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Carbon Tracker Initiative publishes independent 2˚C stress test study of oil and gas majors

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A new study has been released today by the Carbon Tracker Initiative. Sense & Sensitivity: Maximising Value with a 2˚C portfolio, combines low-carbon demand scenarios with oil price and discount rate sensitivity to quantify how reducing exposure to high-cost, high-carbon projects can increase the value of their upstream interests. This analysis is believed to be the first independent 2˚C stress test published of upstream spending on new oil and gas projects.

The study shows that the upstream assets of the world’s seven largest privately owned listed oil and gas companies – ExxonMobil, Shell, BP, Chevron, ConocoPhillips, Eni and Total – could collectively be worth $100 billion more if they aligned their investment plans with the 2˚C target.

The Carbon Tracker Initiative study finds that pursuing a business as a usual growth model will only make more financial sense than a smaller, lower cost 2˚C project portfolio, if oil prices exceed $120 per barrel for a significant period of time.

The report also warns that projects that rely on high oil prices are more risky, and once a ‘fossil fuel risk premium’ is added, prices would need to reach unprecedented levels of $180 per barrel – more than double the Organisation of the Petroleum Exporting Countries’ (OPEC) long-term average assumption of $80 a barrel – for the BAU case to be more attractive.

Shareholders have filed resolutions asking for ExxonMobil, Chevron and other US energy companies to undertake stress tests to ensure they maximise value and don’t just pursue a BAU strategy in the face of stronger regulation and weakening fossil fuel demand as economies transition.

The boards of Royal Dutch Shell and BP decided to support similar resolutions last year that were carried by strong shareholder majorities. The international Financial Stability Board has set up a task force on climate that has just consulted on how this kind of sensitivity analysis could reduce climate risk.

James Leaton, Research Director at Carbon Tracker, said: “A simple carbon sensitivity analysis shows that oil majors pursuing volume at all costs can deliver lower shareholder value than a more disciplined approach. That is why financial regulators need to make 2˚C stress tests standard practice for the energy sector to help avoid companies wasting capital.”

The carbon sensitivity analysis compares the BAU value of the oil majors’ combined upstream portfolio with the value of a portfolio of only those lower projects needed to satisfy demand in a 2˚C world.

Mark Fulton, Adviser to Carbon Tracker and Co-author of the report, said: “In a 2˚C world, the major oil and gas companies will need to manage declining demand for oil. However, this can still prove to be a value-add proposition if they simply avoid developing high-cost, high-carbon projects.”

The research introduces the concept of a Fossil Fuel Risk Premium (FFRP) for companies that assume high future demand will deliver ever higher oil prices, because they run the risk of sanctioning “higher risk, lower return” projects.

Typically those riskier carbon-intensive projects are Canadian oil sands, extra heavy oil typically found in Venezuela and some deep-water projects.

This risk premium represents the greater risk associated with pursuing high-cost growth projects, compared to a lower cost portfolio that would satisfy 2˚C demand. The resulting higher discount rate only strengthens the case that a 2°C portfolio can be worth more to investors today, unless future oil prices rise to very high levels on a sustained basis.

Paul Spedding, former Global Head of Oil and Gas Research at HSBC and Adviser to Carbon Tracker, said: “Oil majors have had phases of prioritising value over volume in the past, but that has to become permanent, as the risk premium for pursuing high-cost projects is increasing.”

OPEC’s outlook averages around $80 a barrel to as far off as 2040, while the International Energy Agency’s (IEA) 450 scenario has oil prices averaging less than $100 a barrel to 2040 – well below the levels needed to justify a BAU strategy.

Shareholder resolutions have been asking for stress tests against the IEA scenarios. This analysis shows that a 2°C path can be good news for investors if company management make the right decisions.

Andrew Grant, Financial Analyst at Carbon Tracker, said: “Prudent capital expenditure can have a positive outcome for shareholder value – executives can deliver the best results for investors by running their companies as if preparing for a lower demand world, whether they personally believe it likely or not.”

The report argues that it is wise for oil majors to make conservative assumptions about future demand, noting that that a small amount of oversupply – roughly two per cent – led to the current era of price volatility and $380 billion of capital expenditure cancelled or deferred by the industry between late 2014 and the end of 2015. A significant portion of this is known to have been high-cost production.

Economy

New Zealand to Switch to Fully Renewable Energy by 2035

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renewable energy policy
Shutterstock Licensed Photo - By Eviart / https://www.shutterstock.com/g/adrian825

New Zealand’s prime minister-elect Jacinda Ardern is already taking steps towards reducing the country’s carbon footprint. She signed a coalition deal with NZ First in October, aiming to generate 100% of the country’s energy from renewable sources by 2035.

New Zealand is already one of the greenest countries in the world, sourcing over 80% of its energy for its 4.7 million people from renewable resources like hydroelectric, geothermal and wind. The majority of its electricity comes from hydro-power, which generated 60% of the country’s energy in 2016. Last winter, renewable generation peaked at 93%.

Now, Ardern is taking on the challenge of eliminating New Zealand’s remaining use of fossil fuels. One of the biggest obstacles will be filling in the gap left by hydropower sources during dry conditions. When lake levels drop, the country relies on gas and coal to provide energy. Eliminating fossil fuels will require finding an alternative source to avoid spikes in energy costs during droughts.

Business NZ’s executive director John Carnegie told Bloomberg he believes Ardern needs to balance her goals with affordability, stating, “It’s completely appropriate to have a focus on reducing carbon emissions, but there needs to be an open and transparent public conversation about the policies and how they are delivered.”

The coalition deal outlined a few steps towards achieving this, including investing more in solar, which currently only provides 0.1% of the country’s energy. Ardern’s plans also include switching the electricity grid to renewable energy, investing more funds into rail transport, and switching all government vehicles to green fuel within a decade.

Zero net emissions by 2050

Beyond powering the country’s electricity grid with 100% green energy, Ardern also wants to reach zero net emissions by 2050. This ambitious goal is very much in line with her focus on climate change throughout the course of her campaign. Environmental issues were one of her top priorities from the start, which increased her appeal with young voters and helped her become one of the youngest world leaders at only 37.

Reaching zero net emissions would require overcoming challenging issues like eliminating fossil fuels in vehicles. Ardern hasn’t outlined a plan for reaching this goal, but has suggested creating an independent commission to aid in the transition to a lower carbon economy.

She also set a goal of doubling the number of trees the country plants per year to 100 million, a goal she says is “absolutely achievable” using land that is marginal for farming animals.

Greenpeace New Zealand climate and energy campaigner Amanda Larsson believes that phasing out fossil fuels should be a priority for the new prime minister. She says that in order to reach zero net emissions, Ardern “must prioritize closing down coal, putting a moratorium on new fossil fuel plants, building more wind infrastructure, and opening the playing field for household and community solar.”

A worldwide shift to renewable energy

Addressing climate change is becoming more of a priority around the world and many governments are assessing how they can reduce their reliance on fossil fuels and switch to environmentally-friendly energy sources. Sustainable energy is becoming an increasingly profitable industry, giving companies more of an incentive to invest.

Ardern isn’t alone in her climate concerns, as other prominent world leaders like Justin Trudeau and Emmanuel Macron have made renewable energy a focus of their campaigns. She isn’t the first to set ambitious goals, either. Sweden and Norway share New Zealand’s goal of net zero emissions by 2045 and 2030, respectively.

Scotland already sources more than half of its electricity from renewable sources and aims to fully transition by 2020, while France announced plans in September to stop fossil fuel production by 2040. This would make it the first country to do so, and the first to end the sale of gasoline and diesel vehicles.

Many parts of the world still rely heavily on coal, but if these countries are successful in phasing out fossil fuels and transitioning to renewable resources, it could serve as a turning point. As other world leaders see that switching to sustainable energy is possible – and profitable – it could be the start of a worldwide shift towards environmentally-friendly energy.

Sources: https://www.bloomberg.com/news/articles/2017-11-06/green-dream-risks-energy-security-as-kiwis-aim-for-zero-carbon

https://www.reuters.com/article/us-france-hydrocarbons/france-plans-to-end-oil-and-gas-production-by-2040-idUSKCN1BH1AQ

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Energy

5 Easy Things You Can Do to Make Your Home More Sustainable

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Shutterstock Licensed Photot - By Diyana Dimitrova

Increasing your home’s energy efficiency is one of the smartest moves you can make as a homeowner. It will lower your bills, increase the resale value of your property, and help minimize our planet’s fast-approaching climate crisis. While major home retrofits can seem daunting, there are plenty of quick and cost-effective ways to start reducing your carbon footprint today. Here are five easy projects to make your home more sustainable.

1. Weather stripping

If you’re looking to make your home more energy efficient, an energy audit is a highly recommended first step. This will reveal where your home is lacking in regards to sustainability suggests the best plan of attack.

Some form of weather stripping is nearly always advised because it is so easy and inexpensive yet can yield such transformative results. The audit will provide information about air leaks which you can couple with your own knowledge of your home’s ventilation needs to develop a strategic plan.

Make sure you choose the appropriate type of weather stripping for each location in your home. Areas that receive a lot of wear and tear, like popular doorways, are best served by slightly more expensive vinyl or metal options. Immobile cracks or infrequently opened windows can be treated with inexpensive foams or caulking. Depending on the age and quality of your home, the resulting energy savings can be as much as 20 percent.

2. Programmable thermostats

Programmable thermostats

Shutterstock Licensed Photo – By Olivier Le Moal

Programmable thermostats have tremendous potential to save money and minimize unnecessary energy usage. About 45 percent of a home’s energy is earmarked for heating and cooling needs with a large fraction of that wasted on unoccupied spaces. Programmable thermostats can automatically lower the heat overnight or shut off the air conditioning when you go to work.

Every degree Fahrenheit you lower the thermostat equates to 1 percent less energy use, which amounts to considerable savings over the course of a year. When used correctly, programmable thermostats reduce heating and cooling bills by 10 to 30 percent. Of course, the same result can be achieved by manually adjusting your thermostats to coincide with your activities, just make sure you remember to do it!

3. Low-flow water hardware

With the current focus on carbon emissions and climate change, we typically equate environmental stability to lower energy use, but fresh water shortage is an equal threat. Installing low-flow hardware for toilets and showers, particularly in drought prone areas, is an inexpensive and easy way to cut water consumption by 50 percent and save as much as $145 per year.

Older toilets use up to 6 gallons of water per flush, the equivalent of an astounding 20.1 gallons per person each day. This makes them the biggest consumer of indoor water. New low-flow toilets are standardized at 1.6 gallons per flush and can save more than 20,000 gallons a year in a 4-member household.

Similarly, low-flow shower heads can decrease water consumption by 40 percent or more while also lowering water heating bills and reducing CO2 emissions. Unlike early versions, new low-flow models are equipped with excellent pressure technology so your shower will be no less satisfying.

4. Energy efficient light bulbs

An average household dedicates about 5 percent of its energy use to lighting, but this value is dropping thanks to new lighting technology. Incandescent bulbs are quickly becoming a thing of the past. These inefficient light sources give off 90 percent of their energy as heat which is not only impractical from a lighting standpoint, but also raises energy bills even further during hot weather.

New LED and compact fluorescent options are far more efficient and longer lasting. Though the upfront costs are higher, the long term environmental and financial benefits are well worth it. Energy efficient light bulbs use as much as 80 percent less energy than traditional incandescent and last 3 to 25 times longer producing savings of about $6 per year per bulb.

5. Installing solar panels

Adding solar panels may not be the easiest, or least expensive, sustainability upgrade for your home, but it will certainly have the greatest impact on both your energy bills and your environmental footprint. Installing solar panels can run about $15,000 – $20,000 upfront, though a number of government incentives are bringing these numbers down. Alternatively, panels can also be leased for a much lower initial investment.

Once operational, a solar system saves about $600 per year over the course of its 25 to 30-year lifespan, and this figure will grow as energy prices rise. Solar installations require little to no maintenance and increase the value of your home.

From an environmental standpoint, the average five-kilowatt residential system can reduce household CO2 emissions by 15,000 pounds every year. Using your solar system to power an electric vehicle is the ultimate sustainable solution serving to reduce total CO2 emissions by as much as 70%!

These days, being environmentally responsible is the hallmark of a good global citizen and it need not require major sacrifices in regards to your lifestyle or your wallet. In fact, increasing your home’s sustainability is apt to make your residence more livable and save you money in the long run. The five projects listed here are just a few of the easy ways to reduce both your environmental footprint and your energy bills. So, give one or more of them a try; with a small budget and a little know-how, there is no reason you can’t start today.

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