Risks of over-investment in new oil and gas fields
The report published by the NGO Global Witness on 23 April 2019 compares IPCC climate model data with forecasts by Rystad Energy market analysts of future investments in new oil and gas fields. The NGO notes that over the next decade, according to IPCC, any production from new oil and gas fields, beyond those already in production or under development, is incompatible with limiting global warming to 1.5°C. Even so, Rystad Energy's forecasts indicate that oil and gas industry investment will increase by more than 85% over the next decade, reaching more than $1 trillion per year. This continued investment in a business-as-usual path would significantly increase the financial risks for oil and gas companies and their investors.
Forecast production (Billion barrels) from new and existing fields compared to the average of IPCC 1.5°C scenarios
Source: “How the IPCC’s 1.5°c report demonstrates the risks of overinvestment in oil and gas” – Global Witness
The above curve indicates to what extent future production and investments are incompatible with a limitation of global warming to 1.5°C. Indeed, production from existing fields already exceeds demand compared to the 1.5°C scenario and will drastically exceed such limit with the exploitation of upcoming new fields. According to the report, two thirds of these investments would be devoted to new areas where development has not yet begun and where projects have not yet been sanctioned. Among the fossil deposits where extraction is most likely to intensify over the next decade are the Kashagan oil zone in the waters of the Caspian Sea in Kazakhstan and new gas sites in the Yamal region of Western Siberia. Important investments are also expected in the United States, which is engaged in the exploitation of shale gas, as well as in Argentina in the Vaca Muerta area.
In a transition to a low-carbon economy, over-investment in fossil fuels is an obvious risk factor for investors since they will quickly face assets being stranded as demand for fossil fuels declines. Moreover, over-investment in oil and gas new fields creates risks for investors even if there is no consensus on a transition to a low-carbon economy. Indeed, over-investment would contribute to excess fossil fuel emissions that would lead to failure of the transition and significant financial costs due to radical climate change. For example, according to Global Witness, a Schroders study assessed that the world is currently on track for a global warming of about 4°C that could lead to global economic losses of up to $23 trillion per year, equivalent to three to four times the losses suffered each year during the 2008 financial crisis. This report echoes the news that in the same week the international network of 36 central banks NGFS (Network for greening the financial system) presented its first report with recommendations for integrating climate risk management in central banks activities and, in the Netherlands, the move by ING bank (under the aegis of OECD, following a complaint by 4 Dutch NGOs) towards more transparency on its portfolio, and alignment with the Paris Agreement.
Félix Fouret, Carbon/Climate Analyst
Source: Beyond Ratings, Global Witness, Les Echos