Anthony Hobley CEO The Carbon Tracker Initiative The World Bank: - - PowerPoint PPT Presentation

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Anthony Hobley CEO The Carbon Tracker Initiative The World Bank: The Carbon Bubble - Unburnable Fossil Fuels 3rd March 2014

Our Mission Financial experts making carbon investment risk visible in the capital markets today Our Team

• Anthony Hobley (Chief Executive Officer)
• Mark Campanale (Founder and Executive

Director)

• Jon Grayson (Chief Operating Officer)
• James Leaton (Research Director)
• Luke Sussams (Senior Researcher)
• Reid Capalino (Senior Researcher)
• John Wunderlin (Staff Attorney & USA)
• Jeremy Leggett (Chair, Board of Directors)
• Alice Chapple (Director)
• Cary Krosinsky (Director)

CARBON T ON TRACKER I INITIATIVE VE

Our Partners

CARB RBON T TRA RACKER I R INITIATIVE: E: DO THE HE MATH

“…an easy and powerful bit

• f 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

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LOR ORD ST STERN ON U ON UNB NBURNAB ABLE C CAR ARBON ON 2 2013

‘This report shows very clearly the gross inconsistency between current valuations of fossil fuel assets and the path governments have committed to take in order to manage the huge risks of climate change’

Professor Lord Stern of Brentford, Chair, Grantham Research Institute on Climate Change and the Environment, London School of Economics

Unburnable Carbon: Wasted Capital & Stranded Assets, Carbon Tracker, April 2013

‘Wasted capital and stranded assets’, made the front page of the Guardian, whilst

being featured by most major press titles both in the UK and the US, including The Economist, Financial Times, Telegraph, Forbes, New York Times and Wall Street Journal.

WHAT D DOE OES T THIS AN ANALYSIS M MEAN?

• Markets are based on a 6 degree trajectory
• Investors are tied into the markets
• The markets are not responding to climate policy
• The financial world faces a systemic risk
• Because financial markets have no “visibility” on the three possible outcomes
• If we are clear on the scenarios there is an opportunity to address both financial & climate risk

using financial transparency

Only ly P Possible le O Outcomes: T : The 3 e 3 Scen cenario ios

The three possible outcomes: 1.The Goldilocks Scenario; Policy & regulatory signal in time to allow orderly transition & managed deflation of the carbon bubble 2.The Nightmare Scenario; Global community fails to send policy & regulatory signal, catastrophic warming of 3 to 6 degrees; 3.The Last Minute Scenario; Action delayed until events drive political shift, resulting action swift & severe – carbon bubble bursts resulting in massive financial shock.

2C BU 2C BUDGET: BR : BROKEN I IN J JUST A A FEW EW D DECADES?

2031 2045

80% probability limiting to 2C; IPCC estimate

CARBON BUDGET DE DEFI FICIT F FOR L LISTED C COM OMPANIES.

Listed reserves are a quarter of all known fossil fuel reserves Current listed reserves (762GtCO2) far exceed a quarter of the total carbon budgets but could double (1541GtCO2) If we break the 2°C budget we very quickly hit 2.5°C and 3°C

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Potential listed reserves Current listed reserves

CURRE

RENT R RESERVES O ON N STOCK CK E EXCHANG NGES

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LONDON MOSCOW TOKYO SHANGHAI HONG KONG INDIA AUSTRALIA JO’BURG SAO PAULO NEW YORK TORONTO PARIS

GLOBAL TOTAL: 762GtCO2

215GtCO2 113GtCO2 144GtCO2 101GtCO2 388GtCO2 273GtCO2

KEY:

• TOTAL
• COAL
• OIL
• GAS

POTENTIAL R

L RESERVES W WITH ONGO NGOING C CAPEX

KEY:

• TOTAL
• COAL
• OIL
• GAS

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LONDON MOSCOW TOKYO SHANGHAI HONG KONG INDIA AUSTRALIA JO’BURG SAO PAULO NEW YORK TORONTO PARIS

GLOBAL TOTAL: 1541GtCO2

366GtCO2 286GtCO2 266GtCO2 186GtCO2 715GtCO2 640GtCO2

REBALA LANCING I IS NEEDED ED BE BETWEEN EEN FLOWS: T The he Ca Cape pex H Hung ungry Beas east

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COAL L VERSUS OI OIL L VERSUS G GAS

WHA HAT I IS AT MOST R T RISK O K OF STRANDI DING A AND D WHA HAT DO DOES S THI HIS MEAN F FOR FOSSI SIL F FUEL ASSET V VALUATIONS?

• Impact on price?
• Coal most exposed

COAL L VS OI OIL L VS GAS

• 3.5%
• 3.0%
• 2.5%
• 2.0%
• 1.5%
• 1.0%
• 0.5%

0.0% 0.5% 1.0% 1.5% 2010-2020 2020-30 Gas Oil Coal

GAS OIL COAL CAGR% 2010-2020 2020-2030 “Only 20% of global coal reserves can be developed by 2050 without CCS in the 450 scenario” (IEA Redrawing the Energy Climate map 2013)

Bahrain DPSA Rumaila Campos Exp West Qurna 1 Kern County Zubair Iara CA Shale Oil Val D'Agri Ph 2 Franco Lula Ganal & Rapak Aldous/Avaldsnes Zaedyus Tempa Rossa Whales Park Guara Carioca Gbaran Ubie Ph2 Cepu Exp Uvat Expansion Kinteroni Peregrino S/SW Margarita-Huacaya Perla GoM Tiebacks Peru Block 39 West Qurna 2 Mars B Moho Nord Schiehallion Ph 2 Roncador Hadrian Yamal Gas Uganda Bl. 1,2,3 Chuandongbei Big Foot Sandridge JV PNG LNG India KG-D6 Clochas/Mavacola Clair Ph 2 Shah Gas Appamattox

• Bl. 15/06 East

SkrugardVito North Alexandria Hub Tiber Kaskida

• Bl. 15/06 West

CLOV Ghana Gas Laggan/Tormore Gorgon LNG Hebron Egina Goliat COP Eagle Ford STL Bakken AOSP Debottle Prelude FLNG Pazflor Wheatstone Shah Deniz Ph 2 Sunrise FLNG Bonga N/NW/SW Yamal LNG OXY Bakken BG Marcellus PSVM Ichthys LNG HESS Eagle Ford Mozambique LNG Carabobo Tanzania LNG BG Haynesville Jack-St Malo QCLNG Kearl FCCL Abadi FLNG GLNG Tengiz Exp Reganne Bolia-Chota STL Marcellus KKD Mariner Shtokman Ph 1 Sunrise Ph 1 Usan RDS Unc Gas Bressay Block 61 Oman Surmont Ph 2 Fort Hills Terre de Grace Kashagan Ph 1 Carmon Creek Joslyn

10 20 30 40 50 60 70 80 90 100 2 4 6 8 10 12 14 16 2020e Net Production, Mboe/d Breakeven, $/bbl

US unconventional gas and LNG projects Deepwater GoM & W.Africa Low-cost conventional giants: Brazil, Norway, Iraq, Guyanas Marginal LNG, Heavy Oil

(Citi: Global Integrated Oil to 2020)

UNCONVENTIONALS S TO FALL O OFF T THE HE C COST ST C CURVE

GROWING CAP CAPEX F FAL ALLING P PRODUCT CTION

Wall Street Journal, Jan 2014

• Oil sector cannot

continue to spend more just to maintain production levels.

• E.g. Shell taking a

haircut on its oil shale assets.

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DO DIVI VIDE DENDS DS A AND C CAPE PEX A ADD D UP?

• Denial
• “We will see it coming”
• “It will happen gradually”
• Commercial concerns
• Risk of backlash from investors for not pursuing value added investments
• Management have flexibility over capital expenditure
• Shareholder message?
• Low return projects tend to be at greater risk from tax, costs and price –

sensitivity scenarios please

• Growth is over-rated
• Conclusion? Be more disciplined on capital investment and return to

shareholders if necessary

MANAG NAGEMENT ISSUES: O OIL

FOSSIL F L FUELS ELS: NEW B BUS USINESS MODELS LS R REQUIRE RED

Paul Spedding, Oil & Gas Sector Analyst, April 2013 “Carbon Tracker’s report “makes it clear that 'business-as-usual' is not a viable

• ption for the fossil fuel industry in the

long term. Management should already be looking to new business models that reduce the risk of stranded assets destroying shareholder value . In future, capital allocation should emphasise shareholder returns rather than investing for growth.”

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FOSSIL F L FUEL EL CRED REDIT R RATINGS A AT RISK

“Financial models that only rely on past performance and creditworthiness are an insufficient guide for investors.” Analysis of oilsands operators: “We note that under a meaningfully lower long- term oil price, the commercial viability of undeveloped reserves and hence the core business model could come into question unless development costs also fall. This could potentially result in a downgrade of more than one notch if we were to place less reliance on undeveloped or probable reserves than at present.”

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What A Carbon-Constrained Future Could Mean For Oil Companies‘ Creditworthiness, 2013

UNW NWIND NDING NG T THE CARB RBON B N BUBBL BLE WHAT C CAN I INVE VESTORS A AND R REGULA GULATORS D DO?

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• 1. Review valuation assumptions

Commission equity and credit research which considers different future scenarios; what happens if 20% probability that Governments take preventative measures on climate?

• 2. Challenge CAPEX plans

Question merit of Company Boards of spending shareholder funds to develop high cost high carbon projects

• 3. Disclosure Enhancement

Listed corporate owners of fossil fuels should disclose embedded CO2 in reserves – future emissions

• 4. Regulation

Address climate change as a systemic risk by collaborating with other investors in challenging financial regulatory framework

OPTION ONS F FOR I INVEST STOR ORS: $ $7 TRILLION QUEST STION ON

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NO NOT BREACHING 2 G 2 DEGR GREES S CEILING G MEANS C S CANCEL ELLING G CAP APEX AN AND W WITH THDRAWING CAS ASH

Engagement with 45 companies on carbon asset risk

• “Institutional investors must think over the long-term, which

means that we must take environmental risks into consideration when we make investments,” said New York State Comptroller Thomas P. DiNapoli

• “Companies must plan properly for the risk of falling demand by

stress-testing new investments to minimize the risk our clients’ capital is wasted on non-performing projects.” said Craig Mackenzie, Head of Sustainability at Scottish Widows Investment Partnership

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• 1. Assessing systemic climate change risk and the role of capital market

regulators in managing financial stability

• 2. Challenging valuation assumptions and debt risk profiles of publically

traded owners of fossil fuels

• 3. Identifying stranded assets and looking in depth at high capital

expenditure fossil fuel projects

• 4. Reviewing the accounting standards for impaired/stranded/sub-

prime assets

• 5. Investigating the capital raising process and how climate risk is

factored into IPO’s and debt raising

• 6. Exploring the contradiction between climate policy and how capital

markets function

SUM UMMARY O Y OF OUR UR WORK RK PROGRAMME

Questions

More information: www.carbontracker.org Anthony Hobley mark@campanale.co.uk