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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.

Energy

Responsible Energy Investments Could Solve Retirement Funding Crisis

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Energy Investments
Shutterstock / By Sergey Nivens | https://www.shutterstock.com/g/nivens

Retiring baby-boomers are facing a retirement cliff, at the same time as mother nature unleashes her fury with devastating storms tied to the impact of global warming. There could be a unique solution to the challenges associated with climate change – investments in clean energy from retirement funds.

Financial savings play a very important role in everyone’s life and one must start planning for it as soon as possible. It’s shocking how quickly seniors can burn through their nest egg – leaving many wondering, “How long your retirement savings will last?

Let’s take a closer look at how seniors can take baby steps on the path to retiring with dignity, while helping to clean up our environment.

Tip #1: Focus & Determination

Like in other work, it is very important to focus and be determined. If retirement is around the corner, then make sure to start putting some money away for retirement. No one can ever achieve anything without dedication and focus – whether it’s saving the planet, or saving for retirement.

Tip #2: Minimize Spending

One of the most important things that you need to do is to minimize your expenditures. Reducing consumption is good for the planet too!

Tip #3: Visualize Your Goal

You can achieve more if you have a clearly defined goal in life. This about how your money can be used to better the planet – imagine cleaner air, water and a healthier environment to leave to your grandchildren.

Investing in Clean Energy

One of the hottest and most popular industries for investment today is the energy market – the trading of energy commodities. Clean energy commodities are traded alongside dirty energy supplies. You might be surprised to learn that clean energy is becoming much more competitive.

With green biz becoming more popular, it is quickly becoming a powerful tool for diversified retirement investing.

The Future of Green Biz

As far as the future is concerned, energy businesses are going to continue getting bigger and better. There are many leading energy companies in the market that already have very high stock prices, yet people are continuing to investing in them.

Green initiatives are impacting every industry. Go Green campaigns are a PR staple of every modern brand. For the energy-sector in the US, solar energy investments are considered to be the most accessible form of clean energy investment. Though investing in any energy business comes with some risks, the demand for energy isn’t going anywhere.

In conclusion, if you want to start saving for your retirement, then clean energy stocks and commodity trading are some of the best options for wallets and the planet. Investing in clean energy products, like solar power, is a more long-term investment. It’s quite stable and comes with a significant profit margin. And it’s amazing for the planet!

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Energy

What Should We Make of The Clean Growth Strategy?

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Clean Growth Strategy for green energy
Shutterstock Licensed Photo - By sdecoret | https://www.shutterstock.com/g/sdecoret

It was hardly surprising the Clean Growth Strategy (CGS) was much anticipated by industry and environmentalists. After all, its publication was pushed back a couple of times. But with the document now in the public domain, and the Government having run a consultation on its content, what ultimately should we make of what’s perhaps one of the most important publications to come out of the Department for Business, Energy and the Industrial Strategy (BEIS) in the past 12 months?

The starting point, inevitably, is to decide what the document is and isn’t. It is, certainly, a lengthy and considered direction-setter – not just for the Government, but for business and industry, and indeed for consumers. While much of the content was favourably received in terms of highlighting ways to ensure clean growth, critics – not unjustifiably – suggested it was long on pages but short on detailed and finite policy commitments, accompanied by clear timeframes for action.

A Strategy, Instead of a Plan

But should we really be surprised? The answer, in all honesty, is probably not really. BEIS ministers had made no secret of the fact they would be publishing a ‘strategy’ as opposed to a ‘plan,’ and that gave every indication the CGS would set a direction of travel and be largely aspirational. The Government had consulted on its content, and will likely respond to the consultation during the course of 2018. And that’s when we might see more defined policy commitments and timeframes from action.

The second criticism one might level at the CGS is that indicated the use of ‘flexibilities’ to achieve targets set in the carbon budgets – essentially using past results to offset more recent failings to keep pace with emissions targets. Claire Perry has since appeared in front of the BEIS Select Committee and insisted she would be personally disappointed if the UK used flexibilities to fill the shortfall in meeting the fourth and fifth carbon budgets, but this is difficult ground for the Government. The Committee on Climate Change was critical of the proposed use of efficiencies, which would somewhat undermine ministers’ good intentions and commitment to clean growth – particularly set against November’s Budget, in which the Chancellor maintained the current carbon price floor (potentially giving a reprieve to coal) and introduced tax changes favourable to North Sea oil producers.

A 12 Month Green Energy Initiative with Real Teeth

But, there is much to appreciate and commend about the CGS. It fits into a 12-month narrative for BEIS ministers, in which they have clearly shown a commitment to clean growth, improving energy efficiency and cutting carbon emissions. Those 12 months have seen the launch of the Industrial Strategy – firstly in Green Paper form, which led to the launch of the Faraday Challenge, and then a White Paper in which clean growth was considered a ‘grand challenge’ for government. Throughout these publications – and indeed again with the CGS – the Government has shown itself to be an advocate of smart systems and demand response, including the development of battery technology.

Electrical Storage Development at Center of Broader Green Energy Push

While the Faraday Challenge is primarily focused on the development of batteries to support the proliferation of electric vehicles (which will support cuts to carbon emissions), it will also drive down technology costs, supporting the deployment of small and utility-scale storage that will fully harness the capability of renewables. Solar and wind made record contributions to UK electricity generation in 2017, and the development of storage capacity will help both reduce consumer costs and support decarbonisation.

The other thing the CGS showed us it that the Government is happy to be a disrupter in the energy market. The headline from the publication was the plans for legislation to empower Ofgem to cap the costs of Standard Variable Tariffs. This had been an aspiration of ministers for months, and there’s little doubt that driving down costs for consumers will be a trend within BEIS policy throughout 2018.

But the Government also seems happy to support disruption in the renewables market, as evidenced by the commitment (in the CGS) to more than half a billion pounds of investment in Pot 2 of Contracts for Difference (CfDs) – where the focus will be on emerging rather than established technologies.

This inevitably prompted ire from some within the industry, particularly proponents of solar, which is making an increasing contribution to the UK’s energy mix. But, again, we shouldn’t really be surprised. Since the subsidy cuts of 2015, ministers have given no indication or cause to think there will be public money afforded to solar development. Including solar within the CfD auction would have been a seismic shift in policy. And while ministers’ insistence in subsidy-free solar as the way forward has been shown to be based on a single project, we should expect that as costs continue to be driven down and solar makes record contributions to electricity generation, investment will follow – and there will ultimately be more subsidy-free solar farms, albeit perhaps not in 2018.

Meanwhile, by promoting emerging technologies like remote island wind, the Government appears to be favouring diversification and that it has a range of resources available to meet consumer demand. Perhaps more prescient than the decision to exclude established renewables from the CfD auction is the subsequent confirmation in the budget that Pot 2 of CfDs will be the last commitment of public money to renewable energy before 2025.

In short, we should view the CGS as a step in the right direction, albeit one the Government should be elaborating on in its consultation response. Its publication, coupled with the advancement this year of the Industrial Strategy indicates ministers are committed to the clean growth agenda. The question is now how the aspirations set out in the CGS – including the development of demand response capacity for the grid, and improving the energy efficiency of commercial and residential premises – will be realised.

It’s a step in the right direction. But, inevitably, there’s much more work to do.

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