THE CARBON WAR

I am here in learning mode 71
oil from $25 per barrel market price up to around $75. Beyond that, if the two
degrees budget applies, the more expensive oil can’t be burned.
But would it make sense to burn it anyway, Mark Fulton asks, given how
expensive much of it is against the current oil price? And what if the oil price
falls, as we expect it might? Currently it is above $100 per barrel, but if supply
begins to outstrip demand, it would fall, and it is easy to imagine demand
scenarios not too far in the future where that happens. Suppose for example
the Chinese economy slows down? The oil on the higher side of the carbon
cost curve is at risk both from climate policymaking and simple economics.
This is true without even considering climate change.
I scan the room trying to gauge the reactions. There is a rapt attention, a
stillness, beyond the scurrying pens on pages.
Mark passes over to James Leaton, who will look at the implications for
companies.
Note how the curve steepens above around $95 market price, James begins.
His manner is the opposite of Mark Fulton’s: quiet, thoughtful, scholarly. You
could never imagine him haranguing junior analysts.
We conservatively estimate that above $95 per barrel fully $1.1 trillion
of capex is at risk of being wasted over the next decade, he says. Which companies
and projects sit in this zone? He talks about specialist companies in
the tar sands, and the companies involved in the Kashagan project as obvious
examples. There are many more. The reports we are publishing today dive into
a lot of company detail.
Anthony Hobley shepherds the event into a phase where panels of experts
discuss the findings. Martijn Rats, Head of European Oil & Gas at Morgan
Stanley, agrees that the oil majors are coming under massive pressure on capital
expenditure. That’s why spending is slowing. The cost curve is actually worse
than Carbon Tracker depicts, he says, because currently international oil companies
need around $100 per barrel to break even. (That is to say, recover their
costs before any profit. An acceptable market price for a breakeven price would
be around $115 per barrel). This is because most oil companies also have substantial
gas reserves, which on a barrel of oil-equivalent basis they can only
realise a maximum of $35 a barrel at present, and sometimes quite a lot less.
So oil needs to cross-subsidise gas.
Great, I think, better for us to be “wrong” on the downside. Morgan
Stanley are saying we are being too conservative.
Martijn Rats turns to James and makes a comment that captures the
whole Carbon Tracker experience to date.