As COP21 negotiations continue in Paris, Barclays’ equities team has analyzed the implications for the energy industry, whose assets and business strategies could see dramatic impacts from conference developments.
The report, released just before the negotiations began last week, explores the potential shakeout for fossil fuels and finds that in a scenario where a significant climate resolution is passed, the oil industry is heavily exposed to potential revenue losses, to the tune of some $22 trillion. The bank’s analysis is based on using IEA’s World Energy Outlook 2015 to determine baseline demand (under the New Policies Scenario, IEA’s reference case) and comparing it to the 450 Scenario, which models energy consumption patterns under a global framework to keep carbon dioxide under 450 ppm, which is understood to prevent global climate change from exceeding an average of 2 degrees Celsius in warming. When comparing global oil demand between the New Policies Scenario and the 450 scenario, Barclays breaks down the risks for the oil sector as follows:
- $16.4 trillion in lost revenue from lower sales of conventional crude oil
- $3 trillion in lost revenue from lower sales of natural gas liquids, and
- $3 trillion in lower sales of unconventional crude oil
Crude oil emerges as the most exposed industry of the three major fossil fuels, because of its comparatively higher price. Total oil demand from 2014 through 2040 falls from 939.5 billion barrels to 830.4 billion barrels, which in weighted annual average translates to a drop from 95.3 million barrels per day (mbd) of demand to 84.3 mbd.
The natural gas industry is also exposed, albeit less so, since natural gas has a competitive advantage over many other fossil fuels in a world where comprehensive climate policies exist, but the industry risks $5.5 trillion in revenue under the 450 ppm policy framework. Coal loses $5.8 trillion—significantly less than oil, but not because less coal is displaced. According to Barclays, oil volumes under the 450 scenario drop by 14,160 million tonnes of oil equivalent (mtoe) from the New Policies Scenario, an 11.6 percent decline. Coal demand falls by 25,228 mtoe, or 22.5 percent. However, the coal sector’s losses are roughly one quarter of oil’s $22 trillion risk, presumably because revenues for the coal industry are much lower than oil. Over the period from 2014 to 2040, Barclays sees total revenue for the oil industry falling from $90.6 trillion under the New Policies Scenario to $68.3 trillion under the 450 Scenario, while coal has less to give, and revenues drop from $15.6 trillion to $9.7 trillion.
Of course, the 450 ppm scenario is an unlikely one, given its highly ambitious nature. However, Barclays’ findings reflect the potentially severe implications for fossil fuel companies of an aggressive climate target being set in Paris this week.
Risk varies widely, not only in terms of the stringency of carbon regulations, but also in terms of how individual companies are positioned in the space. For example, higher demand for efficient gas turbines puts companies such as Siemens, ABB, Schneider Electric, and Weir Group in a position to benefit. Meanwhile, increased reliance on light rail and would benefit Alstom and Siemens.
Among the oil majors, many have been preparing themselves for a global carbon price for some time, and have already put significant investments into both renewables and alternative fuels. Barclays notes that Total is the world’s second largest player in solar photovoltaic, through its affiliate SunPower. Meanwhile, Shell is one of the largest investors in advanced biofuels. Statoil, Repsol and Shell are invested heavily in offshore wind, and BP is one of the largest wind developers in the United States.
Many of these established players in oil and gas are also leveraging low-carbon technologies to improve their operational efficiency. For example, Royal Dutch Shell has helped pioneer GlassPoint, a company that is using large-scale solar steam generators to enhance oil recovery, especially in the Middle East.
Barclays notes that, in the event of a carbon price, oil is particularly difficult to displace from the transportation sector. The report argues that efficiency improvements, biofuels, electric vehicles, and hydrogen vehicles all have a role to play, but notes, “it appears that there is still a long way to go for the ICE to be pushed out and uncompetitive on a cost basis.”
Total is the world’s second largest player in solar photovoltaic, through its affiliate SunPower. Meanwhile, Shell is one of the largest investors in advanced biofuels. Statoil, Repsol and Shell are invested heavily in offshore wind, and BP is one of the largest wind developers in the United States.
Additionally, according to Barclays, “although we acknowledge that a co-ordinated policy response would reduce oil and gas demand compared to the current trajectory, we see oil and gas companies as materially undervalued based on any of the scenarios presented to 2040, all of which see energy demand grow.” The report also notes that the oil majors are ultimately “oil and gas” majors, noting that a one percent switch between coal and gas has the same impact on reducing carbon dioxide emissions as an 11 percent increase in renewable energy production. Thus, many integrated oil companies remain well positioned, but a price on carbon is unlikely to be welcomed in the current environment, where low oil prices have put the industry on its heels. Mark Lewis, the report’s principal author, notes that there remains significant room for uncertainty. “It’s all a question of the level at which the carbon price is set. If you have the kind of carbon price that the IEA says we need for a 2 degree word, those kinds of price levels would undoubtedly impact oil demand as well as coal demand.”