit for listed companies
Less than 900 GtCO2 can be burnt to keep global
warming below 2 degrees celsius
RESOURCES: the estimated amount of hydrocarbon contained in the deposit
RESERVES: the amount of resources that are technologically and economically feasible to extract
For more technical definitions, please visit www.carbontracker.org
The Paris Climate Agreement sends a
clear signal to markets
The direction of travel towards
low-carbon is clear…
• The Paris Agreement is to limit global average warming to
“well below” 2˚C.
• The goal for net zero GHGs after 2050 implies an even earlier
phasing out of CO2 emissions by as early as 2050.
• 187 countries have submitted plans that cover around 95% of
global CO2 emissions and include China and India.
• September 2016 – China and USA have ratified, India and EU
expected to ratify soon
Are fossil fuel companies betting on an
uncertain future?
…Yet
•
•
•
BP is projecting a 24% increase in fossil fuel use by 2035
•
OPEC is clinging valiantly to 54% to 2040
Exxon expects a 27% increase by 2040
Shell’s ‘Current Outlook’ 37% to 2040
Companies are overstating energy demand, underestimating
an increasing role for renewables and ignoring looming
changes in energy.
Sources:
ExxonMobil (2016) The Outlook for Energy: A view to 2040
BP (2016) BP Energy Outlook 2035
Shell (2014) Carbon Asset Risk response
OPEC (2015) World Oil Outlook
All demand risks on the downside
Under 2 degree scenario, or 450 ppm
•
•
•
Coal consumption in 2030 is around 33% below the New Policies
For oil and gas, the equivalent figures are around 20%
By 2040, those decline figures increase to 45%, 30% and 20%.
Sweeping consequences for the energy industry
Source:BarclaysBankClimateChange,WarmingUpforCOP21,November2015
Carbonbudgetperfueltypeforthreecoal-fractionscenarios
Source:Rystad Energy,2016
Big investment shifts required
$15 trillion in unneeded capex for the fossil fuel industry
Are fossil fuel companies planning for
demand and prices?
lower
$33.7 trillion in foregone revenues for the fossil fuel industry
Source:BarclaysBankClimateChange,WarmingUpforCOP21,November2015
Timing of peak demand?
Energy forecasting mis-read:
Level of energy demand varies significantly
Many industry energy scenarios indicate a slightly smaller
percentage of a bigger pie = absolute growth
Supply&Demand
• Mis-read canhappenif
supplyanddemand
sectorsnotaligned
• E.g.USutilities retiring
coalplantsbutUScoal
mining firmsusing
growthprojectionsfor
demand
• E.g.2mbpdgapcreated
increasedoilprice
volatility
Delta between IEA scenarios: Over $2 trillion of capex over
next decade to avoid 156 GtCO2 of emissions
Changingconditionsforcoal&gas
plants
• Capacityfactors
impactedbyfalling
demand,renewables
andoff-gridgrowth
• Competition isgetting
cheaperandmore
flexible
• Lifetimes maybe
curtailed– early
retirements/stranded
assets
Meansnewbusinessmodelsand
restructuringtoreflectthechanging
relationshipswehavewithenergy.
Coal plants operate 80-90% of the time…..
on paper
Capacityfactor(%)
Capacityfactorofcoalplantsinmajormarkets
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
UnitedStates
China
India
Japan
2014average=57%andfalling
EU28
SouthEastAsia
World
1980
1990
2000
Year
Source:IEA,CTIanalysis
2010
Changingeconomicsforrenewables
Technology
• Learningrates
• Deploymentvolumes
• Complementarity
(battery+solar+
communications)
Finance
• Governmentguarantees
• Climatebonds
• Corporatebalance
sheets
• Energyfunds
• Utilities
• Oil&Gas companies
Thediscountrateforcapitalintensiverenewablesisanassumption
thatiseasilyforgotteninupdatingmodelsorfuturescenarios
Things can look very different in just 5-10 years
IEA scenarios of solar + wind electricity generation have evolved over
time
9000
IEA
Historic
8000
IEA WEO
2006
TWh
7000
6000
IEA WEO
2008
5000
IEA WEO
2010
4000
IEA WEO
2012
3000
IEA NPS
2014
2000
IEA CPS
2014
1000
IEA 450
2014
0
2000
2005
2010
2015
2020
2025
2030
2035
2040
IEA INDC
2015
Energy models not so good at incorporating
transformational technologies
Battery costs are coming down faster than expected
Tesla’sPowerwallwas7yearsaheadof
industryaverageforecastsin2014and
25yearsaheadofUSEIAforecasts
Looking forward – EU already out of date
2016lowestcostvsEUReferenceScenario2016
• July:Dong2x350MWOffshoreWindwinningbid:
• Sep:Vattenfall 350MWOffshoreWindwinningbid:
72.70 €/MWh
63.80 €/MWh
EuropeanCommission
https://ec.europa.eu/energy/sites/ener/files/documents/REF2016_report_FINAL-web.pdf
Whoateallthepie?
Thenextstopafter3%is97%...
Bernsteinresearch:
“Thepossibility(althoughanincreasing
possibilitywiththeemergenceof
BMW…andpotentiallyAppleinthe
segment)isthatelectricvehiclesbecome
cheaper,cleaner,andmorereliablethan
vehiclespoweredbyinternalcombustion
engines.
Inthatsituation,electricvehiclesdonot
expandto3%ofnewcarsalesin2020
andthensettleat10%or15%in2025or
2030.Instead,electricvehiclesgofrom
3%offleetadditionsin2020andtake
shareatanacceleratingrateuntilthey
are97%offleetadditionsatsomepoint
15to20yearsfromnow.”
NB– Noteverybodyhas
togetthesamesizepiece
Coal demand dominoes keep falling
Forecasts of total coal demand
Efficiency gains and the emergence of electric vehicles (Evs)
as potential drivers of lower-than-expected future oil demand
The energy industry foresees oil demand growth
120
Oil demand (Million barrels of oil per day)
110
100
90
80
70
60
2005
2010
Actual
BP 2015
Total 2014
IEA NPS
2015
2020
2025
ExxonMobil 2015
Statoil Reform
OEPC
IEA INDC
2030
2035
Shell Current
Statoil Renewal
EIA 2013
IEA 450
2040
Gas is caught between coal and renewables
and its role is changing in some markets to a back-up option
Comparing change in global gas demand across scenarios to 2035
Historic
6000
IEA - NPS
Gas demand (Mtoe)
IEA - CPS
IEA - 450
4000
BP
Exxon
2000
Shell Mountains
Shell - Oceans
Statoil Reform
0
2005
2010
2015
2020
2025
2030
2035
2040
Statoil Renewal
Your
smartphone has
replaced all the
gadgets in this
1991 ad
Are coal and oil
facing similar
disruption?
Dealing with the “Carbon Bubble”
1. Decarbonising the economy has to
start with contracting the fossil
fuel industry
2. Cancelling the next phase of fossil
fuel projects requires investors to
be in agreement
3. Fossil fuel companies now have to
plan an orderly transition out
4. Investors have to ensure climate
competent company boards
Fossil Fuel versus US Solar: Price war
TheEconomist,1st October2016
Renewablesshareofnewannualelectricityadditions:bysector
Supply - Carbon Supply Cost Curves
Whicharethefossilfuelcompanieswithresourcesinhighcost,highcarbon
areasatriskofcommittingtoomuchcapextouneconomicprojects?
Capex trials & tribulations
Kashagan
$50 bn & counting
Petrobras & the sub-salt:
$221 bn over 5 years
Shell in the Arctic:
$2.6 bn impairment
Canada & the tar sands:
50 year financing? Really?
Failing even before the oil price crash
ShellROACE(%)andBrentoilprice($RHS)
20
120
100
15
80
10
60
40
5
20
0
0
2011
2012
2013
ROACE
2014
2015
Brentoilprice(RHS)
Source: Shell's 2015 Financial and Operating Handbook, BP's Statistical review of world energy
• ROACE = “Return on average capital employed”
or “Return on capital”
• Return on capital can be thought of as sort of “rental yield”
for oil fields
• Returns were falling even before the 2015 oil price crash
High-cost projects owned by private listed
corporations
Highest
proportion
of projects
requiring
above
$80/barrel
are owned by
listed
corporations
Source:CarbonTrackeroilreport2014
How Profitable is $70 Oil? Or $50 Oil?
Source: Goldman Sachs Global Investment Research. Annotated by Tom Randall/Bloomberg
Companies with significant exposure to high-cost projects
Source:GoldmanSachsJune2016
Cost curve is key
2degreeprojects
Source: Carbon Tracker Initiative
Growthprojects
2C sees over $1trn wasted in next 10 years.
At current oil prices this value is scary
2 degree budget
450: 85 mbpd = $82.40/bbl (10% IRR), $110.10/bbl (15% IRR)
@Suss_quatch
@carbonbubble
92% of undeveloped oil sands projects need
more than $95/bbl to provide 15% IRR
@Suss_quatch
@carbonbubble
Ranking of companies by unneeded capex under
450 Scenario 2015–25 ($bn)
Source:CarbonTracker:2TrillionDollarDangerZonereport,November2015
Risks…
The $2 trillion stranded assets danger zone
Oil demand peak
in 2020,
no need for
continued growth
$1.4tn at risk
No new coal
mines required
$220bn at risk
Growth in gas will
disappoint,
esp. capitalintensive
LNG
$520bn at risk
Nov 2015
Download full report at
http://www.carbontracker.org/report/stranded-assets-danger-zone/
Ownership of oil capex to 2025 and production to 2035 for new projects
Source:CarbonTracker
DangerZonereport2015
Ownership of gas capex to 2025 and production to 2035 for new projects
Source:CarbonTracker
DangerZonereport2015
Thank you
[email protected]
Carbon Tracker Initiative
www.carbontracker.org
@carbonbubble
#strandedassets
Creating a new financial lexicon
Carbon Tracker reframed the climate debate by revealing the extent
of misalignment between global financial markets and climate
security.”
Guardian Sustainable Business Awards, Innovative Communications 2014
Unburnable
Carbon
Fossil fuel energy sources which cannot be burnt if the world is
to adhere to a given carbon budget.
Stranded Assets
Energy resources which, at some time prior to the end of their
economic life, are no longer able to earn an economic return as a
result of changes in the market and regulatory environment
associated with the transition to a low-carbon economy.
Wasted Capex
High cost capital expenditures fossil fuel projects are usually the
most carbon-intensive ones and require high break-even prices
to profitable. They can potentially become wasted capital in a
demand and carbon constrained world.
Fossil Fuel Risk
Premium
Additional factor which needs to be integrated into analysis of
high-cost high-risk fossil fuel assets to ensure climate risk is
priced properly, and capital is allocated to align with the
transition to a low carbon future.
Ownership of oil capex to 2025 and production to 2035 for new projects
Source:CarbonTracker
DangerZonereport2015
Ownership of gas capex to 2025 and production to 2035 for new projects
Source:CarbonTracker
DangerZonereport2015
AverageglobalLCOEtrendswithupdated
assumptionsconfirmdirectionoftravel
•
•
•
•
Boilerplateassumptionsfavourfossilfuels
2016realworldassumptions=renewablescompetitive
Post20202degrees– renewableswin
LCOEnotthewholestorybutexplainstrends
Fordetailssee“Endoftheload”report