Oil Industry Risks $1.1 Trillion of Investor Cash

Oil explorers like Exxon Mobil Corp. and OAO Rosneft risk wasting $1.1 trillion of investors’ cash through 2025 on expensive, uneconomic projects from the Arctic and deep seas to tar sands, according to a study.

That’s the sum the industry may spend on developments that need market prices of at least $95 a barrel to break even, the Carbon Tracker Initiative said. The money risks being wasted as the total amount of oil the world can afford to burn without warming the planet to unsafe levels is available from less costly deposits that are economical at $75 a barrel, according to its report.

Petroleo Brasileiro SA’s capital spending on projects needing $95 a barrel or more may reach $83 billion through 2025, with Exxon at $73 billion and Rosneft at $70 billion, Carbon Tracker said. The figures aren’t the companies’ own figures but were estimated by the non-profit group, whose backers include the Rockefeller Brothers Fund, Joseph Rowntree Charitable Trust and European Climate Foundation.

Rosneft said consumption of so-called unconventional oil is forecast to rise as demand for energy increases and other sources are depleted. While recovery is a challenge, the resources represent the foundation for a “stable increase in company value for shareholders,” it said in an e-mailed reply to questions.

Scott Silvestri, a spokesman for Exxon, declined to comment beyond saying that the company’s average per-unit production cost in 2013 was $11.48 across its entire portfolio.

Set Tone

Petrobras wasn’t immediately able to comment when contacted for reaction to the Carbon Tracker report.

The non-profit group said smaller companies have the bulk of the exposure as they tend to specialize in unconventional oil.

“Investors should require the majors to demonstrate improved capital discipline, to deliver shareholder value, not just volume of production,” James Leaton, research director at Carbon Tracker, said by e-mail. “The oil majors will set the tone. If they move away from high-cost projects, then the market needs to question providing capital to other smaller players.”

World governments aim to devise by the end of next year an agreement to ensure the global average temperature rise since industrialization began is capped at 2 degrees Celsius (3.6 degrees Fahrenheit). That would entail a maximum of a further 900 gigatons of carbon-dioxide emissions, of which 360 gigatons could come from burning oil, according to Carbon Tracker.

Investment Decisions

“We must stay under the 2-degree maximum because if we don’t, we move into the space of potentially unmanageable risks,” Christiana Figueres, the United Nations diplomat stewarding the effort to get a new global deal, said by phone. “Investment decisions made this decade are going to determine the profile of the energy mix for further decades to come.”

Through 2050, the value of potentially uneconomic projects by private companies reaches $21 trillion, Carbon Tracker said.

About 22 million barrels per day of output through 2050, a fifth of the world potential, may come from non-state projects that rely on a market price of $95, the group said. State-owned oil projects would account for another 7 million barrels per day of production over that threshold, according to its study.

Private industry’s share translates to 135 gigatons of carbon dioxide, while about $1.3 trillion of the spending is from the seven oil majors and the rest from smaller companies. The total investment includes $7 trillion of deepwater and ultra-deepwater projects, $2.8 trillion of potential Arctic output and $1.2 trillion of oil sands development, the study showed.

Shareholder Dividends

Such investments wouldn’t pay for themselves in a world where demand for oil was lower and governments continued to take climate change and air quality seriously, according to the report’s authors. Rather than investing in high-cost projects, oil companies could instead pay money back to shareholders in the form of dividends or share buybacks, they wrote.

The Carbon Tracker Initiative is a London-based nonprofit organization that researches the potential effects of climate change and policy on the world’s capital markets.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE