Why a 2°C business model is less risky than ‘business-as-usual’ for oil companies.
The business model for many companies in the oil & gas sector seems to assume that demand will rise steadily for the foreseeable future. The Local Authority Pension Fund Forum (LAPFF) and Carbon Tracker Initiative believe that planning on this outcome risks over-investment, potentially destroying shareholder value.
The report compares a notional company with a portfolio of projects that are required in order to meet a two-degree, climate-compliant global demand profile and a similar company that presses ahead with business-as-usual’. We find that the two-degree model could be superior in a low oil price environment.
The report also includes a checklist that investors might wish to use when engaging management. Some companies may not be willing to answer some of the questions posed as they regard the answers as commercially sensitive. That is a possible danger signal for investors. The degree of openness displayed by management along with the answers to these questions should enable investors to assess the degree to which their investments are aligned with a two- degree future.
Key questions when engaging management:
- Price: What are your oil and gas planning assumptions? Do you include a downside scenario for prices and what prices do you assume?
- Carbon content: What is the split of undeveloped projects between oil and gas? What proportion of new projects are LNG and oil sands?
- How robust/risky are your future projects? Where do your future projects sit on the cost curve? What is the sensitivity of your company to oil and gas prices?