HSBC: BP, Shell, Statoil at risk from 'unburnable' reserves

HSBC: BP, Shell, Statoil at risk from 'unburnable' reserves

Oil and gas majors, including, BP, Shell and Statoil, could face a loss in market value of up to 60 percent should the international community stick to its agreed emission reduction targets, analysts at HSBC have warned.

A new report from the banking giant finds that 17 percent of Norwegian company Statoil's reserves would become "unburnable" in a world where oil and gas use falls as countries seek to keep carbon concentrations in the atmosphere to 450 parts per million (ppm), the level the International Energy Agency (IEA) estimates is necessary to deliver a 50 percent chance of limiting long-term temperature rises to 2°C.

Governments around the world have repeatedly committed themselves to ensuring average temperatures do not rise above 2° C, the level at which scientists warns atmospheric feedback loops could trigger "dangerous" climate change. 

Under its 2° C scenario, the IEA calculates around 1,440 gigatons (Gt) of carbon can be emitted over the first half of this century in order to meet the 450ppm target. Emissions have already reached 400 Gt, which leaves around 1,000 Gt -- or a third of current proven reserves -- can be burnt.

While Statoil is the worst affected of the oil majors assessed by HSBC, the bank also calculates around 6 percent of BP's reserves are at risk, along with 5 percent of Total's, and 2 percent of Shell's. U.K. company BG Group has almost no reserves at risk, the report finds.

However, HSBC believes a bigger risk to the sector's value comes in the shape of reduced demand potentially leading to lower oil and gas prices, whereupon the potential value at risk for leading fossil fuel firms could rise to between 40 percent and 60 percent of current market capitalization. BP's market capitalization currently stands at around $141.82 billion, compared to Shell's $231.64 billion, Statoil's $83.52 billion and BG Group's $61.46 billion.

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"We believe that investors have yet to price in such a risk, perhaps because it seems so long term," the analysts said. "And we accept that our scenario probably exaggerates the risk as we assume a low-carbon world today rather than beyond 2020. However, we believe it does give an indication of the potential impact on the sector."

It goes on to say that the IEA's low carbon scenario assumes that between 2010 and 2035, coal consumption falls by 30 percent and oil use drops by 12 percent, while demand for gas would grow slowly.

As a result, the report predicts some projects would start to be cancelled, with the most expensive and risky being shelved first. Oil projects being developed at a cost above $50 a barrel would be unlikely to be completed, the report argues, raising questions over controversial oil sand projects and deepwater reserves. The report notes 60 percent of Shell's oil sand reserves have already been written off as "non-commercial" by the market.

"In our view, investors should focus primarily on companies with low-cost future projects," the analysts say. "Capital-intensive, high-cost projects, such as heavy oil and oil sands, are most at risk under our scenario."

James Leaton, research director at Carbon Tracker, an NGO committed to highlighting climate-related investor risks, said mainstream analysts need to take HSBC's findings on board and start questioning fossil fuel companies' business models.

"They need to see there is nowhere for [companies] to go with this business model," he added.

The report comes as a study by the World Future Council calculates that by depriving other sectors of resources that could be used to make products such as plastics, the opportunity cost of burning fossil fuels runs to between $3.2 trillion and $3.4 trillion a year -- or $8.8 billion to $9.3 billion a day.

Report author Dr. Matthias Kroll said the actual costs "are likely to be even higher." He added that factoring in these costs makes renewable energy a much more attractive proposition and, as the energy source is never used up, replacing fossil fuels with renewables should be counted as a financial gain.

"The difference between renewables and fossil fuels is not only the zero cost of renewables but also that they will never be exhausted," Dr. Kroll writes. "Not just the current cost of various renewable energies, but also the costs of not using them need to be taken into account."

This article first appeared in BusinessGreen and is reprinted with permission. 

The photo of a burning $100 bill provided by bioraven via Shutterstock.