Fossil fuel firms facing potential losses of $28trn over 20 years – broker research

New Kepler Cheuvreux study looks out to 2035

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Fossil fuel companies could face losses of $28trn (€20.2trn) in revenues over the next two decades if international governments get serious about limiting carbon emissions to 450ppm of CO2-equivalent (CO2e) to keep global warming below 2°C over pre-industrial levels, according to research by Kepler Cheuvreux, the broker research group.

The research comes as media reports reveal that China and the US have been in ambitious talks on curbing their CO2 emissions ahead of next year’s UN COP21 global climate meeting in Paris in December 2015.

The research shows that the oil industry could potentially be hardest hit by a 450ppm cap with potential losses of $19.3trn in revenues from 2015 to 2035 in the event of a tough global deal, especially in ‘high cost/high carbon’ projects. The coal industry, it said, would lose $4.9trn and the gas industry $4trn under the same projected scenario.

The broker derives its numbers by comparing the International Energy Agency’s base-case scenario for global energy trends out to 2035, known as the New Policies Scenario (NPS), with the IEA’s 450-Scenario (450S) consistent with a 450ppm cap.

It said that under the IEA’s 450-Scenario (450S), the demand for and price of fossil fuels would fall as policies restricted CO2 emissions, equating to a difference between the NPS and the 450S projections over the next two decades of 156 gigatonnes of carbon, on which it bases the related revenue hits.The research report was written by Mark Lewis, a senior member of Kepler Cheuvreux’s sustainability research team, who joined the firm recently. Lewis was a former head of Deutsche Bank’s carbon and energy team.

Kepler Cheuvreux said the likelihood of a tough CO2 cap emerging from next year’s United Nations Framework Convention on Climate Change (UNFCCC) meeting in Paris was low. It noted: “On the contrary, we think the political obstacles to be overcome are extremely formidable, and that a deal of such ambition is very unlikely within such a short timeframe.”

However, the report argues that the fossil-fuel industry should not ignore the issue of carbon risk. It said ‘transparent stress-testing’ of fossil fuel companies’ business models against the risk of a 450-ppm world would represent a meaningful dialogue with investors. It said this would reveal where the biggest risks lie in fossil fuel companies’ portfolios and start an engagement process over managing these risks as climate policies evolve at the national, regional, and global level.

To this end, it said ExxonMobil’s recent carbon-risk report was a missed opportunity.

As RI recently reported, Exxon agreed to report on climate change assumptions used in strategic planning in return for investors withdrawing a resolution on the issue.

However, the investors were disappointed by the subsequent report on ‘Energy and Climate’ which Exxon published at the end of March.

Kepler Cheuvreux agrees, saying: “We think Exxon’s report was: 1) too dismissive of the risk of a coordinated global policy response ever happening; and 2) far too binary in its assessment of the climate-policy risks the oil industry faces.