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Fossil fuel extraction needs 50 per cent cut to meet climate targets

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The world’s largest fossil fuel companies will need to prepare to cut their extraction of oil and natural gas by 50 per cent by the 2030s if the world is going to stick to the climate goals laid out in the Paris Agreement, a report has warned.

The Paris Agreement of 2015 saw countries around the world commit to keeping global warming to 2°C above pre-industrial levels, alongside more ambitious targets to keep this to below 1.5°C.

According to the report from Carbon Tracker, companies are still approving billions of dollars of investment in major projects which are inconsistent with these goals.

“Oil and gas companies are betting against the success of global efforts to tackle climate change,” the report’s co-author Mike Coffin said. “If they continue with business-as-usual investment, they risk wasting more than a trillion dollars on projects which will not be competitive in a low-carbon world.

“If the world is to avert climate catastrophe, demand for fossil fuels must fall sharply. Companies and investors must prepare for a world of lower long-term fossil fuel prices and a smaller oil and gas industry and recognise now the risk of stranded assets that this creates.” 

Carbon Tracker’s report - its fifth annual analysis of the risks associated with investing in oil and gas - warns that companies have not woken up to the “seismic implications” of the International Energy Agency’s finding that no investment in new oil and gas production is needed if the world aims to limit global warming to 1.5°C. 

This would see production at 20 of the world’s 40 largest listed companies shrink by at least 50 per cent by the 2030s as existing projects run down with no replacements, the report finds. Most large shale oil companies would see production drop by over 80 per cent.

According to the report, ConocoPhillips, a shale specialist, is the oil major most exposed, facing a drop of 69 per cent, followed by Chevron (52 per cent); Eni (49 per cent); Shell (44 per cent); BP (33 per cent); ExxonMobil (33 per cent), and TotalEnergies (30 per cent).

Saudi Aramco is the only one of the world’s largest listed oil and gas companies that would see increased production due to its large spare capacity from existing fields.

Axel Dalman, Carbon Tracker Associate Analyst and report co-author, said: “In general, no new projects and a rapid decline in production could deliver a serious shock to company valuations, as new project options are rendered effectively worthless and future cashflows are reduced.

“Lower equity valuations would in turn increase the cost of capital and insolvency risk.  It is crucial for companies to have a strong transition plan, winding down oil and gas activities in an orderly manner and either diversifying into low-carbon businesses or returning capital to shareholders.”

The report also warns that if companies continue to invest in projects expecting a business-as-usual future of stable or rising demand, they risk being left with stranded assets that are uneconomic in a low-carbon world. National climate policies and rapid growth of clean technologies will reduce demand, drive down prices and lead to significantly lower revenues.  

Even though oil prices collapsed in 2020 due to lack of demand during the pandemic, companies continued to make investments that bet against the 1.5°C target, the report found.

Last week, a trade body representing the UK’s oil and gas sector called for greater investment in new oil and gas fields despite efforts to cut global carbon emissions.

It warned that a lack of funding is forcing the UK to import the majority of its gas to meet domestic demand and that gas output from the North Sea is in long-term decline.

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