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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